HUEN WAI KEI v. CHOY KWONG WA CHRISTOPHER

HCA 1093/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1093 OF 2006

______________________

______________________

HCA 2140/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2140 OF 2006

______________________

______________________

(Consolidated)

______________________

J U D G M E N T

______________________

Introduction

1.  These are related summonses under Order 14 which the Master has directed to be heard by a judge.  The two actions arise from the same agreement by which the Plaintiff (“Mr Huen”) sold his shareholding in Pacific World Asset Management Limited (“the Company”) to the Defendant (“Mr Choy”) for a total consideration of $40,000,000.  The Company which was incorporated in Hong Kong in February 1993 had a nominal capital of $3,300,000 divided into 3,300,000 ordinary shares of $1 each.  Mr Huen held 1,000,000 shares, Mr Choy 1,650,000 (that is to say 50% of the shares) and a Mr Poh the remaining 650,000.  It is necessary to provide the background to how and why this sale of shares took place in order to understand the circumstances which have resulted in the dispute which has in turn resulted in these two actions and another one related to them.

2.  The Company’s principal objects were to invest in stock, shares, bonds, debenture stock, government bonds and such like.  On 23 December 2003, a related company Pacific World Fund Manager Limited (“PWFM”) was incorporated in the Cayman Islands.  Its shareholders and directors were Mr Choy, Mr Poh and a Mr Peter Wong.  Previously, in April 1998 by a Trust Deed entered into between HSBC Trustees (Cayman) Limited and the Company, subsequently amended by supplemental deeds, an umbrella Unit Trust known as Global Absolute Profit Series (“GAPS”) domiciled in the Cayman Islands was established.  By virtue of the various deeds of trust HSBC is its trustee and the Company its manager.  GAPS comprised seven sub-funds all being Investment Funds.

3.  The Company was registered with the Securities and Futures Commission of Hong Kong (“the SFC”) and was licensed by it to carry on regulated activities (“Regulated Activities”) under Part V of the Securities and Futures Ordinance (Cap.571) (“the Ordinance”) which included Type 4 and Type 9 regulated activities which relate to advising on securities and asset management.

4.  A company licensed to carry out such regulated activities is by ordinance required to employ two Responsible Officers (“RO’s”).  A RO is of necessity a person who is knowledgeable and experienced in the securities industry and must be of some seniority with the organisation employing him.  A RO needs to be approved by the SFC which is bound to decline its approval of an applicant unless it is satisfied that he is “a fit and proper person” and “has sufficient authority with the licensed corporation”.  Given the importance of the appointment and its pivotal part in the events that has resulted in these actions, it is helpful to have regard to some of the matters that the SFC needs to have regard to in determining whether a would-be RO is fit and proper.  The SFC will have regard inter alia  to the following:

“	(a)	the financial status or solvency;
	(b)	the educational or other qualifications or experience having regard to the nature of the functions which, if the application is allowed, the person will perform;
	(c)	the ability to carry on the regulated activity competently, honestly and fairly; and
	(d)	the reputation, character, reliability and financial integrity, of:
		(i)	where the person is an individual, the person himself;
		(ii)	where the person is a corporation (other than an authorized financial institution), the corporation and any officer of the corporation; or
		(iii)	where the person is an authorized financial institution, the institution and any director, chief executive, manager (as defined in section 2(1) of the Banking Ordinance (Cap.155) and executive officer of the institution.”

5.  From this I can now turn to the events which give rise to the dispute.  Fortunately, these matters are well documented in the contemporaneous documents with the consequence that I am able to provide a relatively brief narrative of the significant parts of evidence.  Unhappily, there was a disagreement between Mr Choy and his two associates Mr Huen and Mr Poh which resulted in Mr Choy sending an e-mail to Mr Poh on 18 October 2005 telling him that he intended to resign as the Company’s RO and from all other positions within the Company [2/194].  His resignation was followed by that of a number of the Company’s staff.  The background to this was that Mr Choy and Mr Poh had disagreed over the conduct of the Company’s affairs.  Mr Choy’s resignation resulted in the Company now only having one RO, he being Mr Poh.  The consequence of this I will need to return to shortly.

6.  The following day, the 19 October, Mr Poh reported Mr Choy to the police for what Mr Poh considered to be a suspicious transaction which subsequently also came to the notice of the SFC and CIMA, being the Cayman Islands Monetary Authority.  Mr Poh became suspicious that Mr Choy’s resignation may have been related to a transaction in July 2004 by which the Company had paid US$1.2 million as a contribution to GAPS because of the unwanted liquidation of one of GAPS underlying funds.  The rights and wrongs of this need not be dwelt on.  Suffice it to observe that Mr Poh had discovered that Mr Choy had been one of the authorized signatories for this payment.  Mr Poh formed the view that this payment should not have been made by the Company as it might have adversely affected the benefits of the Company’s shareholders.  Further, in September 2005, the month prior to Mr Choy’s resignation, Mr Poh had looked at the Company’s documents and in respect of one document he became suspicious that somebody might have forged his signature on one particular document purporting to act on his behalf.  Because of this and the US$1.2 million transaction and Mr Choy’s sudden resignation, he thought it right to lodge a report with the police in order to safeguard the Company’s investors and his position as well.

7.  On the following day, Mr Poh also communicated with the SFC in Hong Kong [2/196] informing it that the Company would be suspending its operations save for dealing with clients redemption requests for their unit trusts.  The SFC required the Company to demonstrate that it had sufficient resources to carry out its Regulated Activities.  On 21 October, Mr Poh met the SFC and filed a statutory Form 5 informing it of Mr Choy’s resignation as a RO and from the Company.

8.  By now matters moved quickly. 

9.  On 19 October Mr Huen, as a fellow director, through his solicitors requested a meeting of the Board of Directors for 22 October [2/203].  At that meeting there was a clearing of the air between the directors.  In event, the board resolved that Mr Choy would withdraw his letter of resignation and resume his duties at the offices of the Company as soon as possible.

10.  According to Mr Choy, in the course of the meeting Mr Huen proposed that he would sell his shareholding in the Company to him for $40,000,000.  His case, refuted by Mr Huen, is that if he were prepared to purchase Mr Huen’s shares there would be no problem in Mr Choy resuming his former position as RO and the Company’s business could continue as before.  He says that he relied on this representation and that is why he withdrew his resignation.  He had looked at the SFC’s website and saw that as at 21 October he was still listed as one of the two RO’s.  When he looked again on 24 October he was able to see that his name had now been removed.  He raised this issue with both Mr Huen and Mr Poh.  He says that Mr Huen and his solicitor Miss Leung assured him that Form 5 relating to his resignation could be validly withdrawn from the SFC provided this was done within 7 days of his resignation.  He was told that there would be no problem in his resuming his position as RO.

11.  He says that given these assurances by Mr Huen and his solicitor, he agreed to the proposal to purchase the shares.  On 24 October, the Company and PWFM purported to unscramble the effects of Mr Choy’s resignation and the filing of the Form 5 by the Company with the SFC.  A letter was written to the SFC signed by the directors of the Company and PWFM [2/209].  Attached to this letter was an Organizational Chart [2/212] which showed that Mr Choy was Principal/Responsible Officer of the Company.  Also on 24 October, the Company sent out notices to its business partners informing them that the Company’s business would be continuing as usual and these notes also came with the Organizational Chart attached to them. 

12.  On 25 October, the Company communicated with the SFC by letter informing it that it would not accept Mr Choy’s resignation and that he would be resuming his duties with the Company, including his position as one of its two RO’s.  See [2/216].  By way of reinforcing this letter and in reply to a request from the SFC, Mr Poh wrote two further letters to the SFC on 26 and 28 October [2/220 and 223] explaining in some detail the circumstances in which he had reported Mr Choy to the police and, more especially, giving his reasons why he and the Company no longer harboured any doubts about Mr Choy’s probity leading to his reinstatement.

13.  Mr Choy says that all of this serves to demonstrate that when he signed the agreement to purchase Mr Huen’s shares for $40,000,000 (the October agreement) he and Mr Huen, and indeed Mr Poh the other director, did so on the shared assumption that he would be reinstated by the SFC as RO and everything would continue as it had before his resignation on 18 October, save of course that he would own both his and Mr Huen’s 1,000,000 shares.

14.  The agreement was entered into on 26 October 2005 [2/164].  It of course forms the basis for these actions.  The terms of payment appear in clause 2.  Upon signing the Agreement, Mr Choy agreed to procure PWFM to transfer 105,779.81 units of Global Arbitrage Strategy Fund Plus A (USD) to Mr Huen valued at $10,000,000 (and some change).  This part of the agreement has been complied with by Mr Choy.  The balance of $30,000,000 was payable by three instalments.  $10,000,000 on or before 25 January 2006; $10,000,000 on or before 25 April 2006 and the balance on or before 25 July 2006.  These payments would be effected by Mr Choy giving Mr Huen three personal cheques in respect of each instalment, each being post-dated.  The first two cheques which were represented on 12 and 25 April 2006 respectively were dishonoured.  Action 1093 of 2006 relates to these two dishonoured cheques, the writ having been issued on 12 May 2006.  The writ in 2140 of 2006 was issued on 27 September 2006, it relating to the 3^rd cheque payable on or before 25 July 2006 which was also dishonoured.

15.  None of this is of course denied.  The cases turn entirely on Mr Choy’s pleaded justification for having taken steps to see that the cheques were not honoured.  In order to understand this I must return to the narrative.

The SFC’s Refusal to Reinstate Mr Choy

16.  Unfortunately, contrary to Mr Poh’s and the Company’s wish that Mr Poh’s explanations would be accepted by both the SFC and by CIMA the opposite occurred.  CIMA replied by e-mail on 27 October to say that Mr Poh’s explanations raised more questions than providing answers in relation to his suspicions about Mr Choy’s conduct leading to his making a complaint about him to the police on 19 October [2/229].  As appears in their e-mail they declined to lift the suspension then in place but would do so if the SFC was willing to accept Mr Poh’s explanations.  Worse was to follow on 3 November when the SFC wrote [2/231] to say that following legal advice it was not possible for it to lawfully allow the Form 5 to be withdrawn.  The Form took effect on its submission and Mr Choy would have to prepare a fresh application to be approved as a RO.  The statutory procedure which I have referred to in paragraph 5 would have to be gone through.  Without two RO’s the Company became unable to continue with its regulated activities.  As a result, its collapse was immediate.  On the same day as the SFC’s letter, the Company’s shareholders decided to capitalize its assets and distribute the proceeds to the shareholders with the intention that it be wound up.

17.  On 15 December 2005, the Company sold its brokerage and advisory business to Noble Apex Advisors Limited [2/234].  On 16 February 2006, the Board of Directors resolved to wind up the Company voluntarily having settled its debts and liabilities and surrendered its licence to the SFC [2/236].  It closed its offices on 24 February 2006 and on 1 March 2006 it ceased business.

What Happened Next

18.  That therefore is the background to the dispute but it is important to add into this background a further agreement dated 4 November 2005 entered into between Mr Huen and Mr Choy.  The timing is significant.  By then the SFC, on the previous day, had informed the Company that the Form 5 could not be withdrawn with the consequence that Mr Choy could not be reinstated as RO without a fresh application being submitted by the Company.  The three cheques totalling $30,000,000 were not then due — the first not till 25 January 2006.  This November Agreement [2/192.2] relates to a property at Residence Bel-Air, owned by a company controlled by Mr Choy, which was Mr Choy’s home. It was then valued at $38,400,000.  The purpose of this agreement is expressed to be in full and final settlement of the disputes between Mr Huen and Mr Choy and supplemental to the sale and purchase agreement for the sale of Mr Huen’s shares in the Company to Mr Choy — see Recital C.  On the same date as this agreement, Mr Choy entered into an agreement through his company which owned the flat at Residence Bel-Air to sell this property to Mr Huen’s nominated company for $38,400,000.  The conveyance was to take effect on or before 4 February 2006.

19.  Given the account of what happened following the collapse of any prospect of Mr Choy being reinstated as RO, he declined to complete the conveyance.  This is now the subject matter of a third action, HCA 1242 of 2006 which is not before me, by which specific performance of the conveyance of the Bel-Air property is asked for.

20.  Mr Fung SC who appears for Mr Choy, submits that Mr Huen cannot have it three ways.  He seeks judgment on the cheques and currently is also proceeding with the property action.  He submits that the property action ought to be stayed pending resolution of the two actions that are before me.  Plainly, Mr Huen is not entitled to have his money under the cheques as well as having the flat conveyed to his company.  Mr Yuen SC, on behalf of Mr Huen, submits that the real purpose of the November Agreement and its underlying conveyance is merely to provide security for the cheques.  This may well be so but not being seized of the property action I am not concerned with any question of whether that should be stayed pending the outcome of these two actions.  What seems very clear is that Mr Huen cannot be entitled to succeed twice.  Whichever way one views these two sets of proceedings what must ultimately be determinative of them is Mr Choy’s defence to the two actions before me to which I must now give consideration.

The Nub of the Matter

21.  Mr Fung has mounted a comprehensive defence which breaks itself down to seven issues.  These range from misrepresentation to frustration and take in implied condition; estoppel by convention otherwise referred to as failure of assumption; the effect of the November Agreement on the October Agreement; total failure of consideration and express and implied mutual release.

22.  At the heart of his plea is an appeal to common sense.  Stripped of the labels that are attached to the legal defences that he has proposed as giving rise to triable issues, he submits that I should ask myself the common sense question:  “Why would a businessman wish to pay $40 million to acquire a suspended operation if it could not be resuscitated through Mr Choy being reinstated as RO of the Company”.  He says that “Common and commercial sense tells us that no businessman parts with $40 million in order to put someone else in control of the business”.

23.  Mr Yuen’s response is to say that this is not the correct question to pose and that in any event I should not answer it.  The obligations under the October Agreement are very clear.  Mr Huen is willing to do his part and Mr Choy declines to.  There can be no possible defence and judgment should therefore be entered.

Order 14

24.  I do not propose to rehearse the principles which apply in such circumstances save to observe that a Defendant is not to be driven from the judgment seat lightly.  Whilst the burden lies with the Defendant to show that there are triable issues which ought to go to trial, the authorities are all one way in saying that Order 14 should not be applied save for clear cases in which there is no serious material factual dispute and in the case of a legal issue there should be “no more than a crisp legal question as well decided summarily …”.  See Hong Kong Civil Procedure 2007, 14/4/9.

Analysis of the Evidence

25.  In order to decide this matter, without attempting to embark on a mini trial on the affirmations, I am required to come to a view of the evidence as it impacts on the issue of whether the Defendant can show that there is or are issues which can only be resolved by a conventional trial with the witnesses being examined and cross-examined.  In relation to this case, it seems to me that I must try to avoid being deflected by the various and numerous legal labels which Mr Fung has sought to attach to his analysis of the evidence.  In saying that I am very conscious that at the end of the day I need to construe the effect of what are very straightforward obligations under which Mr Choy agreed to purchase Mr Huen’s shares under the October Agreement.

26.  It seems to me that the lynch-pin to resolving the matter within the confines of an Order 14 application is that there is very ample material which points to the fact that the consensus between these parties, as well as Mr Poh, was that Mr Choy would be able to be restored as RO in short order.  That once Mr Poh’s long and detailed explanations to the SFC and CIMA were considered by these two bodies they would be accepted and all would be well.  The very distinct message that I get from the evidence, not only the words contained in the affirmations themselves, but on a careful reading of the contemporaneous documents that were circulating at the time that Mr Choy was buying out Mr Huen on the mutual expectation that he would be restored there and then as RO and the Company would continue as before.  I do not believe that Mr Yuen can fairly eliminate that view of facts at this stage just on paper.  It strikes me that this factual issue can only be properly disposed of by a judge who has listened to the witnesses and seen them cross-examined on what they considered was the underlying basis of the sale of Mr Huen’s shares.

27.  Only after this factual issue is resolved can the court be asked to come to a conclusion which permits it to say whether Mr Choy must be held accountable on his agreement.

28.  This being my approach it really is not helpful nor necessary for me to indicate a view on which of Mr Fung’s pleaded defences have ultimately forced the issue save to indicate that ultimately the contest must resolve itself around the issue of whether there was a common assumption between these parties that all would go well and Mr Choy would be reinstated more or less there and then as RO.  As I have already attempted to explain such an issue can only be addressed properly on the current state of the evidence following an examination of the witnesses.

29.  This is not a case which can be said to have “no serious material factual dispute”.  On the contrary the evidence can only be fairly decided following a trial which will in turn inform the legal conclusions which the court is required to arrive at.  Accordingly, I propose to give the Defendant unconditional leave to defend.  As to costs, I will make an order nisi that the costs of this application should be costs in the cause.