OCEAN EQUITY PARTNERS FUND L P v. XU XIANGYANG

HCA 2296/2019

[2020] HKCFI 3171

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2296 OF 2019

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JUDGMENT

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INTRODUCTION

1.  This is the hearing for the assessment of damages arising from the Defendant’s breach of a sale and purchase agreement entered into between the Plaintiff (as seller) and the Defendant (as purchaser) in respect of 90,024,410 shares of China Creative Global Holdings Limited (a company whose shares are listed on the Hong Kong Stock Exchange (stock code: 1678)) (“CCGHL”). 

2.  The Defendant did not file any notice of intention to defend and had not participated at all in these proceedings.  An interlocutory judgment was entered against him on 30 June 2020 whereby it was adjudged that the Defendant do pay the Plaintiff damages to be assessed and costs to be taxed (the “Interlocutory Judgment”).  

3.  The Defendant did not appear at the hearing of the assessment of damages on 29 December 2020 (the “Hearing”).  Having consider the affirmations of service filed by the Plaintiff, I am satisfied that the Defendant has been properly notified of the Hearing and has been properly served with the documents in this action, including in particular the Writ and Statement of Claim, the Interlocutory Judgment, the Plaintiff’s two witness statements and List of Documents, the Notice of Appointment for Assessment of Damages dated 30 October 2020 and the Submissions of the Plaintiff for the Hearing dated 15 December 2020.  

4.  In the circumstances, the Court proceeded with the Hearing in the absence of the Defendant.  

RELEVANT BACKGROUND

5.  The Plaintiff is a Cayman Islands Exempted Limited Partnership, and an investment company engaged in the business of trading and investing in securities and commodities.

6.  Since early 2014, the Plaintiff was the owner of 90,024,410 shares in CCGHL (the “Shares”).

7.  Around late 2017, the Plaintiff was introduced to the Defendant by a Mr Xu Qiang (an executive director of CCGHL), and the Plaintiff came to know that the Defendant intended to purchase all of the Shares from the Plaintiff.  

8.  on 24 April 2018, the Plaintiff and the Defendant entered into a sale and purchase agreement for the Shares (“Agreement”) at the price of HK$0.81 per share, and total purchase price of HK$72,919,772 (the “Consideration”).  

9.  Clause 2.1 of the Agreement provides that the Plaintiff shall transfer (or procure any company controlled by it to transfer) the Shares to the Defendant at the Consideration therein stipulated.  

10.  Clause 3.2 of the Agreement provides for the mechanism by which the Consideration was to be paid by the Defendant.  It was agreed that the Consideration for the Shares may be paid in cash or by exchangeable bonds as follows:- 

(1)  If the Consideration was to be paid in cash, the payment date would be 1 July 2019 (being the latest date of payment, unless otherwise agreed by the parties).  The amount payable would be HK$72,919,772, for 90,024,410 shares. 

(2)  If the Consideration was to be paid by provision of exchangeable bonds, the Defendant would have to provide exchangeable bonds in three phases as follows: 

(i)  Phase 1: not less than HK$16,200,000 worth of exchangeable bonds by 30 June 2018 for not less than 20,000,000 CCGHL shares;

(ii)  Phase 2: HK$24,300,000 worth of exchangeable bonds by 31 December 2018 for 30,000,000 CCGHL shares; and

(iii)  Phase 3: HK$32,419,772 worth of exchangeable bonds by 30 June 2019 (unless otherwise agreed by the parties) for 40,024,410 CCGHL shares.

11.  The Agreement also contained, inter alia, the following terms:-

(1)  Clause 3.4: If the Consideration is to be paid in cash, the Defendant has to effect the transfer of the Consideration to the Plaintiff’s designated bank account within the prescribed period.  Within 5 days of the Plaintiff’s receipt of the Consideration, the Plaintiff has to transfer the Shares to the Defendant. 

(2)  Clause 4.2: If the Defendant does not settle the Consideration within 5 working days after the dates specified in Clause 3.2, he shall immediately settle the same together with interest on the outstanding sum at a daily rate of 0.07%.  The Plaintiff shall transfer the Shares to the Defendant within 5 working days of receiving the Consideration and interest. 

(3)  Clause 9: If the Defendant breaches any of the terms of the Agreement, the Plaintiff has the right to terminate the Agreement immediately.  The Plaintiff shall have the right to sell/transfer the Shares to any third party.  After deducting the price at which the Plaintiff has resold the Shares, it shall be entitled to claim against the Defendant and/or the Defendant’s surety for the difference between the Consideration set out in Clause 3 therein, and the resell price, and interest on late payment.  

12.  On 24 April 2018, the Defendant issued a Letter of Undertaking to the Plaintiff with further elaboration on the mechanism for payment of the Consideration by provision of exchangeable bonds under the Agreement. 

13.  In or around July 2018, the Plaintiff underwent an internal restructuring, and transferred the Shares to Legend Dream Holdings Limited (“Legend Dream”), a wholly-owned subsidiary of the Plaintiff.  This arrangement is consistent with Clauses 2.1 and 7.2(3) of the Agreement, which conferred upon the Plaintiff the right to transfer the Shares to any company and/or entity controlled by it, notwithstanding the agreement between the Plaintiff and the Defendant for the sale of the Shares.  As from 9 July 2018, the Shares were registered in the name of Legend Dream.  

14.  The Defendant failed to pay the Consideration or any part thereof to the Plaintiff (whether by cash or by exchangeable bonds) by the time period specified in the Agreement or otherwise.  

15.  The Plaintiff issued a demand letter to the Defendant on 20 September 2019 requesting payment of the Consideration and interest.  The Defendant did not respond to the demand letter. 

16.  On 12 December 2019, the Plaintiff commenced the present proceedings against the Defendant for his breach of the Agreement, and seeking damages for such breach.  

17.  As mentioned above, the Defendant did not file any notice of intention to defend the present action, and the Interlocutory Judgment was entered against him. 

18.  For the purpose of the Hearing, the Plaintiff has adduced evidence from 1 witness, Louie Siu Keung Chris (“Mr Louie”) (Head of Projects of the Plaintiff), who has produced 2 witness statements (with exhibits), which he adopted as his evidence-in-chief at the Hearing.  

19.  The Defendant has not filed any witness statement or list of documents for the purpose of the Hearing nor has he sought to challenge any of the evidence relied on by the Plaintiff. 

LEGAL PRINCIPLES

20.  In the context of assessing damages for breach of contract, it was held by the Court of Appeal in Wang Ruiyun v Gem Global Yield Fund Ltd [2011] 3 HKLRD 785 at paragraph 17 (with reference to McGregor on Damages (18^th ed) at paragraph 24-008)[1] as follows:- 

“The normal measure of damages 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 […]”

(Emphasis added)

21.  The aforesaid normal measure of damages is subject to the plaintiff’s duty to mitigate its losses.  The legal principles on the duty to mitigate have been set out in Park Avenue Toys Ltd v Candy Novelty Works Ltd (unreported, HCA 11135/1997, 23 August 2004) at paragraphs 43-46 per Deputy High Court Judge Saunders.  In summary: 

(1)  The law does not allow a plaintiff to recover damages to compensate him for loss which he would not have suffered, if he had taken reasonable steps to mitigate his loss. 

(2)  In taking steps to mitigate, a claimant is not under any obligation to do anything other than in the ordinary course of business.  He is not required to go to extreme steps and is not bound to nurse the interests of the defendant.  In mitigating his loss the claimant victim of a wrong is only required to act reasonably, and the standard of reasonableness is not high in view of the fact that the defendant is an admitted wrongdoer. 

(3)  Whether the claimant has acted reasonably is in every case a question of fact, not of law. 

(4)  At the time when the contract is broken it is not always clear what to do next.  A plaintiff will not be treated as behaving unreasonably when he chooses one of the possible reasonable alternatives only to find out later that the other one would have been cheaper. 

(5)  The onus of proof on the issue of mitigation is on the defendant.  If he fails to show that the claimant ought reasonably to have taken certain mitigating steps, then the normal measure of damages will apply.

NORMAL MEASURE OF DAMAGES

22.  As mentioned above, the contract price for the Shares pursuant to the Agreement was HK$72,919,772.

23.  The contractual time for acceptance of the Shares pursuant to the Agreement was 1 July 2019, being the last day on which the Defendant could and should have accepted the Shares pursuant to the Agreement, by paying the Consideration in cash (see Clause 3.2 of the Agreement).  The closing price of the Shares as at 2 July 2019 (being the first trading day after 1 July 2019, which was a public holiday) was HK$0.073 per share.  The market price for the Shares as at the contractual time for acceptance was thus HK$6,571,781.93 (being the product of 90,024,410 shares times HK$0.073 per share).  

24.  Adopting the normal measure of damages, the Plaintiff would be entitled to damages representing the difference between  HK$72,919,772 and HK$6,571,781.93 ie HK$66,347,990.07.  However, the Court has to take into account the steps taken by the Plaintiff to mitigate its losses.  

MITIGATION OF LOSS BY THE PLAINTIFF

25.  According to the unchallenged evidence of Mr Louie for the Plaintiff:

(1)  Since 1 July 2019 (being the date on which the Defendant should have made payment of the Consideration in cash in accordance with the Agreement), the Plaintiff has monitored the market price of CCGHL shares with an aim to reselling the Shares, in order to mitigate its losses.  

(2)  However, as the share price of CCGHL since 1 July 2019 has consistently been well below the contract price of HK$0.81 per share, the Plaintiff made the commercial decision not to sell the Shares, especially considering the actual value of the Shares based on CCGHL’s net asset value. 

(3)  The Plaintiff has also been unable to find any purchaser(s) for the Shares off-market, despite engaging a securities brokerage company Koala Securities Limited to assist.  The Plaintiff did not want to “dump” the Shares in the open market, as it wanted to avoid causing a further drop in the share price of CCGHL.  

(4)  On 12 August 2020, during a period when CCGHL’s share price rose to an 8-month high, the Plaintiff (through Legend Dream) successfully sold 120,000 shares on the Hong Kong Stock Exchange, comprising 74,000 shares at HK$0.081 per share, and 46,000 shares at HK$0.082 per share, for a total of HK$9,766. 

(5)  At around the same time, it transpired that there was a potential general offer for CCGHL’s shares as evident from the announcement issued by CCGHL on 11 August 2020 pursuant to Rule 3.7 of the Takeovers Code (“CCGHL’s Announcement”).  As there was a reasonable chance that the price offered under the general offer would be higher than the market price of the Shares, the Plaintiff decided to refrain from trying to sell any further shares.  At the Hearing, Mr Louie gave evidence that there has been no further development on the potential general offer after CCGHL’s Announcement.  

(6)     Other than the sale of the 120,000 shares on 12 August 2020, the Plaintiff has not taken other steps to dispose of the remaining Shares, which it continues to hold (through Legend Dream).  

26.  Having considered Mr Louie’s evidence and supporting documents relied on by the Plaintiff (which are exhibited to Mr Louie’s witness statements), I am satisfied that the Plaintiff acted reasonably throughout and has taken reasonable steps to mitigate its losses, including in particular:  

(1)  taking reasonable steps to look for potential purchasers;

(2)  deciding not to “dump” the Shares in the market and to hold onto the same in light of the low share price after 1 July 2019;  

(3)  deciding to sell some of the Shares on 12 August 2020 when the share price was at an 8-month high; and   

(4)  refraining from selling more of the Shares in light of the potential general offer referred to in CCGHL’s Announcement.  

27.  Pursuant to Clause 9 of the Agreement, the Plaintiff is entitled to claim against the Defendant for the difference between contract price and the resale price in respect of the 120,000 shares resold on 12 August 2020.  

28.  Therefore, taking into account the aforesaid sale of 120,000 shares by the Plaintiff on 12 August 2020, the damages claimed by the Plaintiff and which the Plaintiff should be entitled to is in the sum of HK$66,346,984.17, comprising the following:  

(1)  In respect of the 120,000 shares which the Plaintiff resold on 12 August 2020 (through Legend Dream), the difference between the contract price and the resale price ie (HK$0.81 x 120,000) – (HK$0.081 x 74,000) – (HK$0.082 x 46,000) = HK$87,434; and 

(2)  In respect of the remaining 89,904,410 shares still held by the Plaintiff (through Legend Dream), the difference between the contract price and the market price as at 2 July 2019 ie (HK$0.81 x 89,904,410) – (HK$0.073 x 89,904,410) = HK$66,259,550.17.  

CONCLUSION

29.  For the above reasons, the amount of damages which the Defendant is liable to pay the Plaintiff should be HK$66,346,984.17. 

30.  I order that the Defendant shall pay interest on the sum of HK$66,346,984.17 at judgment rate from the date of this judgment until full payment.  Counsel for the Plaintiff confirmed at the Hearing that the Plaintiff does not claim for any pre-judgment interest.

31.  I also make an order nisi that the Defendant shall pay the Plaintiff’s costs of and occasioned by the assessment of damages proceedings (including all costs reserved), with certificate for counsel, to be taxed if not agreed.  In the absence of any application to vary within 14 days, the costs order nisi shall become absolute.