NELSON HOLDINGS INC. v. DAVID HSIA

1987 No. A1099

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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Introductory Facts

1. On the 14 October 1984, parties to this action entered into a "Shareholders Agreement" together with a third shareholder, Mr. James Tien. The object and intention was to purchase and develop a piece of land on Market Street in San Francisco. The vehicle to be used for that purpose was Amerisport International N.V. ("Amerisport") a Netherlands Antilles Corporation. The Shareholders Agreement provided that the plaintiff would take up 50%, the defendant 25% and James Tien the remaining 25% of the shares in Amerisport.

2. Articles 3.2 and 3.3(a) of the Agreement were in the following terms:

3.2 Financing and Additional Working Capital Requirements

The Board of Directors of the Company shall use its best efforts to obtain additional loan financing and working capital for the Company, as necessary, from sources other than from the Shareholders and without the need for guaranties or security from the Shareholders. However, in the event that the Board of Directors determines that additional capital or loans is required by the Company or that personal or other guaranties of the Shareholders are required in connection with the Company's operations, the Shareholders agree to contribute capital, to make shareholder loans and/or to issue such guaranties as shall be deemed necessary or appropriate by the Board of Directors of the Company pro rata to the Shareholders' respective shareholdings.

3.3 Management

(a) The Company shall have a Board of Directors consisting of four (4) Managing Directors. Each Shareholder agrees to vote his Common Shares for one (1) Managing Director to be nominated by David Hsia, one (1) Managing Director to be nominated by James Tien, one (1) Managing Director to be nominated by Nelson Holdings, Inc. and one (1) Managing Director resident in the Netherlands Antilles. The Shareholders agree that only Nelson Holdings, Inc. shall have the right to give instructions to such resident Managing Director.

The Agreement was amended in January 1984 and Topmost Investment Incorporated added as a shareholder resulting in the following new shareholding:

Article 3.3(a) was amended to read as follows.

"The Company shall have a Board of Directors consisting of five(5) Managing Directors. Each Shareholder agrees to vote his Common Shares for one (1) Managing Director to be nominated by David Hsia, one (1) Managing Director to be nominated by James Tien, two (2) Managing Directors to be nominated by Nelson Holdings, Inc. and one (1) Managing Director resident in the Netherlands Antilles. The Shareholders agree that only Nelson Holdings, Inc. will have the right to give instructions to such resident Managing Director."

About August 1986 James Tien transferred his 26.67% shareholding to the plaintiff and resigned as Managing Director. In November 1986, Topmost transferred its 5% shareholding to the plaintiff, which brought the plaintiff's total shareholding in Amerisport to 85%.

3. Meanwhile the land at Market Street had been purchased by Amerisport and an 11 storey building completed by early January 1984. Unfortunately the venture did not prove to be a success. The leasing, and sale markets were not favourable. By early 1985 only 2?floors had been leased. It was decided to sell the property and this was done in June 1905 at a considerable loss.

4. The management of Amerisport was in the hands of the plaintiff, which is a family holding company controlled and owned almost wholly by the father of Mr. Philip K.P. Lee, the first Managing Director appointed by the plaintiff. He was also a director of the plaintiff. The second Managing Director in due course appointed by the plaintiff was William Lee, a brother of Philip Lee. James Tien and the defendant appointed themselves as Managing Directors. The managing Director in the Netherlands Antilles was a Netherlands Antilles Corporation.

5. Much work by Amerisport was involved in relation to construction, leasing and financing. The management of Amerisport was in practice attended to by Philip Lee in Hong Kong, and matters in San Francisco by William Lee. Initially the latter made frequent trips from Hong Kong to San Francisco but in September 1982 took up residence there to deal with matters on a day-to-day basis.

6. For the purpose of financing the construction of the building, Amerisport entered into a building loan agreement ("the Loan Agreement") with the Chartered Bank in San Francisco under which it obtained a loan facility of US$18 million. The Bank sought and obtained guarantees from the plaintiff, the defendant, James Tien and Philip Lee.

7. Following partial judgment by consent on 11th May 1988, the plaintiff's remaining claims seek damages for the defendant's failure to pay his contributions, and alternatively, reimbursement of 2 sums of US$79,500 and US$126,600 which the plaintiff says were contributions to Amerisport it paid on the defendant's behalf. The general rule whereby one man, who is compelled to pay money which another is bound to pay, is entitled to be reimbursed by the latter, (see Owen v Tate (1976) 1 Q.B. 402) is not disputed except as to certain aspects which I shall address later.

The US$79,500 claim

8. In the context of moneys drawn down under the Loan Agreement, it is not disputed that interest in an amount of US$836,882 became due and payable to the Chartered Bank. Amerispert had a credit of US$306,000 in its account. Pursuant to clause 3.2 of the Shareholder Agreement, and following general if not specific resolutions of the Board, pro rata demands were sent to the shareholders. The plaintiff's and defendant's respective shares demanded were US$282,649 and US$79,500. The plaintiff paid in its share but no response at all was received from the defendant. Ultimately the plaintiff paid in the defendant's share. The plaintiff also paid the shares of James Tien and Topmost, and subsequently those shareholders settled the payments with the plaintiff.

9. The plaintiff says that if it had not paid in the defendant's share, legal proceedings could have been commenced by the Chartered Bank which would have jeopardised or seriously affected the agreement of sale of the Market Street property then underway; and that it was therefore compelled to pay the defendant's share. I will deal with the matter of compulsion later, as it arises also in relation to the plaintiff's second claim.

Accelerated repayment of plaintiff's loan

10. It is convenient to deal first with the defendant's complaint that payment by the shareholders only arose in March 1985 because the plaintiff in managing Amerisport favoured itself and repaid early a loan of US$680,000 it had made to Amerisport for 5 years from 16th April 1984. The defendant also contends that with the refund by one Christopher Chan of US$490,000 to Amerisport, and of US$l.98m by the Inland Revenue Service, there was no need for the shareholders to have been called upon to put up any additional funds at that point.

11. It must be mentioned that Philip and William Lee were the only 2 witnesses called by the plaintiff; indeed they were the only 2 witnesses who gave evidence in the action. The defendant, David Hsia, was present during the hearing but chose not to give evidence, as he was entitled to do. There was also a wealth of documentary evidence put in by agreement. In general, therefore, the factual issues did not turn out to be unduly contentious. Of course, particular contentions of fact by the defendant could only be put to Philip and William Lee in cross-examiantion and where not conceded or borne out by the agrees documentary evidence were apt to fail for want of evidence.

12. It will be seen therefore why I have no difficulty in accepting William Lee's evidence that the several debts Amerisport had at the time, which he detailed in cross-examination, did indeed exhaust the payments in, except as to Amerisport's bank balance of $306,000 and as to the accelerated repayment in 1985 of part of the loan complained of which was due to be repaid to the plaintiff on 16th April 1989. In my finding, it was necessary for the bank to seek additional funds to pay tire interest due to the Chartered Bank.

13. Turning to the accelerated repayment, it did in a sense favour the plaintiff. It was not shared pro rata between the shareholders, but then, the plaintiff pro rata had overcontributed or oversubscribed, as the Lee brothers put it. William Lee in particular stressed that all along it was the plaintiff which supported Amerisport and that even after the accelerated repayment, the plaintiff remained overcontributed. Mr. Whitehead's response on behalf of the defendant is that any over-contribution and the accelerated repayment do not relate to the same matter also that the Lee's were in control and ran Amerisport like one of their own family companies. However that may be, I do not chink I should be concerned with the ethical aspects of the matter, in which context the accelerated repayment may be thought to be lacking except, perhaps, in the matter of the equitable remedies to which I will come.

14. What matters is not the less than ideal nature of what was done, but that it did not breach the shareholders agreement or the law in any way that has been demonstrated. An authorising Amerisport board resolution had been duly passed. In his usual manner the defendant failed to complain or suggest any different action. Indeed, the defendant's consent to partial judgment that I have mentioned earlier can only be regarded as acceptance of that resolution, albeit in one of its other respects. In my judgment, therefore, the accelerated repayment does not avail the defendant as a defence to the claim for US$79,500. That the defendant's indebtedness to Amerisport would not have arisen had the repayment not been made, is irrelevant. What decides the point, as I have said, is that the repayment so far as I can see pas properly made.

The US$116,000 claim

15. I turn now to the plaintiff's second claim. When it came to selling off the Market Street property, difficulty was encountered. The market was unfavourable, and the location was no less unfavourable. Despite the retention of a leading firm of sales agents and legal advisers to assist, a price of just under US$19m was secured from Continental Investment, only by guaranteeing the projected rental of the 4th and 5th floors by a Rental Guarantee Agreement providing for payment of US$48,000 per month if those floors could not be leased. This was effected by irrevocable standby letters of credit obtained by the plaintiff getting an associated company of the Lee family group, Beaconfield investments to pledge securities it held, to back an inter-bank guarantee by the Chartered Bank Hong Kong to the Chartered Bank in San Francisco which issued the letters of credit. The arrangements were approved by the Amerisport Board, that by then the defendant had ceased to attend Board meetings despite the notices that were sent to him, is irrelevant.

16. I accept the documentary evidence and the evidence of the Lee brothers that the sale arrangements, in particular the Rental Guarantee Agreement, were properly made. The plaintiff and the Lee brothers were of course in control, but there is no evidence that they abused their control. In particular it was suggested by Mr. Whitehead in cross-examination, that having completed the sale of its only asset Amerisport should have boon wound up and an account struck. That is one view. The other, that of the plaintiff, is that there were loose ends particularly in the continuing Rental Guarantee Agreement. I suspect that the major consideration on the plaintiff's part, despite Philip Lee's protestations is that the plaintiff might have to foot the bill, as the letter of credit would then have to be resorted to with realisation of the Beaconfield's securities. I am not persuaded the plaintiff's prolongation of Amerisport's life for that reason would have been wrong, not legitimate or in breach of its obligations, any more then would the resultant scope for the recovery of contributions from the defendant, complained of an the defendant's behalf. If the defendant considers that he is being oppressed by the majority, he is not without remedy better designed to deal with that matter. Subject to the matters to be considered, the defendant's failure to pay the amounts demanded were a breach of the Shareholders Agreement.

17. I turn now to six grounds upon which Mr. Whitehead contends the claim must fail, and it is theseo that are rather more crucial than the matters I have so far considered and upon which the result of the action must turn.

1. Were best efforts by the Amerisprt directors to obtain alternative financing a condition precedent to that was not met?

18. The first question that falls to be considered is thus a construction point. Is the requirement to use best efforts under Article 3.2 of the Shareholders Agreement a condition precedent to determination by the Board that additional capital is required? It is not disputed that the question is to be determined in the context of the commercial purpose and factual background against which the contract was entered into (Chitty on Contract 25th Ed. para. 766). That background was of a group of investors going into a potentially expensive venture to develop property in San Francisco. Against that background and, indeed having regard to the plain language of Article 3.2, it seems to me reasonably clear that its meaning is that the Board, before determing that additional moneys are required from the shareholders, must first use its best efforts to obtain additional loan financing and working capital from sources other than the shareholders. In my judgment therefore upon a true and proper construction of Article 3.2, the best effort requirement is a condition precedent.

19. I turn then to the question of whether is was met. I am satisfied from the evidence that in commercial and practical terms, first in the process of selling and later having sold its only asset and being in deficit with negative cash flow, as testified to by the Lee brothers, Amerisport had no reasonable prospect of raising capital or loan financing other than by calling upon its shareholders. I accept that the Leo brothers nonetheless did in substance make the enquiries to which they testified. In ordinary circumstances enquiries of that sort are hardly likely to amount to best efforts. But in the particular circumstances I have described, I have no doubt that they do comprise best efforts. The contrary view would be absurd, giving that clearly alternative financing or working capital could not be procured. In my finding therefore, in relation to both the interest and the recurring guaranteed monthly rental payments, the Board did use its best efforts to obtain alternative loan financing and working capital.

2. Did the damages claimed arise out of the defendant's breach?

20. It is not disputed and I accept that the relevant law on remoteness is correctly stated in the 15th Ed. of McGregor on Damages, at paragraphs 243 et seq, and particularly paragraph 247, where it is pointed out that the "reasonable foreseeability" test referred to by Asquith L.J. in Victoria Laundry v Newman, was clarified by Lord Reid in Czarnikov v Koufos as being whether the loss is "of a kind which the defendant, when he made the contract, ought to have realised was not unlikely to result from the breach …the words 'not unlikely'…denoting a degree of probability considerably less than an even chance, but nevertheless not very unusual and easily foreseeable"

21. For his part Mr. Whitehead stressed Lord Reid's words quoted earlier in paragraph 247 that the decision in Hadley v Baxendale:

"makes it clear that a type of damage which was plainly foreseeable as a real possibility but which would only occur in a small minority of cases cannot be regarded as arising in the usual course of things or be supposed to have been in the contemplation of the parties: the parties are not supposed to contemplate as grounds for the recovery of damage any type of loss or damage which on the knowledge available to the defendant would appear to him as only likely to occur in a small minority of casts."

22. Turning then to the facts, Mr. Whitehead submits that what the defendant would have foreseen on a shareholder's failure to pay contribution was "repossession" by the Bank to recover advances and interest, a shortfall in that aggregate, followed by less than productive legal action against Amerisport, then legal action against fellow shareholders as joint and several guarantors e.g. the plaintiff who might have to pay the entire shortfall. But that eventuality, he submits, is expressly provided for in Article 3.1 of the Shareholders Agreement which provides a right to the shareholders to be reimbursed. That, he submits, is the natural scenario, which is what the parties expected and what they would forsee. What is not provided for, he adds, is for one of the shareholder to intervene and pay the defaulting shareholder's contribution.

23. I am unable to accept that submission. It seems to me that the possibility of a fellow shareholder paying in the contribution of a defaulting shareholder to avoid the Bank calling in the entire loan and taking legal proceedings, must have been clearly foreseeable as, at the very least, not unlikely to result.

24. Having arrived at that conclusion I have no difficulty with the second limb of what must also be considered i.e. whether the inability or failure to repay by Amerisport was also foreseeable. I think it must have been. In neither case do I think the possibility one which would have been foreseen as likely to occur only in a small minority of cases, having regard to all the circumstances and particularly the nature of the venture and the Shareholders Agreement, at the time it was being entered into.

25. My conclusion as to the recurring monthly rental guarantee payments is the same. In my judgment the damages claimed in both instances are not too remote.

26. Next Mr. Whitehead submitted that on breach of agreement to advanced loans, the measure of damages is not the amount of the loans but the loss sustained by the borrower. That is obviously right and on my understanding was not disputed. It is simply coincidental in the present case and quite clear that the plaintiff's loss is the amount of money loaned in making the contributions that the defendant should have made, which it has not got back, together with interest.

27. I also reject Mr. Whitehead's submission that the money for the loans or contributions came from Federated Properties and that these is no evidence that it was advanced by the plaintiff. I reject that submission as totally and manifestly devoid of any merit whatsoever. The evidence is that Federated Properties is an associate company of the plaintiff and the clear and only possible inference is that the advances were procured by and made on behalf of the plaintiff, and that the plaintiff has suffered the loss of the amounts not repaid.

28. Finally, Mr. Whitehead submits that Amerisport is still a going concern and that accordingly no damages have yet been proved. No doubt that submission is related to the pure speculation and it can only be called that in the absence of any evidence, that Amerisport may, despite it losses, indeed because of them, have significant value arising out of the potential tax advantages of its large losses. Or perhaps that submission is not so related. Whichever way it is viewed, Amerisport on the evidence is in substantial deficit with no prospects of acquiring any assets; having regard to that in the circumstances of the matter, I do not think it premature to assess damages. The plaintiff claims only the amounts contributed and interest. The damages or less suffered by the plaintiff cannot be less than that. Failure to mitigate damages has not been pleaded by the defendant. I proceed than to Mr. Whitehead's third point.

3. The plaintiff's entitlement to restitution.

29. It is submitted that the plaintiff is not entitled to restitution:

(a) that being an equitable remedy, having regard to the Board's conduct; and

(b) as there was no compulsion upon the plaintiff to pay.

30. I will being with the plaintiff's conduct. It is claimed that the Lee brothers controlled the Amerisport Board, the Shareholders Agreement was "very open ended and very difficult to get out of" and that the Lee brothers controlled the purse strings, accounts and day to day management. All of that I dare say is true. But as I have already said it has not been shown that that control was abused, specifically in relation to accelerated repayment of the plaintiff's contribution, its keeping Amerisport in being, or its non-repayment of the contribution made on the defendant's behalf when, it is said, there were sufficient funds for he purpose.

31. As to compulsion, I adopt as an authoritative statement of the law the following passage from paragraph 646, page 443 of the 4t Ed. of Vol. 9 of Halsbury's Laws:

"The compulsion applied to make the plaintiff pay the defendants debt need not be a legal compulsion which admits of no alternative. Thus a payment made under coersion exercised by a person in a position to dictate terms which there is no legal obligation to accept is deemed to be made under compulsion".

32. In my view the very real fear that if the interest or recurring monthly rental guarantee payments were not made by the Board, the Bank would call in the whole loan and institute proceedings thereby ending the sale to Continental Investments or that recourse to the standby letter of credit would be precipitated, in my view constitutes compulsion. And certainly in reference to Own v Tate (1976) 1 QB 402, payment of the contributions cannot be said to have been officious. I proceed to Mr. Whitehead's 4th point which he submitted would be decisive.

4. Whether absence of legal liability on defendant to pay Amerisport is fatal to plaintiff's claim.

33. In submitting than it is, Mr. Whitehead relies upon paragraph 653 of Vol. 9 of Halsbury Laws. What is said there is that.

"…payment must in the case of a payment under compulsion have discharged a legal liability of the defendant, so that the payment to a third party will not found such a claim unless the defendant was under a legal liability to pay that third party,"

34. He then points to the following statement of further and butter particulars of the plaintiff's reply to the Defence:

"The liability of the defendant alleged therein is not a legal liability to the company but a liability under the Shareholders Agreement."

35. I do not read the passage from Halsbury as suggesting that the liability of the defendant must be to the third party. It is perfectly consistent with liability to the plaintiff to pay the third party as in the present case, and as in the case of Beswick v Beswick (1968) AC 58. Equally significant is the absence of authority for the proposition that the defendants liability should be both to the third party and to pay the third party. Accordingly I reject Mr. Whitehead's submission, and see no reason why the defendant should not have been ordered to make restitution had such an order been necessary.

5. Whether specific performances can be ordered in respect of an agreement for a loan.

36. Mr. Whitehead contends and I accept that the courts will not ordinarily enforce an agreement make a loan, although they will grant damages for breach of failure to make a loan. (See South African Territories v Wallington (1897) 1 QB 692 C.A.).

37. Furthermore, a contribution or loan having already been made on the defendant's behalf, it seems to me, as also contended by Mr. Whitehead, that the agreement has already been performed in that specific regard.

38. For those reasons the claim for specific performance, curiously claimed by way of declaration, must necessarily fail.

6. Whether there can be estoppel without a representation.

39. I must say at once that Mr. Ma hastened to assure the court, and very properly, that the point is very much of a subordinate or residual plea. It is singularly deficient in not alleging any representation of the defendant relied upon by the plaintiff. As stated at page 61, para. 66 of Spencer Dower's 3rd Ed. of Estoppel By Representation:

"It is firmly establishes that reticence and passivity in relation to mattes which give rise to no legal duty to speak or act, whether censurable in fore conscientiae or not, is not a representation of anything, and accordingly creates no estoppel".

And it is passivity, i.e. the defendant's failure, despite being a Managing Director, to complain or object to the demand notices and letters sent to him, upon which the plaintiff seeks to rely. Mr. Ma points to paragraph 55 of Spencer Bower where it is said that:

"It is well established that under certain conditions silence or inaction may constitute a representation, as much as positive language or conduct, for the purpose of an estoppel."

But the passage goes on, as indeed does paragraph 66 from which I have already quoted, that the main condition to which such silence or inaction is subject is a legal (and not a more moral or social) duty owed by the representor to the representee to make disclosure or take steps the omission of which is relied upon as creating the estoppel. No such duty was drawn to my attention, and I am not able to discern any. In my judgment, therefore, the plaintiff is not able to rely upon the estoppel it contends for, not that such a conclusion affects the outcome of the plaintiff's action or the conclusion I have come to.

    For all the foregoing reasons there will be judgment for the plaintiff in damages of US$79,500, and US$126,600. It is accordingly unnecessary to make a finding upon the plaintiff's claim for restitution of those sums, which I would otherwise have ordered the defendant to make. Nor is it necessary to make a finding an specific performance, as to which I have come to the conclusion, as indicated, the the plaintiff would fail.

    There would be judgment accordingly. I will now here Counsel upon interest and costs.