CASH SMART ENTERPRISES LTD v. LI TAT TING

HCA 1677/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1677 OF 2004

______________________

______________________

___________________________

ASSESSMENT OF DAMAGES

___________________________

1. By a Writ of Summons issued on 20 July 2004, the Plaintiff claims against the Defendant for damages for breach of a Release Agreement and for breach of a Deed of Put Option.

2. On 24 September 2004, a Defence was filed by the Defendant.  However, as the Defendant failed to comply with an unless order to file and serve his witness statement, judgment was entered in favour of the Plaintiff against the Defendant on 28 July 2005 with damages to be assessed.  This is the hearing for the assessment of damages.

Background

3. At all material times, the Defendant was a controlling shareholder of a company called Surge Recreation Holdings Limited (“Surge Recreation”).  He would like to have Surge Recreation listed in the Hong Kong Stock Exchange in order to finance the operation of certain entertainment theme parks in PRC.  To achieve this, the Defendant sought the financial assistance of a Mr. Chan Chak Mo (“Mr. Chan”) who was and is a shareholder and director of Cash Smart Enterprises Limited, the Plaintiff herein.  After negotiations between the parties, Mr. Chan agreed and did invest a sum of $35 million into the theme parks and on the understanding and agreement that Mr. Chan or his nominee namely the Plaintiff would, inter alia, receive 16% of the issued share capital of Surge Recreation when listed on the Hong Kong Stock Exchange.  Various agreements were then signed which included, inter alia, a Subscription Agreement dated 26 July 2001 and a Deed of Call Option dated 18 January 2002.

4. By the said Subscription Agreement (which was subsequently revised) signed between the Plaintiff and another company controlled by the Defendant, the sum of $35 million invested by Mr. Chan was treated as a subscription for a convertible bond which allowed the Plaintiff to convert the $35 million into shares of Surge Recreation if the market capitalization of Surge Recreation (when listed) was not less than $320 million and the offer price was not be less than $0.54 per share.  By the said Deed of Call Option, the Defendant together with 2 other persons granted an option to the Plaintiff to purchase shares equivalent to 5% of the issued share capital of Surge Recreation (when listed) at the nominal sum of $1.00.

5. However, towards the end of July 2002, due to the penny stock incident and the then prevailing negative stock market sentiment, the Defendant was not able to obtain a valuation of $320 million for the listing of Surge Recreation and the offer price of share could not be fixed at or above $0.54 per share.  After certain negotiations, a Release Agreement dated 31 July 2002 (“the Release Agreement”) was executed under seal between the Defendant and the Plaintiff.  Under the Release Agreement, the Plaintiff agreed to release the Defendant’s obligations and liabilities under the said Deed of Call Option at the consideration of $16,000,000 to be paid by the Defendant to the Plaintiff.

6. The Release Agreement provides, inter alia, that:-

(a)	the consideration of $16,000,000 was to be paid by the Defendant to the Plaintiff in the following manner:-
	(i)	$3,000,000 to be paid within 3 days of the listing of the shares of Surge Recreation in the Hong Kong Stock Exchange;
	(ii)	the balance should be paid on completion.
(b)	completion was to take place at 10:00 a.m. on such date as may be agreed between the parties and, failing such agreement, on a date to be nominated by the Plaintiff which shall be within 3 days of the expiration of 6 months after the date of listing;
(c)	the Defendant should also procure 45,510,000 ordinary shares of Surge Recreation (“Security Shares”) as should have an aggregate value of $20,000,000 to be charged to the Plaintiff within 7 days of the date of listing as security for the due performance and observance of the Defendant’s obligations under the Release Agreement.

7. Surge Recreation was listed on the Hong Kong Stock Exchange on 15 August 2002.  However, in breach of the Release Agreement, the Defendant failed to pay the first sum of $3,000,000 to the Plaintiff.

8. By a letter dated 30 January 2003 from the Plaintiff’s solicitors to the Defendant, the Plaintiff nominated 17 February 2003 as the date of the completion of the Release Agreement.  Despite the said letter, the Defendant failed to complete on the scheduled date.  The Plaintiff therefore claims against the Defendant for loss and damage suffered in the present proceedings.

9. Further and apart from signing a Release Agreement, the parties had also executed a Deed of Put Option (“the Deed of Put Option”) on the same date i.e. 31 July 2002.

10. According to the Deed of Put Option, the Defendant granted an option to the Plaintiff to require the Defendant to purchase from the Plaintiff 66,000,000 shares of Surge Recreation (“option shares”) at the total price of $36,400,000.  A Mr. Leung Yui Fai was appointed to act as a guarantor (“Guarantor”) to guarantee the due performance and observance by the Defendant of his obligations under the Deed of Put Option.

11. The Deed of Put Option further provides, inter alia, the following terms:-

(a)	the option was to be exercised by the Plaintiff at any time during the option period by serving an option notice on the Defendant.  The option period was defined as the period of one week commencing from the anniversary of the date of Surge Recreation shares become listed on the Hong Kong Stock Exchange subject to acceleration;
(b)	as also provided in the Release Agreement, the Defendant should procure 45,510,000 ordinary shares of Surge Recreation to be charged to the Plaintiff within 7 days of the date of listing of Surge Recreation shares to secure the due performance and observance by the Defendant of his obligations under the Deed of Put Option;
(c)	in consideration of the Guarantor giving the guarantee, the Defendant agreed to pay the Guarantor the sums of $3,350,000.00 each on the 90th, 180th, 270th, and 360th days after the listing date as security for the due observance and performance of the obligations of the Defendant under the Deed of Put Option.  If the Defendant failed to make payments to the Guarantor, the option period would be accelerated to one week after 15 February 2003.

12. The Defendant failed to make the payments to the Guarantor as provided in the Deed of Put Option.  The option period was accordingly accelerated to one week after 15 February 2003.

13. On 18 February 2005, the Plaintiff served the option notice on the Defendant requiring completion on 24 March 2003.  However, the Defendant failed to complete the purchase of the option shares on the stipulated date.  Further, and save for the deposit of the share certificates of 5,542,000 shares of Surge Recreation with the Plaintiff as security, the Defendant had also failed to deposit the rest of the Security Shares as required under the Release Agreement and the Deed of Put Option.  By this action, the Plaintiff also claims for loss and damage suffered as a result of the Defendant’s breach of the Deed of Put Option.

The Assessment

14. At the assessment hearing, the Defendant failed to appear despite that notice of hearing had been given.  As such, the hearing proceeded in his absence.

15. At the hearing, Mr. Chan, the Plaintiff’s director and shareholder was called to give evidence.  He adopted his 2 witness statements respectively dated 24 May 2005 and 21 September 2005 as his evidence.  He confirmed that the Defendant was in breach of the Release Agreement and the Deed of Put Option as a result of which the Plaintiff has suffered loss and damage.  He said that Plaintiff would claim for a sum of $16,000,000 as damages for the Defendant’s breach of the Release Agreement and a sum of $36,400,000 as damages for the Defendant’s breach of the Deed of Put Option.

16. Mr. Chan stated that Surge Recreation (which has now changed its name to Innovo Leisure Recreation Holdings Limited) was listed on the Hong Kong Stock Exchange for public trading on 15 August 2002 under stock code 703.  When Surge Recreation was listed, its issued share capital consisted of 600,000,000 ordinary shares and the initial trading price of the shares was about $0.34.  However, soon after the date of listing, the value of the shares of Surge Recreation started to drop to such a level that it never recovered.  In about March 2003, the shares of Surge Recreation were trading at about $0.10.  On 15 December 2003, the trading of the shares of Surge Recreation was even suspended.

17. Mr. Chan further stated that from 24 March 2003 until 15 December 2003, the shares were trading between a high of $0.11 and a low of $0.04.  The highest trading volume was 4,338,000 shares on 23 May 2003.  The average daily trading volume was about 500,000 shares.  In support of the above, a copy printout of the Price Movement of the shares of Surge Recreation for the period from 24 March 2003 to 15 December 2003 obtained from Bloomberg was produced at the hearing and marked as exhibit “P-6”.  The audited accounts of Surge Recreation for the year ending 31 December 2004 was also produced and marked as exhibit “P-7”.  The audited accounts shows that Surge Recreation had a net liability of $15,635,000 as at 31 December 2004.

18. According to Mr. Chan, the Plaintiff should be entitled to claim damages in the sum of $36,400,000 under the Deed of Put Option.  He explained that under the Deed of Put Option, the Defendant was required to purchase from the Plaintiff 66,000,000 shares of Surge Recreation at the total price of $36,400,000 (which is equivalent to $0.55 per share).  However, from the trading record of Surge Recreation shares as per exhibit “P-6”, the shares never traded above $0.11 since 24 March 2003.  He said that there was no prospect of selling the Plaintiff’s shares to a third party at the price of $0.55.  Any attempt to sell 66,000,000 shares in the market would only serve to drive the price down.  And in any event he stated that it was impossible to sell such a large quantity of shares in a market which had little interest in them.

19. Subject to what I have stated below, I accept the evidence of Mr. Chan as set out in his 2 witness statements of 24 May 2005 and 21 September 2005.  In fact, the evidence of Mr. Chan has not been challenged nor contradicted as the Defendant failed to appear at the hearing.  On the evidence, I accept that the Defendant has failed to pay the sum of $16,000,000 as stipulated under the Release Agreement and as such, the Defendant is liable to pay to the Plaintiff the said sum of $16,000,000 as damages. 

20. In respect of the Plaintiff’s claim for damages for breach of the Deed of Put Option, I do not agree that the Plaintiff is entitled to claim for the full amount of $36,400,000.

21. According to McGregor On Damages, 17th edition, para. 24-008, the normal measure of damages for breach of a sale of shares agreement by the buyer is:-

“……the contract price less the market price at the contractual time for acceptance.  This represents what the seller must obtain to put himself in the position he would have been in had the contract been carried out, since he can sell the shares in the market.”

22. It is further stated in para. 7-004 of McGregor on Damages that:-

“……the claimant must take all reasonable steps to mitigate the loss to him consequent upon the defendant’s wrong and cannot recover damages for any such loss which he could thus have avoided but has failed, through unreasonable action or inaction, to avoid.  Put shortly, the claimant cannot recover for avoidable loss.”

23. In the present case, I am of the view that the Plaintiff has failed to take reasonable steps to mitigate his loss as a result of the Defendant’s failure to purchase the 66,000,000 shares on the completion date.  There is indeed no evidence that the Plaintiff has ever attempted to sell the 66,000,000 shares to reduce its loss between the period from 24 March 2003 to 15 December 2003, i.e. the completion date up to the date the trading of Surge Recreation shares was suspended.

24. I appreciate that in the month of March 2003, the share price for Surge Recreation was at about $0.10 and that any attempt to sell the 66,000,000 shares in the market would only serve to drive the share price further down.  I also accept that it is very unlikely that any buyer would be interested to buy the shares in such a large quantity.  However, and in my view, that does not mean that the Plaintiff could not break up the 66,000,000 shares into smaller lots and sell them at different stages or time.  It is to be noted from exhibit “P-6” (i.e. the printout of Price Movement) that during the period from March 2003 to October 2003, the share price of Surge Recreation was able to maintain at the rate of approximately $0.09 per share.  And according to Mr. Chan, the average daily trading volume was about 500,000 shares.  It is not a case that there is no market for the Surge Recreation shares.  In my view, the Plaintiff should have attempted to sell the 66,000,000 shares by smaller lots in order to mitigate his loss.

25. In assessing the damages that the Plaintiff is entitled to, I think it is reasonable for me to proceed on the basis that the Plaintiff was able to sell the 66,000,000 shares in the market and before the Surge Recreation shares were suspended for trading on 15 December 2003.  And since the shares were trading between a high of $0.11 and a low of $0.04 during the 8-month period from 24 March 2003 to 15 December 2003, I am prepared to take the median of these 2 figures as the price for which the 66,000,000 shares were able to be sold in the market.  The median price would thus be $0.08 [i.e. ($0.11 + $0.04) ÷ 2 = $0.08].  The sale of 66,000,000 shares at $0.08 per share would amount to $5,280,000 (i.e. 66,000,000 x $0.08).  The damages that the Plaintiff is entitled to as a result of the Defendant’s breach of the Deed of Put Option would thus be $31,120,000 (i.e. $36,400,000 – $5,280,000).

26. Accordingly, I award damages to the Plaintiff in the sum of $16,000,000 and $31,120,000.  The Plaintiff would also be entitled to interest on these 2 sums at the judgment rate from date of the writ until full payment.  In the present case, there is no reason why costs should not follow the event.  I will make an order nisi that the Defendant do pay to the Plaintiff the costs of the assessment hearing such costs is to be taxed if not agreed.  The order nisi is to be made absolute upon the expiration of 14 days from the date this decision is handed down.