MAK KANG HOI v. HO YUK WAH DAVID

cacv 375/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 375 of 2004

(on appeal from HCA NO. 14674 of 1999)

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JUDGMENT

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Hon Rogers VP:

1.  This was an appeal from a judgment of Ms Recorder G Li given on 12 November 2004.  The judge found in favour of the plaintiff and gave judgment in the sum of $32 million with interest from 29 April 1998 at prime plus 1% with annual rests up to the date of judgment.  At the conclusion of the hearing of this appeal, judgment was reserved.  This court did not hear argument on the plaintiff’s respondent’s notice and the position was reserved that should it be necessary to do so a further hearing would be arranged.  In the circumstances this court has found it unnecessary to consider the plaintiff’s respondent’s notice.

Background

2.  The plaintiff is a surveyor who has been successful not only in his chosen profession but also in investment in shares, primarily “blue chips”.  Through his dealings on the stock market he accumulated considerable wealth.

3.  After the plaintiff had been introduced to the defendant who was a solicitor, he was involved in property projects in the Mainland together with the defendant.  The defendant set up his own firm in late 1994.  After he set up his own firm he became interested in direct investment in property development and infrastructure projects in the Mainland.  As a result, in 1995, he established the Asia-Pac Infrastructure group of companies which included Asia-Pac Infrastructure Development Ltd and Asia-Pac Expressways Investment Management Ltd, which were wholly owned by him.

4.  In 1996, in conjunction with one Gao Jiaren, the defendant incorporated the company which is central to this case namely Greater Beijing Region Expressways Ltd (“GBRE”).  GBRE was incorporated in the British Virgin Islands and, through subsidiaries, held interests in toll road projects in the Mainland, mainly in the Beijing, Tianjin and Hebei regions.

5.  It would appear that the intention was that GBRE would be floated on a stock market, most likely the Hong Kong Stock Market.  Mr Gao and Mr Ho were the original shareholders in GBRE by reason of their holdings through Miracle Chance Ltd, which was another BVI company.  Mr Gao owned 65% and the defendant owned 35% through another of his companies Carnation Developments Ltd.  The intention was that initially investors would be brought in to finance GBRE in two tranches and that the company, or another company to be used as a listing vehicle, would then be floated on the stock exchange.  The investors who would be brought in to hold GBRE’s shares prior to any flotation on the stock market would be expected to subscribe a minimum of US$10 million.  For those who were not prepared to subscribe that amount the defendant set up another company, The PRC Expressways Fund Ltd (the “Fund”).  The minimum investment in the Fund was to be US$2 million.  The details relating to this are set out in what were termed Confidential Information Memoranda (“CIMs”) which were produced both in respect of GBRE and the Fund.

6.  The CIMs make interesting reading.  One of the facts which emerges is that Miracle Chance Ltd would not be paying for its shares, or at the very most would only pay the nominal amount of the shares, the share premium would be paid by the other investors.  From the CIM dated 10 October 1996 in respect of GBRE it appeared that the intention was to raise US$50 million through the Fund; the first tranche placees would contribute approximately US$100 million; the second tranche, which would be offered about three to six months after the first tranche, would raise US$200 million and the public investors on the Initial Public Offering would be contributing approximately US$350 million.  The result anticipated under the heading “Private Placement and Proposed Flotation” was that Miracle Chance Ltd would end up with something like 39.56% of GBRE, or of whatever company would be used as the listing company.  The total amount contributed would be US$700 million.  On the basis of that chart it would appear that it was contemplated that Carnation Developments Ltd would have 35% of Miracle Chance Ltd’s 39.56% of the company thus benefiting from a total capital contribution to the extent of US$96.92 million.  In addition it is noted under the heading “Controlling Shareholders”, and as observed in the judgment, that GBRE had agreed to pay Asia-Pac Infrastructure Development Ltd a consultancy fee which was to range between a minimum of US$3 million and a maximum of US$4.45 million.  In summary, therefore, Mr Gao and the defendant had every incentive to seek and encourage investors in GBRE whether directly or through the Fund.  It is of interest to note that, as the judge found, while companies controlled by the defendant took up two-thirds or so of the redeemable preference shares, the Fund was only able to pay in cash US$6.8 million for the shares allotted to it, leaving over US$23 million outstanding.

7.  In relation to the Fund the way it was intended to operate is set out in the CIM in respect of the Fund dated 10 October 1996.  In respect of the Mode of Participation, it was said that the redeemable preference shares which would be issued were intended to be redeemed at the option of the Fund as far as possible within six months after the date of listing or quotation of the GBRE shares.  In relation to the returns to shareholders it was said that the redeemable preference shares would not be dealt with on any securities market and that the returns to shareholders would be through redemptions of all, or, on a pro rata basis, part of the redeemable preference shares or through the declaration of dividends on redeemable preference shares.  It was then said;

“For the time being, the Fund does not foresee that it will declare dividends on the Redeemable Preference Shares.  Instead the Fund intends to make redemptions of the Redeemable Preference Shares in specie by the distribution of shares representing its interest in GBRE which are dealt in on a recognised securities exchange over the 6 months following the date of the listing or quotation of such marketable shares.  Shareholders receiving such shares may then deal with them as they wish, including to sell them on the recognised securities exchange.  Under the GBRE Investment Agreement, both of GBRE and Miracle Chance Ltd (GBRE’s controlling shareholder) agree to use their best endeavours to obtain a listing or quotation from the shares of GBRE or its direct or indirect holding company on a recognised securities exchange as soon as practicable within 12 months of the initial completion of the GBRE Investment Agreement.”

8.  It is also made clear that there could be a possibility that the GBRE group might be merged into another group in which case the Fund might redeem the redeemable preference shares by a cash payment.  The Fund was to have a chartered life of three years from the date of the initial closing after which the Fund would be voluntarily liquidated.

9.  These CIMs were sent by the defendant to the plaintiff.  Whether the plaintiff would have read the documents sufficiently to be aware of all the implications is, on the findings of the judge, doubtful.  What is clear, however, is that when the defendant initially sought to interest the plaintiff in investing in GBRE or the Fund, the plaintiff was not keen.  Nevertheless, the defendant was successful in enticing investment by the plaintiff.  Whether that was contributed to by the fact that there had been successful IPOs relating to other Mainland infrastructure projects is something which matters not.

10.  The defendant invited the plaintiff to lunch on 3 February 1997.  This was the major occasion on which, apparently, the plaintiff and defendant discussed the arrangement of the plaintiff’s investment.  There was, it seems, also discussion about an investment in a real estate project in Beijing.  That never materialised and, again, the extent of the plaintiff’s interest in such an investment does not seem to me to be of great importance as regards the facts of this case.  What is clear is that the plaintiff’s potential investment in relation to GBRE was discussed.  The initial agreement was to invest HK$20 million.

11.  It was the plaintiff’s case that he agreed to purchase GBRE shares from the defendant in anticipation of the listing on the Hong Kong Stock Exchange.  The plaintiff’s case was that the defendant would refund the plaintiff the purchase price if no listing took place by the end of July 1997.  If a listing did take place the defendant would have the option of either delivering GBRE shares at a discounted price or repaying the plaintiff a sum calculated in accordance with the formula which had been agreed, within one month after the listing.

12.  In contrast, the defendant’s case as it existed on the pleadings at trial, was that the plaintiff was to subscribe for redeemable preference shares of the Fund and in the event of the Fund failing to redeem the Fund shares within one month after the flotation of the holding company of GBRE, the defendant would pay the plaintiff a sum computed by reference to the pricing of the second tranche of GBRE shares.

13.  At this stage it suffices to say that the judge did not accept either version.  What is perhaps more germane is that there is no doubt that the very next day, 4 February, the defendant sent the plaintiff a letter which the plaintiff then signed signifying his agreement.  That read as follows:

“I refer to our discussion yesterday.

As agreed, I understand you will send me the amount of HK$20,000,000 (equivalent to US$2,587,322 at rate of US$=HK$7.73) on the following basis:

1. You will provide to me the sum of HK$10,000,000 on 5^th February, 1997 and the balance HK$10,000,000 on or before 16^th February, 1997, to participate in the profit and gains of such number of redeemable preference shares in The PRC Expressways Fund Limited determined by reference to the pricing of the second tranche private placement of Greater Beijing Region Expressways Limited (“GBRE”) as set out in the term sheet of the private placement of GBRE dated 5^th December, 1996 (i.e. 45% discount to the net asset value of GBRE at the closing of the second tranche private placement subject to such adjustments as stated in the term sheet therein); and

2. Subject to the above, I will, in full satisfaction of your above participating interest, repay you within one (1) month after the listing of the holding company of GBRE (“LISTCO”), in the amount equivalent to the value of such number of redeemable preference shares in the PRC Expressways Fund Limited as determined above, by reference to the issue price of the initial public offer of the shares in LISTCO or by reference to the closing market price of the shares in LISTCO on the date preceding the date of payment, whichever is higher.

Please confirm your acceptance of the above by signing and returning a copy of this letter to me.”

14.  During the hearing of the appeal, I observed that I considered that the letter presented considerable difficulties in construction.  That was a view seemingly shared by the judge.  In the course of the defendant’s evidence it became apparent that despite his protestations that the letter was perfectly clear, the defendant could not explain the calculations until he was “force fed” calculations in the course of his reexamination.  This caused the judge to observe, in my view justifiably, that that part of the reexamination was farcical.

15.  The letter of 4 February was followed by the letter of 17 February which read as follows:

“ I refer to our recent discussions and the letter agreement dated 4^th February, 1997 (“Letter Agreement”), which will be superseded by the following:

1. As agreed, you will provide to me HK$30,000,000 instead of HK$20,000,000.  The sum of HK$10,000,000 has been sent to me on 5^th February, 1997 and you will provide to me the balance HK$20,000,000 on or before 17^th February, 1997.

2. Subject to the above, I will in full satisfaction of the above payments, within one (1) month after the listing of the holding company (“LISTCO”) of Greater Beijing Region Expressways Limited (“GBRE”), repay you an amount equivalent to the value of such number of LISTCO shares, representing X number of shares in GBRE, at the issue price of the initial public offering of LISTCO shares or at the closing market price of the LISTCO shares on the date preceding the date of repayment, whichever is higher.  X number of GBRE shares will be determined as follows:

X =	A
	B
A =	the total amount of your investment i.e. HK$30,000,000 (US$3,880,983 at the rate of 7.73)
B =	the issue price per GBRE share in the second tranche private placement of GBRE as set out in the term sheet of the private placement of GBRE dated 5th December, 1996 subject to adjustments as stated therein

Please confirm your acceptance of the above by signing and returning a copy of this letter to me.”

16.  It was said that there had been no discussion as to the terms of the contract in the intervening time save that the amount was increased.  But the absence of discussion does not preclude new terms being agreed by the parties signified by the issuance and acceptance of the letter of 17 February.  It is clear that the letter replaces any agreement recorded in the letter of 4 February.  Of that there can be no doubt.  The amount of the investment was further increased by another $20 million which was recorded by letter dated 20 February 1997.  That letter was in the same terms as the letter of 17 February save that there was no mention of the letter superseding any earlier agreement.  Each of these letters was signed by the plaintiff signifying his agreement thereto.

17.  It may be noted at this stage that the receipt which was issued for the first $30 million was issued by the defendant’s solicitors firm.  Against “Matter Description” was “The PRC Expressways Fund Ltd” and under the heading “being as to payment of” was entered “Subscription”.  A similarly worded receipt from the defendant’s solicitors firm was issued on 4 March 1997 in respect of the payment of $20 million covered by the letter of 20 February 1997.

18.  The plaintiff’s enthusiasm for the GBRE project can be gleaned from the fact that on 24 February 1997 he sent a handwritten note to the defendant asking for an allotment of $25 million worth of GBRE to him at the IPO stage.

19.  It appears that rather than waiting for the IPO an agreement was entered between Asia-Pac Expressways Investment Management Ltd and the plaintiff for the plaintiff to purchase 7,212 GBRE shares for HK$25 million.  That agreement was dated 23 April 1997.  It is significant that by that stage the Stock Exchange was indicating in clear terms that it did not consider that GBRE was suitable for an expedited IPO.

20.  The plaintiff’s enthusiasm to the GBRE investment clearly began to wane because Asia-Pac Expressways Investment Management Limited agreed to buy back the 7,212 GBRE shares for HK$25 million by two instalments following a meeting between the plaintiff and the defendant on 23 September 1997.

21.  The judge was not entirely certain as to when the plaintiff began to ask for the return of his investment money.  It was probably in August 1997 but certainly by the following year the plaintiff was clearly disenchanted with his investment.  The plaintiff had been requesting his money to be returned and on 21 May 1998 Bloomberg News carried a story about the split between Mr Gao and the defendant and the possibility that GBRE might have to be wound up.  The plaintiff apparently left a strong message with the defendant’s secretary when he could not reach the defendant.  He apologised for that in a note set out in the judgment below, which had mentioned a promise which the defendant had made on 29 April at a meeting at the China Club.  The plaintiff was asking for the balance of $40 million to be returned.  This was in contemplation of the return of $10 million which was returned by cheque of the same date. 

22.  The defendant gave evidence that he considered that he was making an ex gratia payment.  It was the plaintiff’s view that the defendant was under an obligation to pay back the money since the IPO of GBRE was clearly not going ahead.  Be that as it may, it appears that the relationship between the plaintiff and the defendant had deteriorated to the extent that they did not contact each other directly but that the defendant arranged for a solicitor in his office, Mr Loong Ping Kwan, to be the contact with the plaintiff.  It suffices to say that $18 million was returned to the plaintiff.  When the money was returned the plaintiff was requested to sign a letter in similar terms to that of 17 February 1997 indicating that the amount of his investment was reduced in the final figure in the letter of 15 July 1988 to HK$32 million.

The judgment below

23.  The judge rejected the plaintiff’s case that the defendant had agreed to sell GBRE shares or had the option of delivering such shares to the plaintiff.  In my view she did so for clearly very sound reasons.  In the first place the letters in February 1997, particularly that of 17 February 1997 and the later letter as well as the letters in 1998 make no mention of a sale of GBRE shares or options to purchase or put those shares.  In the second place there is a clear distinction between the arrangement that was arrived at by reason of those letters and the manner in which the plaintiff purchased the 7,212 GBRE shares.

24.  The judge also rejected the defendant’s case on the pleadings as they stood at trial that the plaintiff was to subscribe to Fund shares.  Mr Yu SC, who appeared on behalf of the plaintiff, was able to demonstrate the ever-changing nature of the defendant’s case as to the meaning of the letters of 17 February 1997 and thereafter.  He pointed out, for example, that in the defence as originally filed it was alleged that the plaintiff’s total payments of $50 million were in consideration of the defendant making a cash payment.  The defendant’s case then began to change with his witness statement made in May 2000.  In that the defendant said that the plaintiff’s payment represented an agreed purchase of redeemable preference shares in the Fund price at 45% discount to the net asset value.  He went on to say that the plaintiff would then receive shares in the Holding Company either directly as a result of a decision of the directors of the Fund or if the directors did not decide to redeem the redeemable preference shares within one month of the listing the defendant would deliver shares in the Holding Company.

25.  By the time of his second affirmation made in December 2000 the defendant was averring that he held 32,121 redeemable preference shares for the plaintiff.  The defendant’s early evidence at the trial was that he had made plain to the plaintiff that he, the defendant, was selling the plaintiff his own redeemable preference shares as in GBRE.  I do not intend to synopsize the defendant’s evidence in relation to what he considered were his obligations and the plaintiff’s rights under the agreement which had been reached.  It is quite clear that the defendant’s evidence was rambling, at times extremely difficult, if not impossible, to understand.  When put under pressure in cross-examination on the basis that the plaintiff’s legal advisers had by then recently established that the Fund shares owned by the defendant were under charges to financial institutions, the defendant proffered various suggestions as to what rights the plaintiff might have acquired. 

26.  In summary the judge was, in my view, quite correct to reject any of the propositions put forward by and on behalf of the defendant at trial.

27.  The judge accepted that there had been an agreement between the plaintiff and the defendant and was satisfied that the letter of 17 February 1997 and the subsequent letters properly expressed that agreement.  It was an agreement to repay an amount equivalent to the value of whatever company’s shares were listed on an IPO calculated by reference to the proportion which the amount which the plaintiff invested bore to the issue price of GBRE shares in the second tranche of the private placement as set out in the term sheet dated 5 December 1996.  Effectively that was at a 45% discount to the value of the shares he had at that time.

28.  The judge went on to reject the plaintiff’s case that there had been a positive representation that there would be an IPO by July 1997 and that in default thereof the defendant would repay the plaintiff.  However, the judge held that the whole agreement was premised on there being an IPO of GBRE.  She pointed out that the agreements were only workable if there was an implied term that the listing would take place within a reasonable time.

This appeal

29.  On this appeal Mr Jat SC, who appeared on behalf of the defendant, took as his first point that it was not open to the judge to find in favour of the plaintiff having rejected the plaintiff’s evidence as to the nature of the agreement.  His argument was that it was not a mere variation or modification of the plaintiff’s pleaded case: it was a different case to that which was pleaded.  He said that the focus of the trial had been as to the existence of the oral guarantee should there be no listing.  His argument was that there was no focus on the nature of the agreement as such.

30.  In my view having a read large parts of the transcript it is quite clear that there was a great deal of focus, particularly in the defendant’s evidence, as to the nature of the agreement which had been reached.  I do not consider that many of the matters which the defendant now avers should be taken into account, such as the defendant’s dealings with other persons who also invested either in GBRE or the Fund or in relation to other investments such as the real property investments in Beijing, would assist the defendant.  In my view, the judge was correct.  The agreement between the plaintiff and the defendant was effectively reduced to writing and that writing is clear.  There was no direct investment either in GBRE shares or in Fund shares.  The contract was simply that the defendant would pay the plaintiff a sum to be calculated in proportion to the amount which plaintiff invested and the eventual price of the GBRE shares, or the listed company shares if that were different, at the time of the IPO.

31.  In this respect sight cannot be lost of the ever changing nature of the defendant’s case as to what he considered was the nature of the agreement.

32.  The judge was criticized for ignoring the relevance of the six-month lockup period.  The defendant’s explanation was that the formulae contained in the February letters were devised to overcome the six-month lockup period.  But the judge did not appear to have accepted the defendant’s evidence that lockup was mentioned in his discussions with the plaintiff.  The evidence was clear that the plaintiff did not want any Fund shares and was not acquiring any beneficial interest in Fund shares.  That was accepted by the judge.  That the lockup period had been the specific concern of other investors is not to the point: there was no finding that this had been the plaintiff’s concern.

33.  The second major point that was taken was that the judge had failed to take into account or misunderstood various facts.  It was said that this had been occasioned because of the extreme length between the conclusion of the hearing of the trial and the date of judgment.  In respect of that latter point it is, of course, highly undesirable that such a long period should elapse.  The question nevertheless must remain as to whether that has caused the judge to fall into error.  As a preliminary observation, I would mention that in the first place the judgment itself demonstrates that far from the judge not recollecting the events and issues at the trial, her concise and precise reasoning demonstrates that she was fully aware of all the facts and matters and, indeed, events of the trial.  This is, to some extent, confirmed by the fact that because the defendant sought a transcript at a late stage it was necessary to obtain copies of the judge’s notes in case the full transcript was not available by the time of the appeal.  A comparison of the notes and the transcript shows two things.  Firstly the judge took a very full note.  Secondly it would appear that the judge must have confirmed material parts of the evidence by listening to the recording.

34.  It is said first of all that the judge misunderstood the plaintiff’s case.  I see no warrant for that.  The judge was very clear that she was not accepting the plaintiff’s evidence as to what he considered had been agreed.  It was clear that the plaintiff and defendant had come to an agreement, that as a result the $50 million had been paid and the terms of an agreement were set out in the letters of 17 February and thereafter.  In those circumstances it was for the judge to find what the terms of that agreement were.  That she has done.  The judge was justified in her assessment as to why the plaintiff was confused as to what he was purchasing.

35.  Various minor points were made on behalf of the defendant, for example, that the 4 February 1997 letter refers to the Fund and the Fund to shares.  As I have already indicated, that letter is difficult to construe.  Nevertheless, at the end, I consider that it is capable of construction and that construction is certainly not that the plaintiff was investing in Fund shares.  The terms of the receipts which had been issued by the defendant’s firm cannot change the nature of the contract.  In any event the wording is not so clear as to displace the proper construction of the contract itself. 

36.  Many of the points raised on behalf of the defendant related to a rejection of the defendant’s explanations in evidence.  It is hardly necessary to emphasise the fact that having considered the transcript I would have found it surprising, to say the least, had the judge relied on any of the defendant’s evidence.

37.  It was also said that the judge had been unfair in referring to the defendant as being devious in the drafting of the letters in 1998 which were said to supersede the agreement in the letters of 17 February and 20 February 1997.  In my view the judge was justified in making that comment.  Clearly there had been no discussions between the plaintiff and the defendant.  The only discussion that the plaintiff had had was with Mr Loong.  The judge was justified in adopting the view that the plaintiff’s evidence was correct that he had signed the documents in order to acknowledge the receipt of the money.  Whatever else, by May 1998, it was far too late to change the terms of the contract and hence whatever Mr Loong said by way of explanation could scarcely be said to have had contractual effect.

38.  I would therefore dismiss this appeal and make an order nisi in favour of the plaintiff.

Hon Le Pichon JA:

39.  I agree.

Hon Burrell J:

40.  I agree.