CHEMAY INC v. DONG GANG INVESTMENT (HONG KONG) LTD AND ANOTHER

HCA1039/2009

   IN THE HIGH COURT OF THE

   HONG KONG SPECIAL ADMINISTRATIVE REGION

   COURT OF FIRST INSTANCE

   ACTION NO. 1039 OF 2009

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BETWEEN

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J U D G M E N T

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1.  This is the plaintiff’s appeal against the order of Master de Souza made on 18 March 2010 dismissing the plaintiff’s application for summary judgment under Order 14 with costs.

Background

2.  Maoye International Holdings Ltd (“Maoye”) is a company listed on the Hong Kong Stock Exchange. On 21 April 2008, Maoye announced a global offering of its shares in Hong Kong (86,300,000 shares offered) and also internationally (776,700,000 shares offered). The deadline for application for the new shares fell on 24 April 2008.

3.  The plaintiff is a company incorporated in the British Virgin Island and is controlled by one Hwang Jong Moon (“Hwang”).

4.  On 21 April 2008, Hwang was contacted by a Mr Ken Shek who informed him of the investment opportunity from the global offering by Maoye. Ken Shek also emailed to Hwang a draft financial management agreement and other documents relating to the 1^st defendant, a company incorporated in Hong Kong.

5.  As a result, on the following day, Hwang came to meet the 2^nd defendant who was and is the majority shareholder and director of the 1^st defendant. The 2^nd defendant was also introduced to Hwang as the brother of Huang Mao Ru, the chairman of Maoye.

6.  On 24 April, the plaintiff and the 1^st defendant entered into a Specific Commissioned Financial Management Agreement (“the Management Agreement”) whereby the plaintiff appointed the 1^st defendant to manage the plaintiff’s investment of 20 million Maoye shares upon the terms contained therein for a period from 25 April 2008 to 31 January 2009 (“the Management Period”).

7.  The 2^nd defendant in the capacity as a guarantor of the 1^st defendant under the Management Agreement also executed a separate written guarantee in favour of the plaintiff.

8.  After the Management Agreement was entered into, the plaintiff opened a securities account with First Shanghai Securities Ltd (“FSSL”) and acquired 20 million shares of Maoye offered in its global offering for $62 million (with a further $780,580 being paid for commission, transaction levy and trading fee) and the same were held in the plaintiff’s securities account with FSSL where they remained untouched until the end of the management period on 31 January 2009 at which time the value of the 20 million shares of Maoye had dropped to $14 million.

The plaintiff’s case

9.  The plaintiff’s claim against the 1^st defendant is based upon the terms of the Management Agreement. The claim against the 2^nd defendant is based upon the terms of the guarantee given by the 2^nd defendant in favour of the plaintiff.

10.  Pursuant to the Management Agreement the 1^st defendant was appointed as the managing party to manage the 20 milllion share of Maoye.

11.  Under the terms of the Management Agreement, the 1^st defendant had warranted that upon the expiry of the Management Period, the return of investment would not be less than 30% of the Principal Sum (being the $62,000,000 paid by the plaintiff for acquiring the 20 million shares of Maoye); that if there be any loss arising from the investment, the 1^st defendant undertook to pay the plaintiff within five days upon the expiry of the Management Period the amount of the loss so suffered together with a further amount equivalent to 30% of the Principal Sum.

12.  It was also a term of the Management Agreement that if the investment return exceeded 30% of the Principal Sum at the expiry of the Management Period, the excess would belong to the 1^st defendant.

13.  By reason of the fact that the 20 million shares of Maoye had remained in the securities account of FSSL untouched throughout the Management Period, and those 20 million shares had dropped to $14 million at the expiry of the Management Period, the plaintiff’s claim against the 1^st defendant pursuant to the terms of the Management Agreement is now quantified at HK$66,600,000 being the loss arising from the investment of the 20 million shares of Maoye at the expiry of the Management Period together with 30% of the Principal Sum.

14.  The claim against the 2^nd defendant is based on the irrevocable and unconditional guarantee given by the 2^nd defendant in favour of the plaintiff whereby the 2^nd defendant undertook to guarantee the due performance of the 1^st defendant’s obligation under the Management Agreement and to indemnify the plaintiff for any loss arising from the 1^st defendant’s failure to perform its obligations thereunder.

The defence raised

15.  The Amended Defence of the 1^st and 2^nd defendants were filed on 26 November 2009. The pleading was in Chinese but with certified English translation.

16.  By the Amended Defence, the defendants admit the 1^st defendant having entered into the Management Agreement with the plaintiff. It is also admitted that the commission funds of the Management Agreement was 20 million shares and the Management Period was from 25 April 2008 to 31 January 2009.

17.  By way of defence, it was pleaded that the plaintiff had not performed any terms or provisions of the Management Agreement which showed that the plaintiff intended not to be bound by it. It was also pleaded that since the plaintiff did not perform its part of the Management Agreement, the 1^st and 2^nd defendants accept the terminating of the Management Agreement.

18.  The express terms of the Management Agreement relied on by the defendants are as follows :

(a)  Clause A under the sub-heading “Account Management” which specifically provided that the plaintiff shall by itself set the online internet login password of the designated account and that the 1^st defendant  is entitled to know the login password of the said designated account and can login to the designated account;

(b)  Clause B under the same sub-heading of “Account Management” which provided that both parties can use the login password of the said designated account to oversee and manage the movements of the account at any time;

(c)  Clause A under the sub-heading of “Commissioning Party” which provided that before 25 April 2008, the plaintiff was to deposit and ensure that the designated account has 20 million shares totalling $62 million being capital or credit line;

(d)  Clause B of the same sub-heading of “Commissioning Party” which provided that the plaintiff was to sign the necessary documents for application to purchase and subscription, until assisting the 1^st defendant successfully subscribing for the international placement shares; and

(e)  Clause C of the same sub-heading of “Commissioning Party” which provided that if the plaintiff operates by itself, the loss caused has nothing to do with the 1^st defendant.  During the Management Period, if the plaintiff sells the shares by itself, the loss from the shares sold shall have nothing to do with the 1^st defendant.

19.  The details or particulars as to the plaintiff’s non-performance of the Management Agreement as pleaded by the defendants can be summarized as follows :

(a)  the plaintiff did not on or before 25 April 2008 deposit into the designated account or any account $62 million as capital or credit line;

(b)  the plaintiff from beginning to end had not informed the 1^st defendant any account login password for any account thereby depriving the right of the 1^st defendant to access the account to manage the investment of the shares therein;

(c)  the plaintiff did not sign any application subscription document and did not assist the 1^st defendant to subscribe for the international placement shares;

(d)  the plaintiff did not commission any fund to the 1^st defendant;

(e)  the plaintiff did not perform its obligations to enable the 1^st defendant to enjoy its rights as the managing party; and

(f)  the alleged loss caused or incurred by the plaintiff has nothing to do with the defendants.

The application for summary judgment

20.  The application for summary judgment was issued by the plaintiff despite the filing of the Amended Defence of the 1^st and 2^nd defendants.

21.  The basis upon which the plaintiff submit that summary judgment should be given against the defendants is that the allegation of non-performance of the Management Agreement is unbelievable, unsustainable and doomed to fail. In that sense, it is said that the allegations made by the defendants are not made bona fide.

22.  In this respect, the plaintiff has adduced affidavit evidence from Hwang that on some 20 occasions when he met with the 2^nd defendant between the signing of the Management Agreement and up to February 2009, the 2^nd defendant had never complained to him of any failure of the plaintiff to perform the Management Agreement.

23.  There is also evidence from Hwang to the effect that at a meeting with the 2^nd defendant in early February 2009 when Hwang asked the 2^nd defendant to honour the Management Agreement, the 2^nd defendant did not deny liability, but instead replied that he was short of cash and asked for an extension of time to make payment.

24.  The plaintiff further relies on two further meetings Hwang had with the 2^nd defendant, one in mid-February 2009 and the other in mid-March 2009.

25.  It is the plaintiff’s case that in the mid-February meeting, the 2^nd defendant again asked for extension of time to make payment and further offered a piece of land in Dongguan as security. This was evidence by a note scribbled by the 2^nd defendant during that meeting and produced in evidence as Exhibit “HJM-20”.

26.  The plaintiff also relies on the meeting between Hwang and the 2^nd defendant in mid-March, at which the plaintiff says the 2^nd defendant proposed payment by installments and also produced a research report in respect of the land in Dongguan. The proposal for installment payments was also scribbled down by the 2^nd defendant on another piece of paper and produced in evidence as Exhibit “HJM-27”.

27.  On the evidence now adduced by the plaintiff, it was submitted that since the defendants had never complained of any failure to perform the Management Agreement by the plaintiff, had never denied liability to the plaintiff, but had only asked for extension of time to make payment, the matters now alleged by the defendants by way of defence is not believable and not bona fide, but raised only as an afterthought. Accordingly the plaintiff submits that this matter should not have to go to trial but summary judgment should be given.

Defendants’ opposition

28.  The defendants oppose the application for summary judgment and seek to rely on the defences pleaded in the Amended Defence of the 1^st and 2^nd defendants.

29.  In so far as the affidavit evidence adduced by the plaintiff goes, the 2^nd defendant has adduced affidavit evidence on behalf of both defendants.

30.  The defendants deny having ever admitted liability to the plaintiff under the Management Agreement.

31.  The defendants also deny that there was a meeting between Hwang and the 2^nd defendant in mid-February, at which time the 2^nd defendant says that he was in Xian in China and therefore could not have been in Shenzhen where the alleged meeting was said to have taken place.

32.  It was admitted by the defendants that there was a meeting between Hwang and the 2^nd defendant in mid-March and it was in that meeting when the 2^nd defendant had scribbled the two pieces of paper now produced as Exhibit “HJM-20” and “HJM-27”. However, the 2^nd defendant says that was a “without prejudice” meeting with a view to resolving their dispute after the defendants’ receipt of a demand letter from the plaintiff’s solicitors dated 23 February 2009 and to which the defendants’ solicitors had replied. Accordingly, it is the case of the defendants that the proposals scribbled on both “HJM-20” and “HJM-27” were without prejudice proposals made during such without prejudice negotiations.

Decision

33.  In so far as the pleaded defence of the defendants goes, the alleged non-performance of the Management Agreement by the plaintiff can be split into two main categories.

34.  The first category of non-performance relates to the failure of the plaintiff to deposit into the designated account the $62 million before 25 April 2008, the failure of the plaintiff to sign the application or subscription documents or to assist the 1^st defendant to subscribe for the international placement shares and the failure of the plaintiff to commission any funds to the 1^st defendant. All these matters now complained of relates to the acquisition of the 20 million shares of Maoye.

35.  The second category of non-performance relates to the failure of the plaintiff to supply the online password of the designated account to the 1^st defendant to enable the 1^st defendant to operate the designated account by way of investment management.

36.  In respect of the first category of the non-performance pleaded, I take a dim view of that defence raised.

37.  It may well be that the wording of the Management Agreement did contemplate for the plaintiff to deposit into the designated account $62 million before 25 April 2008 for the purpose of subscribing to 20 million shares of Maoye and for the plaintiff to sign the application and subscription documents so as to assist the 1^st defendant to acquire the 20 million shares.

38.  However, as matters transpired, the plaintiff did acquire the 20 million shares of Maoye directly through FSSL and not through the 1^st defendant. The 20 million shares were then deposited into the FSSL account which was the designated account provided for in the Management Agreement.

39.  In the circumstances the plaintiff had performed that part of its obligations, albeit that it did not do so through the 1^st defendant.

40.  On those facts, I accept the submission of Mr Yuen SC, leading counsel for the plaintiff, that there was no fundamental breach by the plaintiff, even if the wording of the Management Agreement was not adhered to strictly, which could give rise to recission or termination of the Management Agreement.

41.  As for the second category of the non-performance pleaded by the defendants, this relate to the failure of the plaintiff to provide the login password to the 1^st defendant to enable the 1^st defendant to manage the investment of the 20 million shares deposited into the securities account of FSSL opened by the plaintiff.

42.  In this respect, the plaintiff did not dispute the fact that the online login password had not been provided to the 1^st defendant by the plaintiff. What the plaintiff says is that the 1^st defendant had never during the entire Management Period asked the plaintiff for the login password. The plaintiff acknowledged that if it had been asked for by the 1^st defendant, the plaintiff would have been duty bound to given the login password to the 1^st defendant by reason of the fact that the wording of the relevant clause in the Management Agreement was that the 1^st defendant was “entitled to know the login password of the said designated account and can login to the designated account.”

43.  It was further submitted by the plaintiff that in the absence of any request by the 1^st defendant for the login password of the designated account, the plaintiff was entitled to sit pretty and was under no duty to give that login password to the 1^st defendant since the strict wording of the Management Agreement makes no provision to that effect.

44.  What that boils down to is whether on the proper construction of the Management Agreement if neither the plaintiff nor the 1^st defendant took any steps to deal with the 20 million Maoye shares sitting in the securities account of FSSL for the entirety of the Management Period, because the 1^st defendant says it was not given the login password so that it could not manage the investment of the 20 million shares in the designated account, but the plaintiff says that the 1^st defendant did not ask for such login online password, who would be responsible for the loss resulting therefrom.

45.  Effectively this brings into play the proper construction of Clause C under the sub-heading “Commissioning Party” of the Management Agreement. Admittedly, on the facts as presented, the plaintiff did not by itself sell any of the 20 million shares of Maoye in the designated account, thus the second sentence of that Clause C will not kick in. However, in the first sentence of that Clause C, it was provided that if “the plaintiff operates by itself, the loss caused has nothing to do with the 1^st defendant”. The word used in the first sentence “operates” (which can only mean ‘operate the designated account’) is to be contrasted with the wording in the second sentence, namely, “if the plaintiff sells the shares by itself”.

46.  For present purposes, it must be arguable that if the plaintiff retained the login password of the designated account without giving it to the 1^st defendant, then the plaintiff must know that the 1^st defendant was not and was not in a position to manage the investment of those shares in the designated account. In those circumstances the only party who was in a position to “operate” the designated account would be the plaintiff itself.

47.  Given the above, this must be a matter for trial since the proper construction of the Management Agreement is involved.

48.  It was submitted by the plaintiff that where the proper construction of a contract is concerned, usually it would be a matter for trial, but that in the present case, there is no dispute as to the factual matrix involving the Management Agreement such that a trial would be necessary.

49.  I beg to disagree with that submission.

50.  The dispute between the parties here is that on the plaintiff’s version, the plaintiff was under no duty to give the login password to the 1^st defendant without the 1^st defendant asking for it.

51.  On the other hand, the 1^st defendant argues that without being given the login password, its duty to manage the investment contemplated under the Management Agreement does not even arise, a fortiori its liability to the plaintiff thereunder.

52.  In my view, the entire factual matrix underlining the Management Agreement and the rights and duties of the parties thereunder fall to be scrutinized by the court before a determination on that issue of dispute can be made by the court.

53.  As for the affidavit evidence adduced by the respective parties are concerned, there are clear factual disputes between them which cannot be determined on affidavit alone.

54.  In all the circumstances of this case, and for the reasons given above, I have come to the conclusion that the Master was right in making the order that he did and this appeal has to be dismissed.

55.  The order of the Master below is to stand in its entirety.

56.  The appeal is dismissed with costs (order nisi) to the defendants to be taxed if not agreed.