YONG LI INVESTMENTS LTD v. LEE SING LEUNG ROBIN

HCA 1367/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1367 OF 2010

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J U D G M E N T

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Introduction

1. The Plaintiff in this action was the owner of some quoted securities.  It agreed, at the Defendant’s request, to charge those securities in favour of a number of creditors of the Defendant. The charges were in writing, but the underlying agreement between the Plaintiff and the Defendant was not.  It is the Plaintiff’s case that it agreed to charge the quoted securities in favour of the Defendant’s creditors subject to certain terms or conditions which had been orally agreed to by the Defendant (“the Oral Agreement”), and that the Defendant acted in breach of a term or condition of the Oral Agreement, thereby giving rise to this action.

2. Up until about a week before the commencement of the trial, the Defendant was represented by solicitors and counsel.  On 5 June 2013, upon an application made by the Defendant’s former solicitors, the court granted leave to the Defendant’s former solicitors to cease to act for the Defendant in this action.

3. In the morning of the first day of the trial, the Defendant through a friend submitted an unsigned letter dated 10 June 2013 to the court stating that due to acute health problems, including high blood pressure and other symptoms, he had been sent to Ruttonjee Hospital on the previous day and remained in the hospital.  In that letter, the Defendant requested for a “stay” of the proceedings.  There was no medical certificate attached to the letter.

4. Some preliminary inquiry was carried out by the Plaintiff’s solicitors and it was confirmed that the Defendant had indeed been admitted to Ruttonjee Hospital.  In order to further investigate the Defendant’s conditions, the court adjourned the trial to the next day with a direction that the Plaintiff’s solicitors should visit the Defendant at the hospital and inform the Defendant that the court was minded to commence the trial on 11 June 2013 unless the Defendant either by himself or though his legal representatives made a proper application to adjourn the trial in which event the Defendant’s application would be considered at 10:00 am on 11 June 2013.

5. In the morning of 11 June 2013, the Defendant again submitted an unsigned letter to the court basically repeating the contents of his earlier letter dated 10 June 2013. Attached to the letter of 11 June 2013 was a “Reference Letter” from Ruttonjee Hospital dated 10 June 2013.  In the Reference Letter, the following was stated: “This is to certify the above named patient was admitted to Ruttonjee Hospital.  Currently he is still under our care.  Thank you!”  As appeared from an affirmation made by Yip Chen Tung, a clerk of the Plaintiff’s solicitors, filed on 11 June 2013, the Plaintiff’s solicitors had visited the Defendant at Ruttonjee Hospital on 10 June 2013 and informed the Defendant of the court’s aforesaid direction.

6. In the letter dated 11 June 2013, the Defendant sought an adjournment of the trial.  The Defendant did not make the application either in person (understandably since he was apparently still hospitalised) or through any legal representatives.  The letter from the hospital did not provide any information regarding the Defendant’s medical conditions, the diagnosis (if any), whether the Defendant could be discharged from the hospital to attend the trial, or when it was expected that he could be discharged.  The Defendant did not suggest that he was not in a position to instruct lawyers to attend the hearing and apply for an adjournment, or provide the court with information regarding the Defendant’s medical conditions and an estimate of when the trial could commence if it was to be adjourned.

7. In all the circumstances, I exercised my discretion to order the trial to commence on 11 June 2013 in the Defendant’s absence, and reserved the question of costs of the hearing on 10 June 2013.

8. The Plaintiff called one factual witness, namely, Mr Lee Shing (“Mr Lee”), a director of the Plaintiff, to give evidence.  In view of the fact that the Plaintiff’s case depends on its ability to prove an oral agreement the terms of which were not evidenced in writing and the further fact that Mr Lee would not be subjected to any cross examination, I directed that Mr Lee’s witness statements should not stand as his evidence in chief and Mr Lee should give evidence in chief in the traditional way.

Background facts

9. By an agreement in Chinese writing dated 9 July 2009, the Defendant agreed to sell and the Plaintiff agreed to purchase a total of 312,000,000 shares of a company known as Grand T G Gold Holdings Limited (“the Company”) for the consideration of HK$31,200,000 (ie HK$0.1 per share).  The shares of the Company were listed on the GEM board of the Stock Exchange of Hong Kong, and the 312,000,000 shares represented approximately 11.44% of the then existing issued share capital of the Company.

10. Completion of the sale and purchase took place on 10 July 2009, and 312,000,000 shares of the Company were duly transferred to the Plaintiff by the Defendant.

11. On 9 September 2009, the Plaintiff executed 4 written charges (“the Share Charges”), whereby the Plaintiff charged 21,430,000, 10,690,000, 11,600,000 and 6,280,000 shares, totalling 50,000,000 shares, of the Company (collectively “the Charged Securities”) in favour of Golden Success Investments Limited, Galaxy Global Opportunity Fund, Galaxy China Opportunities Fund and Galaxy China Deep Value Fund respectively (collectively “the Chargees”).

12. The Share Charges were in the same form and contained materially the same terms.  The following facts were recited in each of the Share Charges:

“(A) On 29^th April 2009, the Chargee has entered into a settlement agreement with Rubional, Lee Wing Leung and [the Defendant] (collectively known as ‘Debtors’) and [the Defendant] undertakes to provide security shares (as defined in the Settlement Agreement) on or before 29^th May 2009 (‘Undertaking’);

(B)  At the request of the Defendant, who is in negotiation with the Chargee for certain variations of the Undertaking under the Settlement Agreement, the Chargor has agreed to enter into this Charge and charge the Charged Securities in favour of the Chargee subject to and upon the terms and conditions of this Charge.”

13. Clause 2.1 of the Share Charges states that:-

“In consideration of the Chargee agreeing to vary the undertaking, the Chargor as legal and beneficial owner hereby charges by way of first fixed charge the Charged Securities to the Chargee as continuing security for the payment and discharge of the Secured Obligations”.

14. The expression “Secured Obligations” is defined to mean “the repayment of the Balance of the Agreed Loss and Damages (as defined in the Settlement Agreement) by the Debtors and/or [the Defendant] to the Chargee as stipulated under the Settlement Agreement”.

15. Pursuant to the Share Charges, the Plaintiff delivered to the Chargees the original share certificates of the Charged Securities and undated bought and sold notes and instruments of transfer in respect of the Charged Securities duly executed by the Plaintiff.

16. The present action was commenced by the Plaintiff against the Defendant on 9 September 2010 for breach of a term of the Oral Agreement which I shall further explain below.

17. The Chargees, apparently in exercise of their rights under the Share Charges, transferred the Charged Securities to themselves or their nominee on 11 and 17 January 2011.

18. It appears from the Statements of Claim in various actions, namely, HCA 780, 781, 782 and 2015 of 2012, commenced by the Chargees against (inter alia) the Debtors in May and October 2012 that:-

(1)   Under the Settlement Agreements all dated 29 April 2009, the Debtors were obliged to pay HK$8,572,000, HK$4,276,000, HK$4,640,000 and HK$2,512,000 to Golden Success Investments Limited, Galaxy Global Opportunity Fund, Galaxy China Opportunities Fund and Galaxy China Deep Value Fund respectively on or before 28 October 2010.

(2)   Under various Supplemental Settlement Agreements all dated 28 September 2009, the amounts of the indebtedness owing and payable by the Debtors to the Chargees were reduced by half.

(3)   By 31 December 2011, the Debtors had only paid accrued interest on the principal debts but not any part of the principal debts due and owing to the Chargees.

19. On 23 July 2012, three of the Chargees obtained judgments in HCA 780, 781 and 782 of 2012 against the Debtors.  At the trial, I was further informed by Mr Raymond Tsui (appearing together with Mr Wilson Lau for the Plaintiff) that the remaining Chargee also obtained summary judgment recently against the Debtors in HCA 2015 of 2012.

The Oral Agreement

20. According to Mr Lee Shing, he first came to know the Defendant in or about 2006 and soon they became good friends.

21. In or about June 2009, the Defendant told Mr Lee Shing that that he was then a director and major shareholder of the Company and that he was in some financial difficulties.  The Defendant further told Mr Lee Shing that the Company had good assets including gold mines in Mainland China, and proposed to sell some shares of the Company to Mr Lee Shing so as to alleviate his financial difficulties.  Eventually, Mr Lee Shing, through the Plaintiff, purchased 312,000,000 shares of the Company from the Defendant for the consideration of HK$31,200,000.  The Plaintiff’s purchase of the 312,000,000 shares of the Company from the Defendant was completed on 10 July 2009.

22. In or about August 2009, the Defendant told Mr Lee Shing that he was indebted to “Galaxy” under certain settlement agreements, and requested Mr Lee Shing to help him fulfil his obligation under the settlement agreements by charging some of the shares of the Company that the Plaintiff had bought from him as security for his indebtedness to his creditors.

23. According to Mr Lee Shing, he was at first unwilling to help the Defendant but the Defendant repeatedly urged him to help and told him that the Defendant would be in trouble if he did not help.  The Defendant also said that the shares would only be charged but would not be transferred to the creditors.  At that time, in addition to having become (through the Plaintiff) the owner of some shares of the Company, Mr Lee Shing was also an executive director of the Company, while the Defendant was the chief executive officer and an executor director of the Company.  Eventually, Mr Lee Shing acceded to the Defendant’s request because he thought that helping the Defendant would also be helping himself, but subject to 3 conditions:-

(1)   the Defendant would fulfil or carry out his obligations under the Settlement Agreements;

(2)   the Defendant would, within 2 weeks after the execution of the Settlement Agreements/Share Charges (see further below), deliver to the Plaintiff the Settlement Agreements; and

(3)   if the Plaintiff’s shares were to be transferred to someone else and the Plaintiff were to suffer any loss, the Defendant would indemnify the Plaintiff of such loss.

24. Mr Lee Shing said that the Defendant had orally agreed to the aforesaid 3 conditions before the Share Charges were executed on 9 September 2009.

25. Mr Lee Shing’s evidence in court was inconsistent on the question whether the Defendant agreed to deliver to the Plaintiff the Settlement Agreements within 2 weeks after the execution of the Settlement Agreements or 2 weeks after the execution of the Share Charges.  In his evidence in chief, he said it was the former.  However, upon the court’s questioning at the conclusion of his evidence in chief, it became clear that Mr Lee Shing might have been confused between the Settlement Agreements and the Share Charges.  Mr Tsui then asked Mr Lee Shing some further questions on this issue.  Eventually Mr Lee Shing said that the second condition which the Defendant had agreed to was that the Defendant would deliver to the Plaintiff the Settlement Agreements within 2 weeks after the execution of the Share Charges.

26. In view of the fact that the Settlement Agreements had already been made on 29 April 2009 (as stated in Recital (A) of each of the Share Charges), it would not make much sense for the parties to agree, in August or September 2009, that the Defendant would deliver to the Plaintiff the Settlement Agreements within 2 weeks after the execution of the Settlement Agreements, although I note that Mr Lee Shing said in his evidence that he had not read Recital (A) prior to the execution of the Share Charges (indeed Mr Lee Shing said that he could not read English) and he did not know when the Settlement Agreements were entered into.

27. I have carefully considered Mr Lee Shing’s evidence in light of the undisputed background facts of this case and I am satisfied that he was genuinely confused, at the time when he gave evidence, between the Settlement Agreements and the Share Charges.  In respect of the second condition, I find that the Defendant orally agreed with Mr Lee Shing that he would deliver to the Plaintiff the Settlement Agreements within 2 weeks after the execution of the Share Charges.

28. Overall, I find as a fact that the Defendant had agreed to the 3 conditions required by Mr Lee Shing as consideration for the Plaintiff’s execution of the Share Charges, and these 3 conditions are binding on the Defendant as an oral agreement between the Defendant and the Plaintiff.

Breach of Oral Agreement

29. There is no dispute that the Defendant did not deliver to the Plaintiff the Settlement Agreements within 2 weeks after the execution of the Share Charges or at any time thereafter, notwithstanding the Plaintiff’s demands, including a demand letter sent by the Plaintiff’s solicitors, Y S Lau & Partners, dated 27 August 2010. Accordingly, the Defendant was in breach of the Oral Agreement.

30. At the trial, Mr Tsui confirmed that the Plaintiff would not be relying on any causes of action based on the Defendant’s failure to pay the debts due under the Settlement Agreements, or the fact that the Plaintiff’s shares had been transferred to the Chargees or their nominee, because such causes of action would have accrued after the date of the Writ in this action.

Relief

31. The Plaintiff seeks the following relief.  First, the Plaintiff asks for delivery of:-

(1)   the Settlement Agreements dated 29 April 2009; and

(2)   the Supplemental Settlement Agreements dated 29 September 2009,

with liberty to apply for delivery of further documents arising from the Settlement Agreements and Supplemental Settlement Agreements.

32. Mr Tsui argues that the Plaintiff is entitled to such relief by way of specific performance of the Oral Agreement.  It is clear, however, from the evidence of Mr Lee Shing that the only documents which the Defendant agreed to deliver to the Plaintiff were the Settlement Agreements.  The Supplemental Settlement Agreements were apparently entered into more than 2 weeks after the execution of the Share Charges.  It is difficult to see how the Oral Agreement could have covered the Supplemental Settlement Agreements unless it was contemplated by Mr Lee Shing and the Defendant, at the time of the execution of the Share Charges, that they would be entered into within 2 weeks thereafter.  There is, however, no evidence to this effect.

33. In all the circumstances, I am only prepared to make an order that the Defendant shall deliver the Settlement Agreements to the Plaintiff.  I see no basis to make any order giving liberty to the Plaintiff to apply for delivery of further documents arising from the Settlement Agreements and Supplemental Settlement Agreements.

34. Second, the Plaintiff seeks to recover damages as a result of the loss of the Charged Securities, which have been transferred to the Chargees or their nominee.  The problem with this claim is that the Plaintiff’s loss did not flow from the Defendant’s failure, in breach of the Oral Agreement, to deliver the Settlement Agreements within 2 weeks after the execution of the Share Charges.  Mr Tsui argues that had the Plaintiff been given the Settlement Agreements, it could have brought a quia timet action for a declaration that it is entitled to be exonerated and an order that the Defendant should pay off the outstanding debts due to the Chargees as well as an order that the Defendant should set aside a fund for this purpose.

35. However, a quia timet action can only be brought when the obligation which a surety has guaranteed has accrued due, ie as soon as the principal becomes liable (see Andrews QC and Millet QC, Law of Guarantees, 6^th Ed, paragraph 10-026).  Apparently, the Defendant’s obligation to pay the Chargees under the Settlement Agreements only fell due on 28 October 2010, which was a date after the commencement of this action on 9 September 2010.  It follows that as at the date of the Writ, the Plaintiff could not have brought a quia timet action against the Defendant.  In any event, there is no evidence to show that the Plaintiff’s loss could have been avoided had such an action been brought by the Plaintiff.

36. In all, I am not satisfied that the Plaintiff has shown that its loss of the Charged Securities was the result of the Defendant’s failure to deliver the Settlement Agreements within 2 weeks after the execution of the Share Charges.

37. It follows that the only relief which the Plaintiff has established is that referred to in paragraph 33 above and that is only the relief which I shall grant to the Plaintiff.

Costs

38. I order that the Plaintiff shall have 50% of the costs of the action against the Defendant, to be taxed if not agreed, having regard to the fact that the Plaintiff has succeeded only to the extent of obtaining an order for delivery of the Settlement Agreements but failed to recover any substantial damages.

39. The Plaintiff also asks for the costs of the hearing on 10 June 2013 to be taxed on an indemnity basis.  Although, for the reasons set out in the earlier part of this judgment, I exercised my discretion to commence the trial on 11 June 2013 notwithstanding the fact that the Defendant was apparently still in hospital at that time, I consider that the adjournment of the hearing on 10 June 2013 was necessary in order to ascertain the physical or medical conditions of the Defendant.  It remains a fact that the Defendant was hospitalised on 10 June 2013 and could not attend the hearing on that date.  Overall, I do not consider it appropriate to order that the costs of the hearing on 10 June 2013 should be taxed on an indemnity basis.

40. Lastly, nothing in this judgment is to be read as precluding the Plaintiff from bringing a further action against the Defendant to recover its loss and damage arising from the loss of the Charged Securities.