FU WOO INTERNATIONAL LTD v. FU WOO GROUP LTD AND OTHERS

HCA 398/2016

[2019] HKCFI 1144

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 398 OF 2016

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JUDGMENT

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1.  The plaintiff (“FWI”) claims for repayment of a loan against the 1^st defendant (“FWG”) as the borrower, and the 2^nd defendant (“Chan”) and the 3^rd defendant (“Chen”) as the alleged guarantors. Judgment has been entered against FWG. This is the trial of the claim against the alleged guarantors.

Background

2.  FWG was incorporated in the BVI.  Chan and Chen were its only directors and shareholders[1].  At the material time, FWG wholly owned a coal mine in Bengkulu, Indonesia (“the Coal Mine”) through direct and indirect shareholdings in two Indonesian companies, namely PT Fu Woo Mining Indonesia (“PTFW”) and PT Injatama (“PTI”) [2].

3.  On or about 30 June 2011, through the introduction of Lin Liang-sen (“Lin”), Zheng Ping (“Zheng”) came to know Chan. By then, Lin had known Chan for a couple of years, and had had business dealings in coal with him.  Zheng was the chairman of a company in the business of ventilation systems for vehicles.

4.  Soon afterwards, Chan represented to Zheng that he was in search of investors for FWG to fund the production at the Coal Mine, and he invited Zheng to consider making investment[3].  Discussion between the parties followed.  After discussion and meetings, Zheng, Chan and Chen eventually met in Fuzhou on 25 September 2011, when they signed a Chinese document under the title of “Indicative Term Sheet — 投資框架”,the terms of which are set out in Appendix 1 to this judgment[4].

5.  The Indicative Term Sheet recorded that FWG was preparing to make an initial public offering of its shares on the Main Board of the Hong Kong Stock Exchange (“HKSE”) or other international exchange in mid-2013. The shareholders of FWG undertook to use their endeavour towards that goal. The essential terms included:

(1)   FWI[5] undertook to invest in the form of interest-bearing redeemable and convertible loan, whereby the loan would be convertible to the new shares issued by FWG.  Upon conversion, FWI would effectively acquire 67.11% shareholdings in FWG and thus interest in PTFW and PTI.  FWI would be entitled to exercise the option to convert its loan to shares by 31 August 2012.

(2)   The investment amount would be RMB 306,000,000, payable by two instalments of RMB 102,000,000 and RMB 204,000,000in the week before or after 30 September and 31 December 2011 respectively.

(3)   For every RMB 102,000,000 received, FWG would pay interest at the monthly rate of RMB 2,000,000 prior to the conversion of the loan to shares.

(4)   If the listing plan did not succeed by 31 December 2013, FWI would be entitled to request FWG to redeem the whole amount of the convertible debts, principal and interest or the relevant shares and dividends.

(5)   49% of the shares of FWG would be pledged to FWI, and the two controlling shareholders of FWG, Chan and Chen, would personally guarantee the return of the interest, dividend and principal.

(6)   The provision of the convertible loan would be conditional upon the satisfactory result of due diligence investigation in respect of FWG.

(7)   In the meantime, the terms of the Indicative Term Sheet would be binding onthe parties.  Upon the satisfactory completion of due diligence investigation in respect of FWG, the parties would complete the investment, the terms of which would be set out in formal agreement.

(8)   The Indicative Term Sheet shall be governed by Hong Kong law.

6.  The Indicative Term Sheet was dated 25 September 2011, and signed by Zheng as well as Chan and Chen on each page.  Chan and Chen also signed at the end as the representatives of FWG, while Zheng signed as representative of FWI.

7.  FWI started extending the loan contemplated under the Indicative Term Sheet days after its signing.  The first instalment of RMB 102,000,000 was paid during the period between 27 and 30 September 2011.  The second instalment was paid to FWG during the period between December 2011 and May 2012 in the total sum of RMB 124,000,000.  The total amount extended was RMB 226,000,000, which was RMB 80,000,000 less than that stipulated in the Indicative Term Sheet[6].

8.  In the meantime, steps in connection with due diligence investigation were taken.  FWI’s financial and accounting consultant, Tang Lo Nar (“Luler”), visited Jakarta and the Coal Mine.  Zheng himself also visited the Coal Mine.  Solicitors were engaged to draft formal agreements.

9.  Eventually, the formal agreements contemplated under the Indicative Term Sheet never went beyond the draft stage.  Nor did FWG succeed in getting its shares listed on the HKSE by the end of 2013 or at all. FWI also never got to exercise the option to convert the loan to shares of FWG.

10.  Apart from payment of interest and repayment of RMB 30,000,000 in principal by December 2013, FWG has defaulted in the repayment.  FWI decided to back out, and Zheng informed Chan of that by the end of 2013.  Demand for the repayment of the principal and interest due on its loan followed.

11.  On 2 May 2014, FWG issued a 債權債務結算單 (“the Credit and Liabilities Statement”), which the parties signed.  Lin signed the document as witness. The document confirmed the outstanding principal sum of RMB 196,000,000 [7] and accrued interests owed to FWI as at 30 December 2013.  It also confirmed that Lin Chun was another investor, apparently through FWI, who provided the principal sum of RMB 80,000,000.

12.  On 16 February 2016, FWI commenced the present action against FWG, and Chan and Chen as the guarantors.  The claim is based on the agreements in respect of the loan and the guarantee that are said to be evidenced by the Indicative Term Sheet[8].

13.  At the same time, FWI filed an application for ex parte injunction against the defendants.  According to FWI, it came to learn at the end of 2015 or early 2016 that FWG had apparently entered into various agreements back in the end of September 2014 to sell its assets, namely substantial shareholdings in the Indonesian companies without the prior knowledge or consent of FWI.  For alleged failure of the purchaser to honour the payment obligation for such sale and purchase, FWG and the purchaser became engaged in litigation in Indonesia.  FWI also came to learn that Chan might enter into compromise with the purchaser in such litigation in Indonesia. Seeing the risk of dissipation of the major asset of FWG, FWI applied for the injunction.  The ex parte injunction was grantedon 17 February 2016, whereby the defendants were restrained from disposing of their assets and FWG from settling any claims in relation to their assets in the Indonesian litigation.

14.  On the basis that on the very day following the grant of the ex parte injunction mentioned above, Chan and others allegedly entered into a shareholders’ agreement with a view to selling all the interest in PTI, and thus the interest in the Coal Mine, to Lin Chun, FWI further applied for receivership of FWG and the removal of the powers of Chan and Chen as its directors.  By consent of FWG and the indication of neutral stance of Chan and Chen, the receivership order was granted on 25 February 2016.  The order was continued on 18 March 2016.

15.  As mentioned, in default of notice of intention to defend, judgment in the amount claimed was entered against FWG on 2 September 2016.

FWI’s case

16.  The claim is based on the agreements in respect of the loan between FWI and FWG as well as the guarantee given by Chan and Chen as evidenced by the Indicative Term Sheet.  As mentioned, the total principal sum of the loan extended to FWG was RMB 226,000,000, which was RMB 80,000,000 less than that stipulated in the Indicative Term Sheet.  According to FWI, the amount that it undertook to provide was reduced by subsequent agreement on 23 December 2011, upon representation by Chan that Lin Chun (and another) would come up with the investment of RMB 80,000,000.

Case of Chan and Chen

17.  The pleaded case of Chan and Chen is that the Indicative Term Sheet was and is not binding or enforceable because:

(1)   the Indicative Term Sheet was prepared by FWI, and Chan and Chen came to sign it without independent legal advice;

(2)   the terms of the Indicative Term Sheet were preliminary and subject to formal agreement, and they signed it on the belief that it was not binding or enforceable.

18.  Alternatively, if the Indicative Term Sheet was and is binding and enforceable, Chan and Chen deny agreeing in their personal capacities or as guarantors in respect of the repayment of the loan and interest owed by FWG to FWI.

19.  Alternatively, if they were or are bound as personal guarantors, they say they are still not liable for the following reasons:

(1)   Their liability under the guarantee was subject to the condition precedent that FWG charged the requisite percentage shareholdings to FWI, which never happened.

(2)   Alternatively, their liability under the guarantee was discharged on the ground that FWI was in breach for its loan being RMB 80,000,000 short, contrary to the Indicative Term Sheet.  This was so, even assuming that there was the variation by agreement as alleged by FWI [9].

Witnesses

20.  Zheng, Luler and Lin gave evidence in respect of the matters in the deal in which they were involved respectively.  So did Chan and Chen.  There is no dispute that Chen did not take part in the business discussion between Zheng and Chan.  Other than that, the evidence of Chan and Chen as per their statements basically follow the same vein.

21.  As a general observation, I note that the evidence of all the witnesses, perhaps to a relatively lesser degree, Luler and Lin, may at points invite scepticism.  However, I come to my assessment on the basis of the evidence as a whole and in the context of the case.

Circumstances up to the signing of the Indicative Term Sheet

22.  Before turning to the other specific issues raised in defence as set out above, I would address the dispute between the parties in respect of the circumstances up to the signing of the Indicative Term Sheet.  FWI is enforcing the agreement in respect of the loan to FWG and the personal guarantees given by Chan and Chen as evidenced by the Indicative Term Sheet.  It is in this context that the Indicative Term Sheet and its terms are analysed. For the avoidance of doubt, I do not agree with Mr Chan, appearing with Mr Ho for Chan and Chen, who categorises FWI’s case as contending that the agreement between the two sides was partly orally made and partly written. 

23.  As pleaded, and repeated in his evidence as per his statement, which he adopted, Chan admitted that his company had been looking for investor for the Coal Mine business at the material time in 2011 [10].  There is no real dispute that whilst Lin was the general manager of his company in Fuzhou that had had business dealings with Chan, Zheng ran a completely different kind of business at the time, and had no experience in coal business at all.  Nor had he had any previous business dealing with FWG, Chan or Chen.  As mentioned, on FWG’s side, it was Chan who dealt with Zheng.  Apart from being a mutual contact, Lin also gave Zheng advice.  This basically sums up the parties’ background at the material time.

24.  According to Zheng, he did not take on board Chan’s invitation to invest immediately after their first meeting on 9 August 2011, as he knew nothing about the coal industry.  However, Chan asked to meet him again, and so they did in Fuzhou on 20 August 2011.  On that occasion, Chan provided further information and made further representation about the business prospect of FWG.  Chan proposed that Zheng might consider investing by way of a loan which would be convertible to shares in FWG in due course with a view to obtaining a controlling interest in the Coal Mine.  Zheng raised the requirement of due diligence investigation in respect of Chan’s companies and the issue of security and personal guarantees in respect of the repayment obligation of FWG, which, according to Zheng, Chan agreed.  Zheng also requested, and Lin endorsed, that formal agreement should be prepared.  However, to accommodate Chan’s request for injection of funds shortly, Zheng proposed the signing of what subsequently came to exist as the Indicative Term Sheet while the formal agreements would be prepared.

25.  When it came to Chan’s oral testimony during cross examination, his case somehow became that the Coal Mine was already in production in 2011 and he was not really looking for investment. Instead it was Zheng who allegedly took the initiative and expressed interest in acquiring FWG with a view to having its shares listed.  Further, Lin arranged him to meet Zheng on 30 June 2011, which was followed by Zheng’s call for a further meeting.  Chan said he was absolutely passive about that. At the further meeting set up by Zheng, further terms were allegedly proposed by Zheng.  Chan subsequently discussed the proposal with Chen, who apparently left everything to Chan.  Yet both seemed to be impressed by the listing plan proposed by Zheng.  That eventually led to their agreement to yield 67.11% of the shareholdings in FWG in consideration of investment of RMB 306,000,000 by Zheng.

26.  The above version according to Chan during cross examination seems to suggest that Zheng was the one who initiated the investment proposaland subsequently devised its terms.  Clearly the credibility of such assertionsmust be assessed in view of their fundamental difference from what Chan andChen have pleaded and stated, which they also adopted under oath.  Further, the inherent plausibility of such evidence should be assessed against the parties’ respective background as summarised above.  In the course of illustrating his case in court, Chan repeatedly attributed the conception of idea and arrangement to Zheng and Lin to such an extent that not all, if any, of that was actually put to Zheng and Lin in the course of their cross examination.  Chen was far from forthcoming in his evidence, and was conspicuously trying to distant himself from involvement and responsibilityin the matter.  All only invite scepticism about these aspects of the evidence of Chan and Chen.

Preparation and signing of the Indicative Term Sheet

27.  As to the Indicative Term Sheet, there is no dispute that Zheng initiated its preparation.  Concerning this document, the major dispute raisedby Chan and Chen is that it was allegedly produced by Zheng to their surpriseand completely out of the blue on 25 September 2011.  The document is said to have been prepared by FWI without first providing a draft for them to review in advance.  Nor were they allowed time to seek independent legal advice on the terms.

28.  Luler confirmed that pursuant to the instruction of Zheng in early September 2011, she began coordination with Chan’s personal assistant,Helen (“Helen”).  In evidence are copies of the email correspondence between Luler and Helen since early September 2011, which shows that Luler had visited Chan’s office.  According to her, she had also met with Chan.  In accordance with the limited information obtained,Luler came up with the initial draft of the Indicative Term Sheet by 9 September 2011.  Luler sent this initial draft to Helen and asked her to pass the same to Chan.  In forwarding to Zheng her email to Helen, Luler reported in her email to Zheng that the document was drafted according to the idea and request of Chan, and that Chan would arrange to meet and discuss with Zheng at Fuzhou.

29.  It was indeed an initial draft.  By then, even the corporate vehicle that Zheng would use as the contracting party in the deal was still unknown.  It also bore the hallmarks of a non-professionally prepared agreement.  Amongst others, the provision in respect of the guarantee, which the present dispute focuses on, was worded as follows:

「發行人將全部 [49%] 的股權質押給投資者，發行人個人擔保利息、股利及本金贖回。」

30.  Essentially, it provided that FWG (as the issuer) would pledge its shares to FWI (as the investor) as security, and FWG would personally guarantee the return of principal and interest, etc.  It is readily apparent that the company would be in no position to pledge its shares as security to FWI.  Only its shareholders, ie, Chan and Chen, could do that.  Further, to say that FWG would personally guarantee the performance of its obligations to FWI, which was its primary obligation, was superfluous both literally and in substance. Contrary to that, Chan in his oral evidence somehow maintained that Zheng allegedly explained to him that it was a guarantee by FWG.  Not only was that not put to Zheng, but it was also incredible both inherently and viewed against other evidence.   

31.  The evidence shows that Zheng indeed had the initial draft of the Indicative Term Sheet revised, and that Luler eventually sent the revised draft to Helen on 21 September 2011.  The revisions included, among other things,identification of the corporate vehicle of Zheng in the deal (ie, FWI).  As to the personally guarantee, the wordings were revised as follows:

「發行人將全部 [49%] 的股權質押給投資者，發行人兩個控股股東個人(陳三明和陳虎) 擔保利息、股利及本金贖回。」

Essentially, it was revised so that the personal guarantee should be given by the two controlling shareholders of FWG, Chan and “陳虎”(or Chen Hu) [11].

32.  On the same day, Helen acknowledged receipt of the revised draft.

33.  At this juncture, I would digress to mention what happened when the trial began that had to do with the email correspondence referred to above.  About a week prior to the commencement of the trial, FWI disclosed a one-page printout of two emails, one from a Carol to Zheng dated 20 September 2011 merely attaching the revised draft Indicative Term Sheet mentioned above, which was followed by Zheng’s email on the same day to Luler but without its own content.  On behalf of Chan and Chen, issue was taken as to the late discovery.  However, Mr Chan did not object to its admission and inclusion.  Quite on the contrary, he submitted that the documents are relevant as well as ought to be admitted and included for the trial.  Yet on this basis, he asked for adjournment of the trial on the ground that his side was rendered not ready for the trial because of the documents.  Essentially the argument was that his side should be entitled to consider the train of enquiry that should be conducted as a result of the documents or else there would be no fair resolution of the dispute.

34.  I dismissed such claim on behalf of Chan and Chen as an overstatement of the impact of the documents on the trial, and refused the request for adjournment.  The major dispute between the parties is whether or not drafts of the Indicative Term Sheet had been provided by FWI to FWG before its signing on 25 September 2011.  The newly disclosed emails appeared to be the internal correspondence subsequent to the initial draft of Indicative Term Sheet and before Luler got hold of the revised draft from Zheng and sent the same to Helen as mentioned above.  The timings of all the emails are inherently consistent.  Zheng and Luler would give evidence in respect of the preparation and forwarding of the drafts, and they would be subject to cross examination.  The identity of this Carol, if relevant, and explanation of these two emails could be explored when the witnesses gave evidence.  I did not agree that the admission of these newly disclosed documents would in any way prejudice the fair resolution of the dispute in this respect without affording the defence with the opportunity to explore the alleged train of enquiry.  What happened during cross examination of Zheng and Luler proved me right.

35.  Back to the events after the revised draft of the Indicative Term Sheet is said to have been sent to Helen on 21 September 2011.  On 24 September 2011, Zheng and Chan met at Lin’s home at Fuzhou. According to Zheng, Chan brought along the draft Indicative Term Sheet mentioned above and they went through its terms.  The parties made appointment to meet on the following day.  Chan denied the existenceof this meeting on 24 September, though it does not seem that the denial was maintained all the way to the end.

36.  On 25 September 2011, the parties met again at Lin’s home.  This time, Chen was also present.  According to Zheng, Chen said things to the effect that as the Coal Mine was the responsibility of Chan, he expected Chan not to cause him harm by getting him to agree to act as a guarantor.  This was denied by Chan and Chen.  Nevertheless, Zheng, Chan and Chen signed the document on that occasion.

37.  All matters considered, including those specifically discussed below, on balance, I find what the witnesses for FWI said above reflect the truth, and I reject the evidence of Chan and Chen insofar it conflicts with that of FWI’s witnesses.

38.  The background of the parties and how they got to meet for the first time and began business discussion mentioned above refer.  Further, the first instalment of the loan would have to be paid by 30 September 2011 (ie, five days after the signing of the Indicative Term Sheet).  By then, the due diligence investigation in respect of FWG’s group of companies and the Coal Mine, if ever really started, was far from complete, let alone to the satisfaction of Zheng.  Nor had the formal agreement been prepared.  Nevertheless, FWI would basically be carrying out its part of the deal.  It is not at all surprising for Zheng to be concerned about contractual protection when actually parting with substantial sum of money in connection with people whom, and business which, he had had no experience of dealing with. This, in my view, is also in line with the sort of attention on the part of FWI,as far as Zheng and Luler managed as laymen, to the drafting of the Indicative Term Sheet.

39.  Chan alleges ignorance about the Indicative Term Sheet until Zheng produced it entirely to his surprise and out of the blue on 25 September 2011, and therefore the expectation that he and Chen would have to sign it, as it was, right there and then.  The allegation is incredible.  The contemporaneous email correspondence mentioned above confirms that both the initial draft and the revised draft of the document were sent byLuler to Helen before the parties met on 24 September 2011.  As mentioned, in forwarding to Zheng her email to Helen attaching the initial draft, Luler described that the document was drafted with the ideas of Chan incorporated and that Chan would arrange to meet and discuss with Zheng in Fuzhou later.  There is no reason to suspect that at that point of time, Luler would somehow calculate to make a self-serving statement instead of simply one of truth.

40.  In court, Chan suggested that he had not come across the drafts of the Indicative Term Sheet to him, as he had been travelling abroad during September 2011.  Again, such evidence invites scepticism.  The explanationwas suggested for the first time in court.  It is also too convenient to attribute any failure to Helen, when she is not a witness.  The attempt to downplay Helen’s role as a mere accountant is futile, in view of Luler’s evidence in respect of her actual liaison with Helen.  More importantly, the evidence mentioned above and below, on balance, suggests the contrary.

41.  The contemporaneous evidence confirms that Zheng suggested, if not expected, such personal guarantee to be given by Chan and Chen.  Hence his specific revision to the initial draft of the Indicative Term Sheet, mentioned above, to stipulate the guarantee to be given by Chan and Chen, the two controlling shareholders, instead of FWG.  However, his revision was such that the other guarantor was “陳虎” (or Chen Hu).  According to Zheng, he so named Chen because this was how he then reckoned Chen had been referred to during the previous conversation with Chan. 

42.  Zheng’s evidence is doubted on the basis that he is said to be unable to reconcile his evidence during his cross examination and the allegedmistake about Chen’s name.  During cross examination, Zheng gave evidencein respect of his check on Chen’s economic means.  It is therefore submitted that Zheng could not possibly do so without knowing Chen’s name.  On balance, such attack does not suffice to strike down the indisputable factthat Zheng somehow did name Chen incorrectly on the Indicative Term Sheet at a time that would give rise to no basis for suspecting that the mistake was less than genuine.

43.  Indeed, the mistake was corrected in the version of the Indicative Term Sheet that the parties came to sign on 25 September 2011. In the circumstances, the correction of Chen’s name, more probably than not, was moved by Chan’s side after Zheng’s revised draft was sent on21 September 2011 and before the parties met to sign the corrected version on 25 September 2011.  This also lends weight to FWI’s case that Chan managed to bring out the draft Indicative Term Sheet during the meeting on 24 September 2011, when the parties also went through its terms.

44.  Attempt is made to doubt the evidence on behalf of FWI in respect of the exact timing of the consensus in respect of the terms of their deal.  In view of the sequence of events mentioned above, what is beyond question is the fact that personal guarantee in respect of FWG’s obligation was specifically raised in the discussion between Zheng and Chan, made clear by Zheng’s revision of the initial draft of the Indicative Term Sheet, and reviewed prior to as well as agreed upon on 25 September 2011 as evidenced by the signing of the Indicative Term Sheet.  This subdues the query as to the credibility of this aspect of the evidence on behalf of FWI.

45.  I therefore reject the contention that the Indicative Term Sheet was tendered for signing on 25 September 2011 entirely out of the blue and to the surprise of Chan and Chen.  I accept the evidence of FWI’s witnessesto be the truth, and reject what Chan and Chen said to the contrary in that regard.

Whether the Indicative Term Sheet is binding and enforceable

46.  Chan and Chen allegedly signed the Indicative Term Sheet upon the belief that it was not binding or enforceable.  They indeed contend that as a matter of law and fact, it was and is not binding or enforceable on the ground that:(i) it was subject to formal agreement, which was never entered into; and (ii) it was subject to due diligence investigation by FWI to its satisfaction, which also did not happen.

47.  Chan and Chen contend that the document, as the title suggests, provided an indicative investment framework only.  They also rely on the following provisions:

「以下各方同意以上投資框架條款，最終投資條款以正式協議為準。」

and

「可轉換貸款的提供決定於，而不限於令人滿意的盡職調查結果 (包括業務和運作，法律，稅務，財務和會計)行為。」

48.  The above provisions were such that the Indicative Term Sheetwas agreed subject to the terms of the formal agreement, and the convertible loan would be provided conditional upon satisfactory due diligence investigation.  However, for the reasons mentionedbelow, I reject the contention of Chan and Chen that the Indicative Term Sheet is thus not binding or enforceable.

49.  What the title of the document may suggest is not determinativeof whether or not the terms of the document are binding.  Where the language of a document, or a letter of intent, does not negative contractual intention, it is open to the court to hold the parties bound by the document.  The court will be inclined to do so where the parties have acted on the document for a long period of time or have expended considerable sums of money in reliance on it.  The fact that the parties envisage that the letter of intent is tobe superseded by a later formal contractual document does not per se prevent the letter from taking effect as a contract: see Chitty on Contracts (32^nd ed) Vol 1 at §2-132.  The question depends on the terms of the document as understood by the parties at the time of their bilateral acceptance of it.

50.  The Indicative Term Sheet set out FWI’s undertaking to pay thefirst instalment of the loan in the sum of RMB 102,000,000 within five days of the signing of the document.  At the time when the parties signed the document, the reality known to them was that due diligence investigation in respect of FWG’s group of companies, if ever started, was to be completed.  So was the preparation of formal agreements.  Notwithstanding that, the parties contemplated immediate performance of the major obligations of FWI,and this in fact happened.

51.  In respect of the loan extended, FWG had also repaid part of the principal and interest in performance of its obligation.  In court, Chan explained that this reflected no more than his willingness to acknowledge responsibility in respect of the loan actually extended.  However, FWG’s stance went beyond that because Chan had allegedly chased Zheng for payment.  According to Chan in court, that was because he saw FWI as wanting to invest.  I have no difficulty in rejecting such explanation as beingartificial, if at the same time he rightfully, as he claimed, denied the existence of any binding contractual relationship between the parties.

52.  To suggest that either party to the deal embarked on performanceof the major obligations, whilst knowing full well that both conditions of due diligence investigation and formal agreement would not be satisfied in time,yet in the absence of any kind of contractual protection, in my view, defies common and commercial sense in the circumstances of this case.  Objectively assessed, this could not be the understanding of the parties when they signed the Indicative Term Sheet.

53.  The above observation is also borne out by the actual terms of the Indicative Term Sheet.  Following the provision in respect of the condition of due diligence investigation mentioned above, the document provided:

「在這期限內，本投資框架條款對投資人／債權人和發行人有束縛。在令人滿意的盡職調查完成由投資人／債權人，投資人／債權人和發行人將完成最終的投資協議。」

Literally construed, it means that the terms of the Indicative Term Sheet would be binding pending formal agreement that should be concluded upon satisfactory result of the due diligence investigation.

54.  Further,, the Indicative Term Sheet provided:

「本投资框架条款由香港法律管理。」

The above choice of law clause specifying that Hong Kong law applies to the terms of the Indicative Term Sheet would have served no purpose, if the terms were not meant to be binding and enforceable.

55.  In support of the argument that a written agreement expressly made subject to formal agreement is not binding and enforceable, Mr Chan relies on the old case of Winn v Bull (1877) 7 Ch D 29 and the more recent case of Valencia v Llupar [2012] EWCA Civ 396.  In my view, both stand for the applicable principles explained therein but not per se answers to the dispute in the context of the present case.

56.  In Winn, the written agreement to a lease expressly provided that this was subject to formal agreement.  The parties eventually could not agree on all the terms of the formal agreement.  The court held that the agreement to a lease was not binding.  In Valencia, the correspondence between the parties made clear that the contract for partnership was under negotiation.  The court held that there was never a binding partnership between the parties.  The party who had made payment of money upon the mistaken belief that there was a binding partnership was entitled to restitution of the money paid.

57.  It suffices to say that both cases did not involve the terms of the written agreement and circumstances like those that existed in the present case as discussed above.  In other words, the result of application of the same principles to the facts of the present case does not contradict these authorities cited on behalf of the defence.  I should also mention that the entitlement of the party who had made payment upon the mistaken belief that there was a binding contract to restitution as a consequential relief, as found in Valencia, lends no support to Chan’s explanation in court of his company’s repayments to FWI whilst denying any understanding as to the existence of any binding contractual obligations on either party to the deal.

58.  The Indicative Term Sheet is in Chinese.  As I find above, Chan had been provided with the drafts of the document, and the parties had the chance to go through its terms, prior to the signing of it on 25 September 2011.  There is objectively no basis for alleging ignorance of the terms when the document was signed.  Nor is there basis for the alleged lack of opportunity to obtain independent legal advice. In any event, the law is also clear that he who signed the documents is bound by its terms, irrespective of whether or not he has read or understood them, when there is no recognised element in play that would have vitiated the contractual document, such as fraud, misrepresentation, mistake or unconscionable conduct.  In this regard I reject the lukewarm suggestion of the possible absence of clear mind or intention when the document was signed in the course of dinner with drink on 25 September 2011.

59.  I also reject the suggestion that the terms were somehow dictated by Zheng, when, apart from how the terms of the final version of the Indicative Term Sheet came about as explained above, it remained open to the parties as experienced businessmen, who were capable of understanding the terms, to decide whether or not to agree to them and to signify such agreement by signing the document.  There is no valid basis for questioning the binding effect or enforceability of the Indicative Term Sheet.

Whether the Indicative Term Sheet is binding on Chan and Chen in their personal capacities as guarantors

60.  The next contention in defence is that if the Indicative Term Sheet is binding and enforceable, the parties to it are FWI and FWG but not Chan or Chen in their personal capacities.  Nor did either of them agree to act as guarantor as a matter of fact.

61.  Much is said on behalf of the defence about the manner in which the Indicative Term Sheet was signed by the parties.  As mentioned, Zheng signed as representative of FWI while Chan and Chen signed as representatives of FWG.  Emphasis is also placed by the defence on the wordings of the provision referred to in §53 above, which refers to the investor/creditor (ie, FWI) and the issuer (ie, FWG) only.

62.  All circumstances considered, I reject the above contention.

63.  Insofar as a written contract is concerned, whether or not one who signs for and on behalf of his principal is also personally liable depends on the objective assessment of the parties’ intention as appearing from the terms in the particular context of the case: see Bowstead & Reynolds on Agency (21^st ed) at §§9-036 to 9-037.  The following principles set out in Hamid (t/a Hamid Properties) v Francis Bradshaw Partnership (2013) 148 Con LR 205 at §57, per Jackson LJ, cited by both sides’ counsel, are helpful:

“ In my view the principles which emerge from this line of authorities are the following. (i) Where an issue arises as to the identity of a party referred to in a deed or contract, extrinsic evidence is admissible to assist the resolution of that issue. (ii) In determining the identity of the contracting party, the court’s approach is objective, not subjective. The question is what a reasonable person, furnished with the relevant information, would conclude. The private thoughts of the protagonists concerning who was contracting with whom are irrelevant and inadmissible. (iii) If the extrinsic evidence establishes that a party has been misdescribed in the document, the court may correct that error as a matter of construction without any need for formal rectification. (iv) Where the issue is whether a party signed a document as principal or as agent for someone else, there is no automatic relaxation of the parol evidence rule. The person who signed is the contracting party unless (a) the document makes clear that he signed as agent for a sufficiently identified principal or as the officer of a sufficiently identified company, or (b) extrinsic evidence establishes that both parties knew he was signing as agent or company officer.”

64.  Amongst others, if the contract imposes obligations that could only be construed as being undertaken by the agent, the agent who signed the contract may also be personally liable: see Bowstead (above).

65.  First, the Indicative Term Sheet did not merely record the responsibilities undertaken by the two corporate bodies.  As discussed, insofar as the provision of security by pledge of its shares is concerned, FWG would be in no position to do so.  The undertaking as recorded in theIndicative Term Sheet could only be that of the shareholders, Chan and Chen.

66.  Then, there was the provision in respect of the personal guarantee to be provided by Chan and Chen, which came about as a result of the specific revision made by Zheng to the initial draft of the document as mentioned above.  The revision removed the initial provision for the company to guarantee its primary obligation to FWI, which made no sense.

67.  Following the above provision is this:

「公司的主要股東承諾將盡所有能力爭取在港交所上市。」

The major shareholders of FWG that undertook to use their endeavours to have its shares listed on the HKSE are Chan and Chen.

68.  Second, as mentioned, there is no dispute that it was Chan whodealt with Zheng, and Chen did not take part in the business discussion prior to the signing of the Indicative Term Sheet.  Apart from the correction of the name of Chen in the draft of the document available by the meeting on 24 September 2011, Zheng and Chan did not get to sign the document then.  Instead they arranged to meet again on the following day, 25 September 2011, which Chen also attended.  According to Zheng, Chen’s attendance was expected for the purpose of signing the document to signify his undertaking ofhis personal obligations recorded therein.  Otherwise it would have sufficed for Chan alone to sign the Indicative Term Sheet for and on behalf of FWG.  This is disputed on behalf of Chan and Chen on the ground that various documents, including application forms with the bank, cheques and financial documents, show that Chan and Chen were joint signatories.  However, I do not see how it must follow that a contractual document could only be signed by both of them for and on behalf of FWG, in the absence of evidence of such corporate constitutional requirement.  In my view, what is argued on behalf of FWI remains forceful and in line with the objective reality.

69.  Third, when the parties came to sign the Indicative Term Sheet, they signed on each page of the document.  According to Zheng, it was he who requested them to do so.  On the contrary, Chan emphasized how they came to sign as representatives of FWG on the last page, and explained[12]that they did in that manner exactly because they did not want to act as the guarantors for the loan.

70.  In my view, the relevance of how the parties signed the document cannot be considered independent of its terms, which, as discussedabove, provided for both the obligations of FWI and FWG and thosethat could only be undertaken by Chan and Chen personally.  Each page of the document was signed, I find, to signify the signing parties’ acceptance of the record of the terms agreed among the parties.  As mentioned from the outset of this judgment, the parties’ dispute as to how the Indicative Term Sheet came about and came to be signed has to be determined in the context of FWI’s claim that it evidences the agreement between the parties in respect of the loan and the guarantee.

71.  Last, reliance is also placed on the principle of contra proferentem applicable to the construction of a written contract.  It is argued that Zheng could have, but failed to, made clear in the Indicative Term Sheetthe provision that Chan and Chen should also sign in their personal capacities.  Any ambiguity arising out of the lack of such specification, it is argued, should be ruled against Zheng and thus FWI.

72.  Whilst the principle is correctly cited, any ambiguity apparent from the mere wordings of the document, as discussed above, could be and is resolved as a matter of construction of the terms of the document as a whole and in context. This is actually in line with what Giles J said in the Australian case of Clark Equipment Credit of Australia Ltd v Kiyose (1989) 21 NSWLR 160 at 174C–D, cited by Mr Chan:

“ In the result, I conclude that the proper approach is to inquire whether there is to be found an intention that the signatory be personally bound to the contract evidenced in the document, meaning thereby not a subjective intention but an intention to be found objectively, notwithstanding a qualification attached to the signature. That intention, or lack thereof, is to be found upon the construction of the document as a whole, including but not being limited to the qualification attached to the signature, in the light of the surrounding circumstances to the extent to which evidence thereof is permissible. The inquiry is not limited to considerationof the signature and its qualification in order to determine whether or not the signature indicates an assent to be personally bound.”

73.  Each case turns on its own context and facts.  I therefore do not agree that the notion of contra proferentem serves to trump in the circumstances of this case.

74.  On behalf of FWI, reference is also made to the solicitors’ correspondence after the commencement of this action where the solicitors for Chan and Chen at one point[13] acknowledged that they were relevant parties to the Indicative Term Sheet.  In my view, this may not amount to unequivocal admission and, for FWI’s purpose, is not a necessary support of its case, in view of the consideration of the circumstances prevailing at the relevant time as discussed above.

75.  To sum up, I find as a matter of fact that Chan and Chen agreed to personally guarantee the performance of the obligations of their companyas evidenced by the Indicative Term Sheet, which they also signed to signify their respective agreement, and not merely for and on behalf of FWI.

Whether or not the guarantor’s liability is subject to condition precedent which has not been satisfied

76.  The contention is that the liability of Chan and Chen as guarantors was subject to the condition precedent, namely the pledging of 49% shares in FWG in favour of FWI.  This has not happened.

77.  Amongst all, it is this contention that caused me to ponder at one point.  However, I should make clear that this is not because of how this was argued on behalf of Chan and Chen.  I shall explain.

78.  What Mr Chan submits is that where the guarantee provides for a pledge of shares, that would be considered as a condition precedent so that the non- fulfilment of which would absolve the guarantor from liability. He relies on Greer v Kettle [1938] AC 156 as the authority in support. There the lender lent to the borrower upon the latter’s agreement to repay and charge of shares in a third party company as security.  In consideration of the lenderagreeing to lend to the borrower on those terms, the guarantor undertook toshoulder up the repayment as the principal debtor.  What the guarantor agreed to undertake was the repayment of the secured liability of the borrower.  The shares in question in fact had never been issued, and the liability of the borrower was never secured, contrary to the terms of the loan.  As the guarantor’s undertaking was based on the liability of the borrower being secured, it was under no liability when in fact such liability of the borrower was never secured.

79.  In Greer, there was a material difference between the liability that the guarantor agreed to undertake and the actual liability owed by the borrower to the lender.  That was what caused the court there to hold that the guarantor was under no liability.  The present case is different.  As discussed, it is clear that the share pledge had to come from Chan and Chen as the shareholders, who at the same time agreed to guarantee the discharge of the obligation of their company to repay.  Greer does not serve as an authority for their contention that their liability as guarantors did not set in unless and until they have pledged their shares.

80.  The question that, in my view, should be considered is whether it was agreed that the guarantors would provide personal guarantee only in the form of pledge of shares instead of generally and separately from the share pledge.  If it was the former, there may be a point in defence, albeit not in terms of non-fulfilment of a condition precedent.  This is what caused me to ponder.

81.  Reference is made to the draft formal contractual documentations prepared by the solicitors.  It is trite that reference to post- contractual conduct of the parties or documentation is legitimate insofar as they are relevant to the issue of whether and, if yes, what they have agreed, but not what the parties meant by the written terms that they have agreed on.

82.  The drafts prepared by the solicitors consist of the investment co-operation agreement, to which the following drafts were appended:

(1)   Convertible bond agreement;

(2)   Share mortgage deeds;

(3)   Recognition of subordinated debt agreement;

(4)   Shareholders’ agreement; and

(5)   Shares contracting agreement.

83.  The parties to the draft investment co-operation agreement are FWI, FWG and its shareholders, ie, Chan and Chen and the Indonesian shareholder.  Pursuant to that agreement, and relevant to the present purpose, the corporate parties would enter into the convertible bond agreement (1), while Chan and Chen would execute their respective share mortgage deeds (2).  This basically reflects the scheme contemplated by the Indicative Term Sheet.  There is no separately drafted personal guarantee.  Does that mean the personal guarantee of Chan and Chen was only agreed to take the form of the shares pledge?  All circumstances considered, I would answer in the negative.

84.  To begin with, notwithstanding the written remark on the face of the draft investment co-operation agreement that these were finalised drafts dated 29 June 2012, none of the drafts is conclusive as a matter of fact.  None of the parties confirmed during the trial that the drafts were finalised or agreed upon.  They said quite to the contrary.

85.  Turning to how the term as to the personal guarantee was worded in the Indicative Term Sheet as mentioned above, there is no basis to read the first part in respect of the shares pledge either as a (pre)condition to the guarantee or as the form that the guarantee should take.  As a matter of literal construction, the first part and the second part of the provision (in respect of the personal guarantee) are neither mutually exclusive nor the first limiting the second.  As mentioned, on the construction of what the provision was intended to mean, the draft formal agreements, being post-contractual conduct and documentation, are not admissible.

86.  Most importantly, back in the context in which the Indicative Term Sheet is analysed, namely, it being the evidence of the parties’ agreementin respect of the loan and the guarantee, the factual premise for the document,as I find, was that the parties indeed agreed in terms as contended by FWI, which were reduced into writing.

87.  In the circumstances, I reject the contention that the enforceability of the personal guarantee given by Chan and Chen was subjectto the share pledge, without which their liability as personal guarantors neverset in.  Even without the share pledge, the liability of Chan and Chen as the guarantors, I find, remains.

Whether Chan and Chen are discharged from their liabilities as guarantors

88.  FWI was said to be in breach in that its loan to FWG was RMB 80,000,000 short of what it undertook to provide and as stated in the Indicative Term Sheet.  Chan and Chen go so far as contending that their liabilities as personal guarantors would be discharged upon the variation of the principal amount of the loan even by way of agreement.

89.  Zheng’s explanation in this respect as mentioned above refers.  The Credit and Liabilities Statement prepared by FWG, and signed by the relevant parties, supports the explanation.  As explained by FWI, the sum of RMB 80,000,000 became undertaken by Lin Chun subsequent to the parties’ agreement as evidence by the Indicative Term Sheet.  Whilst as a statement setting out the account amongst the investors, the Credit and Liabilities Statement made no reference to any shortfall of investment on the part of FWI.  This was so, notwithstanding the allegation of Chan that he had even chased Zheng for the alleged shortfall.  Further, had this been the case of FWG, one would have expected it not only to defend FWI’s claim but also to counterclaim for damages as a result of such alleged breach.  All lead me to dismiss such allegation as being incredible.

90.  On the basis that the variation, according to Zheng and which I accept, was agreed to by Chan on behalf of FWG, it lies ill in his mouth to effectivelyturn it round to become a basis for his disputing liability under the guarantee.

91.  Not all sorts of variation of the principal debt have the consequence of discharging the secondary liability of a guarantor.  It is not likely that variation with the mere effect of reducing the principal debt and thus the secondary liability of the guarantor of such debt will discharge such liability.  It could have been different if the variation, even in the form of reduction of the principal debt, had affected the core basis of the guarantee.  One instance is where the entirety of the principal amount of the loan promised by the lender is so material that the guarantors somehow would not have committed had it been otherwise.  This is however not the case of Chan or Chen.  Nor is such case made out by the evidence.  The Indicative Term Sheet actually provided that:

「轉換率：投資額／可轉換債3.06億人民幣，轉換為投資人／債權人持有富和集團有限公司FU WOO GROUP LIMITED 67.11% 股權……如果投資的金額有變化，按此比例調整。」

92.  In other words, the parties contemplated that the variation of the amount of the loan would have caused adjustment in the shareholdings upon the conversion of the loan.

93.  It was only in the closing submission did Mr Chan drop this specific contention in defence, saying that this was in view of how the oral evidence unfolded during the trial.  In my view, the contention is unmeritorious from the outset.

Others

94.  On pleading, there seems to be dispute as to whether or not the solicitors acting for FWI, who were responsible for drafting the formal agreements mentioned above, also acted for FWG then[14].  For that, there has been written correspondence whereby the defence demanded for the solicitors’ recusal from the case for alleged conflict of interest.  However, no issue was actually taken when it came to the trial, whether in the opening or closing submissions of the defence.  To leave no doubt, I accept the case of FWI that apart from obtaining information from Chan in connection with the drafting of the documents then and the fact that it was arranged between the parties for the payment of fees for that to come from FWG, the solicitors did not in fact act for FWG then.

Conclusion and order

95.  Rejecting their defence, I enter judgment against each of Chan and Chen[15] in respect of the liability of FWG as adjudged pursuant to the judgment against it dated 29 August 2016.

96.  Following this event, Chan and Chen shall pay FWI’s costs of this action against them, including any costs reserved.  Costs shall be taxed, if not agreed.  In the absence of application in 14 days to vary, this costs order shall become absolute without further order of the court.

Appendix 1

FU WOO GROUP LIMITED
富和集团有限公司
INDICATIVE TERM SHEET
投资框架

以下各方同意以上投资框架条款，最终投资条款以正式协议为准。

发行人：富和集团有限公司FU WOO GROUP LIMITED

代表签字：

签字日期： [Signed] [Signed]

[2011.9.25]

投资人/债权人：OWLSWICK ENERGY LIMITED (FU WOO INTERNATIONAL LIMITED)

代表签字：

签字日期： [Signed] [2011.9.25]