CHINA PROPERTY DEVELOPMENT (HOLDINGS) LTD v. 北京明華軒投資諮詢有限公司

HCA720/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

ACTION NO. 720 OF 2005

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D E C I S I O N

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Introduction

1.  This is an application by the plaintiff to continue an ex parte injunction.  The injunction restrained the defendant from presenting a petition to wind up the plaintiff on the ground that the plaintiff had failed to satisfy a statutory demand served on the plaintiff on 14 March 2005.

Background

2.  By a Chinese agreement dated 9 August 2004, the plaintiff agreed to purchase from one Mandecly Limited and one Mr Tsoi Yuk Ming 20 per cent of the shares of one World Lexus Pacific Limited.  Mandecly was owned by one Mr Chan Tat-man.  The defendant herein was owned by Mr Tsoi and Mr Chan.  Mr Chan and the defendant were also parties to the said sale and purchase agreement.

3.  Prior to the making of this agreement the plaintiff already held 80 per cent of the shares of World Lexus.  It did so through two wholly owned subsidiaries.  With the acquisition of the remaining 20 per cent shares, the plaintiff became the 100 per cent owner of World Lexus.  World Lexus through its wholly owned subsidiary “北京太平洋城房地產開發有限公司” (“BPP”) had a joint venture with a local village government in Beijing.  The venture was to develop a real estate project in the fashionable Chaoyang District in Beijing.  The project was called “Richmond Park”.

Deductions and Arbitration

4.  Under the agreement the plaintiff had to pay the defendant various sums.  The plaintiff made some deductions purportedly under the agreement.  Some of the deductions were undisputed but some were subject to arguments.  The agreement contained a conciliation clause and an arbitration clause for resolution of disputes amongst the parties.  In the event of a dispute, either party could serve a notice for negotiation.  If the dispute could not be resolved in 30 days, arbitration proceedings could be invoked.

Inter-Pleader Proceedings

5.  Apart from the question of deductions, there was also the argument of to whom the payment should be made.  Clause 7.2 of the agreement provided that the payments should be made to the defendant.  However, Mr Tsoi through his solicitors had demanded payment to be made to him and Mandecly.  RMB¥12 million had in fact been so paid and the defendant had acknowledged such payment as having been made by the plaintiff under the agreement.  The defendant’s solicitors then suggested that the plaintiff could resort to inter-pleader proceedings.

6.  On 2 March, the plaintiff instituted HCMP436 of 2005 to interplead who should be paid a sum of RMB¥12,155,371.  This sum was arrived at by deducting all the disputed and undisputed deductions from the sums payable.  The plaintiff was to pay this RMB¥12,155,371 into court and for the same to be dealt with by a court order.

The Statutory Demand

7.  Of the sums that were deducted, the defendant disputed two sums of RMB¥20 million and RMB¥7.32 million.  BPP, the subsidiary of World Lexus, had entered into certain agreements with one “北京華正時房地產開發有限公司” (“HZS”) as listed in Appendix 2 of the sale and purchase agreement.  They resulted in litigation.  BPP claimed HZS RMB¥10 million and HZS counterclaimed RMB¥20 million.  Clause 3.4 of the sale and purchase provided that if BPP should suffer any loss because of the existence of these agreements, the vendors (i.e. Mandecly and Mr Tsoi), the defendant and Mr Chan should be jointly and severally responsible to compensate such loss.  Pursuant to this clause the plaintiff deducted RMB¥20 million from the money payable under the agreement.  Regarding the sum of RMB¥7.32 million, it was withheld by the plaintiff to cover a land premium paid to the Mainland government for the right to develop part of the project.  The defendant did not think that the plaintiff had the right to deduct these two sums.  It thus served a statutory demand on the plaintiff on 14 March 2005 seeking payment of the two sums.

8.  It should be noted that at this stage the inter-pleader proceedings were still pending and the defendant’s right to receive payment under the agreement had yet to be confirmed by a court order. 

The Correspondence Before Action

9.  After the defendant had issued the statutory demand, the plaintiff’s solicitors by a letter of 29 March pointed out that there was a dispute as to the defendant’s entitlement to receive the payment and that any dispute on the deduction should be resolved by arbitration.  They also threatened to apply for an ex parte injunction against the defendant from presenting any petition to wind up the plaintiff.

10.  The defendant’s solicitors replied on 30 March denying any right of the plaintiff to deduct the sums in the statutory demand and suggesting that the plaintiff could inter-plead these sums if it had any doubt on the rightful recipient.

11.  On 1 April, the plaintiff’s solicitors replied that by reason of recent developments it was no longer necessary to deduct the RMB¥7.32 million for the land premium and it would pay this sum into court under HCMP436 as well.

12.  Regarding the RMB¥20 million, they said that the plaintiff was prepared to pay the same into court under another set of proceedings pending resolution by arbitration of the plaintiff’s right to make this deduction.  This was on condition of the defendant’s withdrawal of the statutory demand.

13.  On 6 April, the defendant’s solicitors wrote back and said that the defendant would accept the plaintiff’s proposal subject to conditions and that the defendant’s undertaking not to petition for the plaintiff’s winding up would only cover the RMB¥20 million and not any other sum, and in the event of a “final determination” dismissing the HZS counterclaim, this sum should be added to the inter-pleader proceedings or be paid to the winner of those proceedings. 

14.  On the same day the plaintiff’s solicitors replied and confirmed that the proposed arrangement would only cover the said RMB¥20 million.  They further said that the “final determination” should cover the exhaustion of all rights of appeal and retrial permissible under the law of the Mainland.  However, they also pointed out that it might well be more sensible to leave any dispute to be dealt with by the court or by arbitration.

15.  On 11 April, the defendant’s solicitors wrote back and said that they only agreed that “final determination” should cover the exhaustion of all rights of appeal but not retrial as might be permissible under law of the Mainland as such right was too vague, uncertain and contingent to be included in the agreement.

16.  On 12 April, the plaintiff’s solicitors replied and disagreed with the defendant’s solicitors.  They however said that since the parties could not come to terms, it was not necessary to prescribe a solution for the issue and the issue could be left to the court or to the arbitration proceedings.  They also enclosed a draft writ of summons for the new proceedings and a draft consent summons for payment of RMB¥20 million into court and a stay of this action in favour of arbitration.  Unfortunately, this final suggestion was not accepted by the defendant. 

17.  The defendant’s solicitors replied on 14 April that the arbitration would cover other sums and the measure to be taken for the RMB¥20 million should not be mixed with those issues.  They further said that if the parties could not come to terms on the measure to be adopted for the RMB¥20 million, the defendant would proceed to wind up the plaintiff.  The defendant did not want to leave the dispute on when the RMB¥20 million could be released to be determined by the court or by arbitration.  The defendant’s solicitors gave the plaintiff 8 more days until 22 April to consider whether to accept their terms.

The Ex Parte Injunction

18.  On 22 April, the plaintiff applied ex parte for an injunction to restrain the defendant from presenting a petition to wind up the defendant and offered to pay the RMB¥20 million into court.  The application was granted by Yam J on condition of payment into court of the RMB¥20 million within 2 working days.  The payment was duly made by the plaintiff on 25 April.

The Progress of Arbitration

19.  The plaintiff had also invoked arbitration proceedings on 12 April.  It then appointed Mr M T Yeung of counsel as one of the arbitrators and the vendors, Mr Chan, and the defendant jointly appointed Mr Rimskey Yuen, SC, as the second arbitrator.  The third arbitrator has yet to be appointed as at the date hereof.

Further Deductions and Inter-Pleader Proceedings

20.  On 29 April, the plaintiff filed a further affirmation in HCMP436 (the inter-pleader proceedings).  It sought to amend the sum to be interpleaded.  It did not simply add RMB¥7.32 million to the original RMB¥12,155,371.  It instead sought to make further deductions for various items so that the total sum to be paid in was reduced by RMB¥11,529,400 and the net sum to be interpleaded was only RMB¥7,945,971 despite the addition of RMB¥7.32 million.

21.  I explain these further deductions.  When the plaintiff issued the inter-pleader proceedings, it had already made some deductions in respect of a claim intimated by one Wong Po-kong against World Lexus.  Wong’s claim was for RMB¥5.34 million and the plaintiff deducted the same to cover its exposure.  The defendant at that stage did not object to this deduction, though its solicitors by their letter of 14 March suggested to deposit the same into a joint bank account of the solicitors.

22.  In the second affirmation in the inter-pleader proceedings the plaintiff deducted a further sum of RMB¥4,037,400.  This sum was made up of RMB¥854,400 as interest claimed by Wong, RMB¥1.3 million-odd for Wong’s estimated costs and RMB¥1.8 million-odd for the plaintiff’s estimated costs.  This further deduction had in fact been referred to in paragraph 23 of the supporting affirmation in the plaintiff’s application for an ex parte injunction but no figure had been mentioned there.

23.  The next item of further deductions was RMB¥642,000 on account of the costs in the HZS action. 

24.  The third item was a sum of RMB¥1.9 million.  Under clause 2.4.1.1 of the agreement, the defendant had to refund RMB¥18.1 million to BPP and at the same time the plaintiff had to pay RMB¥20 million under the agreement.  By an error in paragraph 34 of the plaintiff’s first affirmation in the inter-pleader proceedings, the defendant was misled to think that the plaintiff was amenable to have a set-off of the two sums despite the difference in the parties involved.  However, the plaintiff did not intend a set-off, though it did not dispel the defendant’s misunderstanding despite the ease of the task.  The plaintiff in fact wanted this clause to be performed strictly by the right parties, thus the plaintiff deducted a further RMB¥1.9 million in its second affirmation in the inter-pleader proceedings.  The effect of this deduction corrected the plaintiff’s previous error of calculation of the amount to be interpleaded in the first affirmation though the plaintiff never explained the error to the defendant.  The need to make cross-payments by and to different parties under this clause was also referred to in paragraph 59 of the ex parte affirmation. 

25.  The fourth item was a sum of RMB¥4,950,000.  Under clause 3.7 of the agreement, the vendors and Mr Chan had to provide certain tax invoices for RMB¥15 million, otherwise the plaintiff could withhold 33 per cent of this sum to cover the tax payable for it.  The invoice was not furnished and the plaintiff deducted RMB¥4,950,000 in the second affirmation of the inter-pleader proceedings pursuant to this clause.  The plaintiff did indicate in paragraph 59 of the ex parte affirmation that the invoice was still outstanding but it did not say what consequence would flow from that or how much money would be deducted. 

26.  These four items thus make up the RMB¥11,529,400.  There was in fact a further item of deduction in respect of some ad valorem duty.  That, however, did not form a subject of dispute and I will say no more about that.

Merit

27.  The detailed and apparently comprehensive written submissions of Mr Pow and Mr Lee have not dealt with the merit of the plaintiff’s claim for the injunction.  Mr Pow launchs his attacks on the merit in the course of his oral submissions.

28.  Mr Wong for the plaintiff submits that the plaintiff had merit in its claim for an injunction because the debt of RMB¥20 million was bona fide disputed on substantial grounds as at 22 April and the defendant should not have issued the statutory demand or to petition for the plaintiff’s winding-up on the strength of that.

29.  The first point is that there was a bona fide dispute on substantial grounds on whether the plaintiff was entitled to receive the payment.  Mr. Wong refers to the inter-pleader proceedings which were instituted at the suggestion of the defendant’s solicitors and they were still pending.  He argues that even if the plaintiff was obliged to pay this sum and was wrong in not paying, it still did not mean that the defendant could have issued the statutory demand.  The defendant could have sued the plaintiff for payment or to seek a judicial declaration on its entitlement to receive the sum, but it could not have issued the statutory demand before establishing such right.  It may well be that the right was vested in Mr Tsoi and not in the defendant.

30.  The second point is that there was a bona fide dispute on substantial grounds on which the plaintiff was entitled to withhold the RMB¥20 million pending the HZS counterclaim. 

Locus to Receive Payment

31.  Mr Pow submits to the contrary on both points.  He refers me to the various provisions in the agreement which provided that payment should be made to the defendant and any variation of any term in the agreement required written confirmation from all parties thereto.  He thus submits that the defendant’s right to receive payment from the plaintiff was beyond dispute.  He says that his solicitors’ suggestion of inter-pleader proceedings was not a concession of the defendant’s entitlement.

32.  It is preferable to look at what the defendant’s solicitors have said in their letter of 2 February 2005 on conflicting demands:

“	Conflicting demands from various parties and interest on overdue principal sums
	It seems that, subject to the alleged disputed sum of RMB5.74 million, all along your client admits the outstanding principal sums but is only concerned about the identity of the rightful recipient of the sums as your client has received conflicting demands from various parties. In the circumstances, if this is the real concern of your client, the proper and correct approach is for your client to take out interpleader proceedings with all the relevant parties allegedly having interest in the sums named as Respondents and pay in the undisputed portion of outstanding principal sums into Court. In that event, your client can remove all the risk associated with paying the sums to a wrong party.
	What your client is not entitled is to withhold payment, sit back and demand a joint instruction/confirmation from all the parties claiming interest in the sums. Your client has no authority to make such request under the Agreement. In our view, it is owing to your client’s inaction that your client should bear the accrued interest on the principal sums.”

33.  The defendant’s solicitors were not saying that they had no doubts about the defendant’s entitlement to receive payment and the plaintiff should pay the sum to it. 

34.  After the defendant’s solicitors had served the statutory demand on the plaintiff on 14 March, the plaintiff’s solicitors replied on 29 March and again raised the issue of conflicting demands.  The defendant’s solicitors replied on 30 March.  The relevant part of the reply reads: 

“

2.

Your client’s alleged concern of the rightful recipient of the payments due under the 20 per cent Agreement is not an issue at all. Your client can always take out interpleader proceedings or to increase the interpleaded sums under HMCP 436 of 2005 to safeguard the situation of paying the wrong party as it has done in HCMP 436 of 2005 in respect of the sum covered by that proceedings.”

35.  They were not insisting on payments to be made to the defendant.  They were happy for the sum to be inter-pleaded.  Such a view is only consistent with a mutual understanding between the plaintiff and the defendant that the conflicting demands should be sorted out in legal proceedings.  After the inter-pleader proceedings were instituted, the defendant never said that they were improperly taken out or that there was no need for them.  They never criticised the plaintiff for having taken them out.  I must say that the defendant’s attitude on this was entirely reasonable.

36.  Having decided this issue in favour of the plaintiff that the locus had to be resolved and that the defendant was not entitled to serve a statutory demand, I think the plaintiff has merit in its claim for the injunction and I think it is not necessary for me to deal with the second point on whether the plaintiff was entitled to withhold the RMB¥20 million.  However, in deference to the efforts of counsel, I will also briefly deal with this point.

Right to withhold the RMB¥20 million

37.  Mr Pow says that the plaintiff was not entitled to make the deduction under clause 3.7 because it was only for BPP to claim the loss from the defendant and the claim could only be made after the loss has been sustained.

38.  The history of this matter leading to the agreement and the inter-relationship of the various clauses in the agreement have not been gone in to in this application.  The same applies to the question of set-off.  The defendant is the assignee of the payments payable under this agreement.  There may or may not be an implied term that the plaintiff could seek recompense of BPPC’s loss under clause 3.4.  Since this matter will go to arbitration, the less I say about it the better.  I therefore refrain from expressing a view on this matter, as suggested by Mr Wong.

Material Non-Disclosure

39.  Mr Pow submits that when the plaintiff applied for the ex parte injunction it informed the judge that it had admitted liability for RMB¥12,155,371 and would pay that sum into the inter-pleader proceedings.  It further told the judge that it would pay another RMB¥7.32 million into those proceedings, and a further RMB¥20 million into court under this action.  He said that such information lured the ex parte judge into a false sense of security that the defendant’s interests would be adequately protected.  However, within a week, when the plaintiff filed the second affirmation in the inter-pleader proceedings, it deducted RMB¥11,529,400 and only paid in RMB¥7,945,971 into those proceedings.  This was worse than before.  Instead of paying RMB¥7.32 million more, the plaintiff in fact paid RMB¥4,209,400 less than before.  The defendant became furious, and it is understandable.

40.  But the question is whether the failure of the plaintiff to advise the ex parte judge of this further deduction of RMB¥11,529,400 amounted to material non-disclosure.  Mr Pow submits that it was.  He says when the ex parte judge considered the application for injunction, the plaintiff’s proposed payments assured him that the plaintiff was solvent and the injunction could be granted.  Alas, he says, the judge was misled.

41.  Mr Pow further submits that the plaintiff should have in mind the amounts of the further deductions at the ex parte application.  The plaintiff denied that it was aware of the exact sum to be further deducted for the Wong Po Kong claim at that stage.  It said that the sum was being calculated only.  The plaintiff indeed had not said a word that there would be a deduction of RMB¥4,950,000 if the tax invoice was not produced. 

42.  However, are these matters about deduction in the inter-pleader proceedings relevant to the weighing operation of the ex parte judge, or are these mere background information?  Could the full disclosure of the further deduction of RMB¥11,529,400 make a difference to the weighing process of the ex parte judge? 

43.  The ex parte judge was asked to restrain the defendant from presenting a petition to wind-up the plaintiff on the basis of non-satisfaction of a particular statutory demand for two particular sums of RMB¥7.32 million and RMB¥20 million.

44.  For the RMB¥7.32 million, the plaintiff said it would pay it into the inter-pleader proceedings. For the RMB¥20 million, the plaintiff said that it would pay it into court under this action.  So the court was in effect advised by the plaintiff that the plaintiff had the money and was in a position to pay the sums demanded in the statutory demand, but it had good reasons not to pay the same to the defendant.  It would however provide security to make sure that the claims in the statutory demand could be met if they should be met at any time. 

45.  The court was not being asked to restrain the defendant from pursuing the plaintiff for any other debt, whether by the service of other statutory demands or by winding-up proceedings, or otherwise.  The plaintiff only sought an injunction to deal with the claims in this particular statutory demand and not otherwise.  Even the further deductions were disclosed to the ex parte judge, they would not have an effect on the weighing operation.

46.  Assuming that the full extent of the further deductions was disclosed, the ex parte judge would not have refused the injunction because of them.  He could not have asked for further payment into court in this action to cover these further deductions before granting the injunction because the injunction would not affect the defendant’s right to recover these further deductions. 

47.  I therefore hold that it was not necessary to disclose to the ex parte judge the exact amount of the further deductions as the same was not material for the weighing process on whether to grant the ex parte injunction.  The reference to such deductions in the ex parte affidavit was only to furnish a fuller background to the judge.

48.  Before leaving this topic, there is one more matter raised by the defendant which Mr Pow has also characterised as material non-disclosure.  It is about the terms of the order, which reads: 

“

1.

the defendant be restrained and an injunction is hereby granted restraining it, whether by itself or by its officers, servants or agents or otherwise howsoever from presenting and/or issuing a winding up petition against the Plaintiff upon or in respect of a Demand dated 14 March 2005 and served by the Defendant (through its solicitors Anthony Siu & Co.) on the Plaintiff (“the said Demand”), whether for or on the basis of the non-satisfaction of the said Demand or otherwise.” (emphasis added)

49.  Mr Pow says that this injunction is wide-ranging and operates beyond the statutory demand and restrains the defendant from filing a winding-up petition on any ground or for any debt. 

50.  I must say that after reading the ex parte affirmation, the existence of these three words “whether” and “or otherwise” appeared to be an error as the thrust of the application was to restrain a winding-up petition in respect of the statutory demand for the RMB¥20 million and not otherwise.  Mr Wong for the plaintiff clarifies the purpose of the words “or otherwise” and I think if these two words are moved to just behind the word “non-satisfaction”, the ambiguity would be removed.  I accept Mr Wong’s explanation and find that neither he nor the ex parte judge intended the injunction to have the broad effect as contended by Mr Pow.

51.  Then Mr Pow says that the plaintiff’s failure to draw this error to the attention of the ex parte judge was a material non-disclosure which resulted in the judge making an injunction with broad effect.  I would decline this submission as I find that neither the plaintiff nor the defendant had taken the injunction as having any effect beyond the statutory demand in question.  I say this because after the injunction was granted, the defendant was not deterred by it and issued a further statutory demand for the further deductions in the Wong Po Kong claim and the tax invoice issue.  The plaintiff also threatened to apply for a further injunction to deal with this statutory demand, which was later withdrawn.  Neither party paid any regard to the ex parte injunction as granted.

Urgency

52.  Mr Pow also attacks the ex parte application by saying that there was no urgency and thus no need to have it made ex parte.  Indeed, the defendant’s solicitors had repeatedly given the plaintiff indulgence by undertaking not to file the petition for winding-up for short periods for the parties to negotiate.  The last indulgence was given on 14 April to last until 22 April for the plaintiff to consider accepting the defendant’s terms.  There was thus no urgency, as submitted by Mr Pow.

53.  I think if the plaintiff should have, either in the evening of the 21st or the morning of the 22nd, offered to apply for inter partes injunction in return for the defendant’s undertaking not to file the petition to wind-up the plaintiff in the meantime.  It was possible that the defendant would have accepted it.  However, the issue of urgency was for the ex parte judge, and once it was accepted by the judge, it was not a matter to be revisited for the purpose of discharge.  There is no authority that an ex post facto demonstration of the lack of urgency can by itself justify the discharge of an ex parte injunction.  However, it does not mean that there can be no consequence if it can be demonstrated later that there was no urgency.  The court can always express its disapproval by an appropriate costs order.

Locus Resolved and HZS’s Counterclaim Dismissed

54.  I understand that the inter-pleader proceedings have been resolved in the plaintiff’s favour with no pending appeal and the HZS counterclaim has also been dismissed with no appeal.  However, these later developments do not retrospectively make good the statutory demand if it was not good as at 22 April.  The defendant is of course at liberty to take whatever measure it may deem proper to advance its interests in the light of these developments. 

Continuation of Injunction

55.  In the premises, I continue the ex parte injunction but move the words “or otherwise” from the end of the order to just behind the word “non-satisfaction”. 

56.  I also order as prayed for by the summons of the plaintiff issued on 25 April 2005 that the action herein be stayed pending the outcome of the arbitration proceedings commenced by the plaintiff against the defendant and others on 12 April 2005.

57.  I further grant liberty to the parties herein to apply to uplift this stay on the ground that the other party has failed to exercise its best endeavours to proceed with the arbitration proceedings.

58.  I order that the costs of the application to continue and the defendant’s application to oppose be to the plaintiff on a party and party basis.