CHEUNG TAI HONG HOLDINGS (TECHNOLOGY) LTD. v. CHENG YUK KUEN

HCA 3166/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3166 OF 2001

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REASONS FOR DECISION

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1. This is an application by the plaintiff for summary judgment adjourned by a Master for hearing before a Judge. The summons for summary judgment was issued by the plaintiff after the close of pleadings. Directions were given by the Master for the defendant to file evidence in opposition and the plaintiff to file evidence in reply. No evidence was filed by the defendant. Two days before the hearing, the defendant's solicitors filed a summons under Order 67 rule 6 returnable on the day of the hearing seeking leave to cease to act. I granted the application having been satisfied that the solicitors' summons had been served on the defendant and excused the solicitors from attendance at the hearing. The defendant did not appear.

2. After hearing submissions, I granted summary judgment as sought and these are the reasons for my decision.

3. The plaintiff claims HK$89,910,000.00 against the defendant and its claim arose out of the following agreements:

(1) a sale and purchase agreement dated 17 February 2000 made between the defendant as vendor and the plaintiff as purchaser for the entire issued share capital of Sunray Power Limited ("Sunray"), Sunray being the holder of 950,000 shares in Value-Net Limited ("Value-Net");

(2) a shareholders' agreement dated between 13 March 2000 in respect of Value-Net entered into between Head High Holdings Limited ("Head High"), Spike International Holdings Limited ("Spike"), Profit View Limited ("Profit View"), Law Man Yik, Sunray, the defendant and Value-Net;

(3) a sale and purchase agreement dated 2 May 2000 made between the defendant as vendor and the plaintiff as purchaser for the entire issued share capital of Profit View, Profit View being the holder of 715,000 shares in Value-Net; and

(4) a supplemental deed between the parties to the shareholders' agreement in (3) amending the terms in that agreement.

4. I shall refer to the agreements in (1) and (3) collectively as "the Sale and Purchase Agreements". They contained similar provisions. The agreement in (2) would be referred to as "the Shareholders' Agreement" and the deed in (4) as "the Deed".

5. The effect of the Sale and Purchase Agreements was that after the completion of the sale and purchase (which had taken place), the plaintiff acquired, through Sunray and Profit View, 30% of the issued share capital of Value-Net. In consideration for the shares in Sunray and Profit, the plaintiff gave the defendant a total sum of HK$89,910,000.00, which was partly paid by cash and partly paid by the listed shares of the plaintiff's parent company. After the completion, the defendant remained the owner of 25% of the shares of Value-Net, through his shareholding in Spike.

6. Under clause 5.3 of the Sale and Purchase Agreements, the defendant "irrevocably guarantees" to the plaintiff that the consolidated profit of Value-Net after taxation and minority interest but before exceptional and extraordinary items, if any, for the financial year ending 31 March 2001, as being ascertained from the audited 2001 accounts ("the audited 2001 net profit") will not be less than HK$16 million. By clause 5.1, the plaintiff and the defendant agreed to procure Value-Net to instruct Deloitte Touche Tohmatsu ("Deloittes") to carry out an audit on the consolidated accounts of Value-Net for the year ending 31 March 2001 on or before 31 July 2001.

7. It was provided in clauses 5.5, 5.6 and 5.7 that the plaintiff should have an option by serving written notice on the defendant requiring the defendant to purchase the entire issued share capital of Sunray and Profit View from the plaintiff at the "option price", in the event that the audited 2001 net profit should be less than HK$16 million and that the option would be exercisable within one month after the receipt by the plaintiff of the audited 2001 accounts. The option price, as stipulated in clause 5.8, would be the sum calculated pursuant to the formula set out. The plaintiff's claim herein for HK$89,910,000.00 is equivalent to the option price calculated in accordance with that formula.

8. By clause 3.05 of the Shareholders' Agreement, it was provided that Deloittes should be appointed by Value-Net for the purpose of carrying out an audit on the consolidated accounts for the year ending 31 March 2001.

9. It is the plaintiff's case, as pleaded and verified on affidavit, that the defendant was in breach of clause 5.1 of the Sale and Purchase Agreements, alternatively an implied term of the Sale and Purchase Agreements, in failing to take all such steps as were necessary to enable Deloittes to carry out the audit by (i) appointing Deloittes as the auditors; and (ii) producing all necessary management accounts, consolidated accounts and records to enable the audit to take place. The defendant had only delivered monthly management accounts of Value-Net to the plaintiff for the months from May to October 2000 and had failed to provide all necessary documents and information to the plaintiff for an audit to be carried out, despite repeated requests of the plaintiff. Value-Net had ceased to trade and to produce management accounts by early 2001. Its registered office and business address was closed in March 2001.

10. On 28 June 2001, the plaintiff wrote to Deloittes seeking to instruct them to carry out an audit of the accounts of Value-Net for the year ending 31 March 2001. On 29 June 2001, the plaintiff wrote to the defendant demanding him to provide all necessary documents and records for an audit to be done and to appoint Deloittes as the auditors. There was no response from the defendant. Similar letters of the plaintiff to other shareholders, Spike and Head High, also met with no response. Deloittes replied on 5 July 2001 that they had not been contacted by the directors of Value-Net to appoint them as its statutory auditors, nor had they been given any written approval from the directors to perform any other kind of special audit and they were unable to accept the plaintiff's appointment. Deloittes further stated that given the limited documents and information the plaintiff was able to provide, they could not have performed an audit for the 2001 accounts.

11. The plaintiff has asserted that if an audit had been carried out in respect of the financial position of Value-Net as at 31 March 2001, the audited 2001 profit would be less than HK$16 million, having regard to the fact that Value-Net had recorded a net loss since April to October 2000 in the total sum of HK$4,798,506.77, that the staff had been laid off since early 2001, and that Value-Net had ceased business at least since March 2001.

12. As a result of the defendant's breach, the plaintiff was precluded from exercising the option in clause 5.5 of the Sale and Purchase Agreements. The plaintiff claims that it has suffered loss and damage in the sum of HK$89,910,000.00, being the option price that the defendant would have to pay had the contracts been performed.

13. I am satisfied on the plaintiff's case as pleaded and verified by affidavit that the plaintiff has established its claim. I also accept the submission of Mr. Samuel Chan, who appeared on behalf of the plaintiff, that although a defendant may show cause against an application for summary judgment "by affidavit or otherwise" under Order 14 rule 4(1), it is established practice that the defendant is required to file an affidavit before the court can be satisfied he has raised a triable issue, unless it is an unusual situation that he is able to raise a triable issue with reference to the plaintiff's pleading and affirmation alone, without any need to put in evidence to substantiate any of his allegations (see Chinakong Manufactory Ltd. v. Uniden Hong Kong Ltd. [1993] 1 HKLR 28; Hong Kong Civil Procedure 2002, Vol. 1, para. 14/4/3).

14. It is on the above basis that I turn to consider the defence and counterclaim filed by the defendant to see whether by this pleading any triable issue is raised. Two grounds of defence are pleaded. Evidence is required from the defendant to substantiate and verify those grounds of defence, which is lacking at the moment. In summary, it is contended that the plaintiff was under an obligation to provide further funding to Value-Net by virtue of clause 4.01 of the Shareholders' Agreement and that the plaintiff was in breach of this obligation. The defendant counterclaims for damages for breach of the Shareholders' Agreement and seeks to set off his counterclaim against the plaintiff's claim. No evidence is filed by the defendant in support of this allegation. In any event, I am satisfied this defence is a sham and is wholly devoid of merits. For one thing, the plaintiff is not a party to the Shareholders' Agreement. Moreover, the allegation that the plaintiff was under an absolute contractual obligation to provide funding as required by Value-Net is contrary to the express contractual provisions being the proviso to clause 4.01, clause 4.04, clause 10 and paragraph 28 of Schedule 2 in the Shareholders' Agreement and clause 3.2.2 of the Deed. The other defence raised is that the plaintiff was in breach of the Sale and Purchase Agreements in that the plaintiff could and should have accepted delivery of the accounts of Value-Net by the defendant's staff in November 2000 and resolved to appoint Deloittes as the auditors by the two directors nominated to the board of Value-Net by the plaintiff. Again, no evidence is filed in support of this allegation. In any event, it is clear from the letter of Deloittes that on the available management accounts which were prepared up to October 2000, they were unable to carry out an audit for the year ending March 2001. There is no substance in this point either.

15. I am satisfied there is no triable issue raised by the defendant and it would be appropriate to enter summary judgment for the plaintiff. The order I made is as follows:

(1) final judgment is entered against the defendant in the sum of HK$89,910,000.00 with interest thereon at 9% per annum from the date of the writ to the date of judgment and thereafter at the judgment rate until full payment; and

(2) costs of this action be to the plaintiff, to be taxed if not agreed.