INSPIRING INVESTMENTS LTD v. CHUN HU HING AND ANOTHER

HCA 2090/2014

[2018] HKCFI 925

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2090 OF 2014

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J U D G M E N T

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1.  This is a claim of breach of a sale of shares agreement made in late June 2012 between the plaintiff and the 1st and 2nd defendants. The shares are 12,287 “Series A Preferred Shares” (“the Preferred Shares”) of and in Goldstone Apparel Concept Ltd (“GAC”). GAC is a Hong Kong company that used to supply garments of a famous designer brand Guy Laroche through its PRC subsidiaries and related companies.

2.  Edmond Ip Tak Chuen (“Edmond Ip”) is and was at all material times the sole shareholder and director of the plaintiff (“Inspiring”).  Inspiring used to be a lender of GAC.  GAC owed Inspiring a HK$13 million loan and a HK$6 million loan in June 2012. 

3.  The Preferred Shares were converted from the HK$6 million loan.

4.  The 1st Defendant (“Dexter”) is and was at all material times a shareholder and director of GAC. 

5.  The 2nd Defendant (“William”) is the son of Dexter.  He is and was from 10 August 2010 a shareholder of GAC and from 1 November 2010 to 4 March 2014 a director of GAC.

6.  Dexter and William used to be represented by solicitors and counsel in this action, but were acting in person at the trial of the action.

The 13 million loan

7.  On 31 March 2010, Edmond Ip for Inspiring as the lender and Dexter for GAC as the borrower and for himself as the guarantor entered into a loan agreement under which Inspiring would advance HK$13 million to GAC.  Pursuant to this agreement, Inspiring advanced HK$13,333,000 to GAC on 31 March 2010 (“the 13 million loan”).

The 5 million loan

8.  On 11 November 2010, Edmond Ip as the lender, GAC as the borrower, and Dexter and William as the guarantors entered into another loan agreement whereby Edmond Ip agreed to lend HK$5,000,000 to GAC.  Pursuant to this agreement, Edmond Ip advanced a total of HK$5,000,000 to GAC in 3 tranches from November 2010 to December 2010 (“the 5 million loan”).

9.  On 12 May 2011, Edmond Ip received HK$2,500,000 (from one Mr Anthony Au, a mutual friend of Dexter and Edmond Ip) as partial repayment of the 5 million loan. 

The 6 million loan

10.  In about July 2011, Edmond Ip agreed to transfer his right to the outstanding HK$2,500,000 of the HK$5 million loan to Inspiring and use Inspiring to advance another HK$4,166,500 to GAC thereby making the total amount of the further loan to HK$6,666,500. 

11.  On 22 July 2011, Inspiring as the lender, GAC as the borrower, and Dexter and William as the guarantorsentered into a further loan agreement.  Pursuant to this agreement, Inspiring advanced HK$6,666,500 to GAC on 22 July 2011 (“the 6 million loan”).  The 5 million loan was thereby discharged.

The terms of the sale of Preferred Sharesagreement as alleged by Inspiring

12.  Inspiring pleaded that the agreement for sale of the Preferred Shares was made in late June 2012.  Inspiring alleged that the agreement was concluded partly orally and partly in writing (“the Sale of Shares Agreement”).  Insofar as it was made orally, it was contained in or evidenced by the following discussions:

(1) a discussion on 21 June 2012 between Edmond Ip (on behalf of Inspiring), Dexter (on behalf of himself and William) and one Jason So (on behalf of an investor called SAIF Partners IV LP (“SAIF”)). 

(2) a discussion on 26 June 2012 between Edmond Ip (on behalf of Inspiring), Dexter, William and Jason So (on behalf of SAIF). 

13.  Insofar as the agreement was made in writing, it was contained in or evidenced by the following:

(1) an e-mail sent by William on 22 June 2012 to Edmond Ip and copied to Dexter;

(2) an e-mail sent by Dexter on 25 June 2012 to, inter alia, Edmond Ip and Jason So with copy to William; and

(3) a personal guarantee executed by Dexter and dated 28 June 2012.

I will refer to the relevant parts of the two e-mails and the guarantee in the summary of evidence below. 

14.  Inspiring pleaded the terms of the Sale of SharesAgreement as follows:

(1) Inspiring would convert the 6 million loan together with interests thereon into the Preferred Shares.

(2) Inspiring would forego its right to seek repayment of the $6 million loan and interests from GAC.

(3) In consideration for Inspiring’s above obligations:

(i) Dexter and/or William would accomplish the sale by Inspiring of the Preferred Shares to third parties for at least HK$6,666,500 (the capital of the 6 million loan) by 31 December 2012 (“the 1st Obligation”).

(ii) In the event that Dexter and William should fail to sell the said Preferred Shares to third parties by 31 December 2012, Dexter and/or William would purchase the shares from Inspiring for HK$6,666,500 (“the 2nd Obligation”). 

(iii) Dexter and William would execute a personal guarantee in favour of Inspiring as security for their performance of the 1st and 2nd Obligations as set out in §§(i) and (ii) above.

(iv) Dexter would pledge his interest in a Canadian property (owned by him and his wife) to Edmond Ip as security for his performance of the 2nd Obligation.

15.  Inspiring further pleaded that there was an implied term implied as a matter of obvious implication and/or to give business efficacy to the Sale of SharesAgreement that in the event that Dexter and William should fail to discharge their 1st Obligation to sell the Preferred Shares to third parties by 31 December 2012, Dexter and/or William would, in discharge of their 2nd Obligation, purchase these shares from Inspiring at HK$6,666,500 within a reasonable time, and in any event no later than the date of the Writ and the Statement of Claim.

16.  The implied term only supplied the time frame for the performance of the 2nd Obligation.

The alleged breaches of the Sale of Shares Agreement by the defendants

17.  Pursuant to the Sale of Shares Agreement:

(1) Dexter issued a letter of assignment dated 22 June 2012 to Edmond Ip whereby he purportedly assigned his interest in the Canadian Property to Edmond Ip as security for his performance of the 2^nd Obligation. 

(2) Dexter executed the personal guarantee dated 28 June 2012 in favour of Inspiring.  But William did not do so.

(3) GAC issued the Preferred Shares to Inspiring on 5 July 2012.

18.  However, Inspiring pleaded that Dexter and William had breached their 1st and 2nd Obligations in failing to cause any third party to purchase the Preferred Shares by 31 December 2012 and did not buy these shares by themselves thereafter.

Inspiring’s claims

19.  Inspiring pleaded that the business of GAC came to an end in late 2013 to early 2014.  Its licence to use the trade mark of Guy Laroche Femme brand in the PRC market was terminated because it failed to fully settle the royalties to Guy Laroche.  Many of the employees of GAC and its subsidiaries and related companies in the Mainland had resigned.  Its related companies in the Mainland had all ceased operation. The value of the Preferred Shares was therefore reduced to their face value of HK$12,287 or HK$1 per share or less.  Inspiring thus suffered a loss of (HK$6,666,500 – HK$12,287 =) HK$6,654,213.  Inspiring claims Dexter and William for this sum.

20.  Inspiring also denied in the reply that it had failed to mitigate its loss.  Inspiring pleaded that GAC was a private company and in poor financial condition since late 2012.  It was thus not worthwhile to incur time and expenses to look for buyers for the Preferred Shares.  Any such attempt would have failed.

21.  There is no claim for the 13 million loan or the preferred shares converted from this loan.

The terms of the agreement to sell the Preferred Shares as alleged by the defendants

22.  Dexter and William deny Inspiring’s claim.  They admitted the making of the 13 million loan and 6 million loan by Inspiring to GAC and the 5 million loan by Edmond Ip to GAC. They also admitted that they had asked Edmond Ip to convert the 13 million and 6 million loans into preferred shares of GAC.  The reason being that the investor SAIF was going to invest into GAC but did not want GAC using its investment money to repay the two loans due to Inspiring.

23.  Dexter and William pleaded that there was a meeting of Edmond Ip, Dexter and Jason So held at the end of June 2012 in which Edmond Ip agreed to convert the 13 million and 6 million loans into the preferred shares subject to the pre-condition that “Dexter and William would make endeavour to arrange to sell the Preferred Shares to a third party at a premium after the conversion”.  

24.  They also deny that they had agreed or undertaken to purchase the Preferred Shares from Inspiring at HK$6,666,500 in the event that these shares were not sold to third parties by 31 December 2012.

25.  They further pleaded that they were not in breach of the agreement or pre-condition in that they had approached more than 20 potential investors between 2012 and 2013 to raise funds for GAC.  Of these investors, they had approached three of them with a view to procure the sale of the Preferred Shares to them.  The three investors are (i) one Legend Capital in November 2012; (ii) a listed company in Hong Kong (the transaction failed as Edmond Ip disagreed with the deal structure in March 2013); and (iii) a private equity fund called “深圳前海元通基金管理有限公司” to such effect on 22 August 2013 though the attempt failed. 

26.  They further pleaded that in early January 2013, GAC had an inventory of a value of RMB11.7 million.  Hence, the Preferred Shares had more than a nominal value.

27.  They also pleaded that Inspiring had failed to mitigate its loss as it should have taken but failed to take any steps to secure a buyer for the Preferred Shares after 31 December 2012 as quickly as possible at a reasonable price.

The issues

28.  The issues between the parties are as follows:

(1) Whether Dexter and William had to succeed in selling the Preferred Shares for Inspiring by 31 December 2012 for at least HK$6,666,500 (the 1st Obligation) or they were only obliged to assist Inspiring to sell the Preferred Shares for at least HK$6,666,500.  

(2) Whether Dexter and/or William was in repudiatory breach of their 1st Obligation or their obligation to assist Inspiring to sell the Preferred Shares for at least HK$6,666,500. 

(3) Whether Dexter and/or William had to discharge the 2nd Obligation.

(4) Whether Dexter and/or William was in repudiatory breach of their 2nd Obligation and the implied term in failing to purchase within a period from 31 December 2012 the Preferred Shares from Inspiring at HK$6,666,500 or at all.

(5) Whether Inspiring has accepted Dexter and/or William’s repudiatory breach by issuing the writ and statement of claim.

(6) If Dexter and/or William was in repudiatory breach of their 1st Obligation:

(i) Whether Inspiring is entitled to claim for the loss of HK$6,654,213 from any of them; and

(ii) Whether Inspiring has taken reasonable step to mitigate its loss.

(7) If Dexter and/or William was in repudiatory breach of their 2nd Obligation and the implied term:

(i) Whether Inspiring is entitled to claim for the loss of HK$6,654,213 from any of them; and

(ii) Whether Inspiring has taken reasonable step to mitigate its loss.

The plaintiff’s case on the formation of the 1st and 2nd Obligations

29.  Since Dexter and William denied that there was the Sale of Shares Agreement and disputed their obligations to sell the Preferred Shares, I invited Ms Ho, counsel for Inspiring, to outline how the 1st and 2nd Obligations were formed and affixed on Dexter and William.  Ms Ho then furnished me with her supplemental opening submissions dated 31 January 2018.

30.  For the formation of the 1st Obligation on Dexter and William, Ms Ho referred to the meeting on 21 June 2012 wherein Dexter on behalf of himself and William offered to sell the Preferred Shares to third parties for at least HK$6,666,500 no later than 31 December 2012.  This was followed by an e-mail by William to Edmond Ip with copy to Dexter on 22 June 2012 which recapped the offer made in the meeting on 21 June.  I will refer to its content below.  This e-mail contained the further assurance of a pledge by Dexter of his interest in the Canadian property.  The pledge by assignment was in fact signed by Dexter on 22 June 2012 (B153) which referred to the 1st Obligation to sell the Preferred Shares though without the deadline of 31 December 2012.

31.  Dexter on 25 June also sent an e-mail to Edmond Ip with copy to William and representatives of SAIF. He referred therein to both the 1st and 2nd Obligations.

32.  The 1st Obligation was finally agreed to by Dexter and William in the meeting of 26 June.  It was also embodied in the personal guarantee signed by Dexter and dated 28 June 2012.

33.  Regarding the 2nd Obligation, Ms Ho submitted that it was proposed by Edmond Ip to Dexter on or shortly before 25 June 2012.  Dexter then referred to it in his e-mail sent out on 25 June.  It was agreed to by Dexter and William in the meeting on 26 June. Dexter then recorded it in his personal guarantee dated 28 June 2012. 

Inspiring’s evidence on the terms of the Sale of Shares Agreement

34.  There is no dispute that the 6 million loan was repayable on 21 July 2012 and both Dexter and William were guarantors for its timely repayment.  Edmond Ip said in his witness statement that in March 2012, Dexter told him that SAIF, a private equity fund investor, was interested to invest in GAC’s operation by acquiring shares in GAC.  But SAIF did not want its investment money to be used by GAC to repay the 13 million and 6 million loans to Inspiring.  Dexter and William therefore suggested to him that Inspiring could convert the two loans into preferred shares of GAC.  He initially declined the suggestion as he did not intend to hold any long term interest in GAC’s project or GAC.  Furthermore, the 6 million loan was to be due on 21 July 2012.  He preferred to have repayment of that loan as soon as possible.  His evidence on this point is supported by an exchange of e-mails between him and Dexter on 17 June 2012 at 10:49 a.m. and 18 June 2012 at 9:41 a.m. (B571-574).

35.  Dexter and William then made a proposal to ensure that Inspiring would only be holding the Preferred Shares for a short period.  They proposed to arrange Inspiring to sell these shares within half a year at a price of at least HK$6,666,500 (being the principal amount of the 6 million loan).  Edmond Ip considered the proposal feasible.  Upon further discussion, he on behalf of Inspiring and Dexter and William reached the Sale of Shares Agreement in late June 2012 (in terms as pleaded by Inspiring).

36.  Edmond Ip also said that the Sale of Shares Agreement was made partly orally and partly in writing.  The oral part was made in two meetings held on 21 June and 26 June 2012.  He and Dexter attended the first meeting.  Dexter (on behalf of himself and William) promised in that meeting that they would look for third parties to take up the Preferred Shares by 31 December 2012 and that the consideration would be at least HK$6,666,500 (the 1st Obligation). 

37.  The second meeting was attended to by William and Jason So as well.  Dexter in this meeting reassured Edmond Ip that they would look for third parties to take up the Preferred Shares by 31 December 2012 and that the consideration would be at least HK$6,666,500. Edmond Ip recalled in §38 of his witness statement that he told Jason So at the meeting that the condition for Inspiring’s agreement to convert the 6 million loan into the Preferred Shares was that Inspiring would be entitled to “put” the Preferred Shares to Dexter and/or William (i.e. to require Dexter and/or William to purchase the Preferred Shares), and that Dexter had agreed to pledge his interest in his shares in GAC to secure this 2nd Obligation to purchase the Preferred Shares.

38.  For the part of the Sale of Shares Agreement that was made in writing, Inspiring referred to two e-mails exchanged by Edmond Ip with Dexter and William and Dexter’s guarantee dated 28 June 2012.  The first e-mail was sent by William to Edmond Ip with copy to Dexter at 4:35 p.m. on 22 June (B577-578).  William said:

“As we (Dexter and William) mentioned during our meeting yesterday (21 June), we will provide you with the following:

(1) 20M HKD preferred shares (to be converted from the 13 million and 6 million loans).

(2) (Dexter and William) Personal Guarantee at 6.66M HKD.

(3) We will sell (the Preferred Shares) at Premium (aim at 2X of the current valuation of 66M HKD). We should complete this transaction the latest by Dec 31^st 2012.

(4) Furthermore, to demonstrate our commitment and confidence, we pledge to your [sic] our property in Toronto.”

39.  The second e-mail was from Dexter to Edmond Ip with copy to William and the representatives of SAIF and sent out at 2:31 p.m. on 25 June 2012 (B584-585).  That was after another meeting between Edmond Ip and Dexter on that day.  Dexter said:

“The Second CB (the 6 million Loan) Converted into (the Preferred Shares) – (Edmond Ip) proposed that he will give (Dexter) a “put” on (the Preferred Shares) and (Dexter) could put this in the market place at the price HK$10M until 31st December 2012 for which (Dexter) have to pledge (his) shares as security…Kindly confirm.”

40.  The “put” mentioned in this e-mail is for Dexter to buy the Preferred Shares from Inspiring. 

41.  Dexter’s guarantee dated 28 June 2012 stated, inter alia:

“1. Conversion of HK$13,333,000 CB Loan to preferred shares

[Inspiring] agrees to convert the CB loan at HK$13,333,000 (CB loan #1) plus accrued interest as GAC preferred shares.

2. Conversion of HK$6,666,500 CB Loan to preferred shares

[Inspiring] agrees to convert the CB loan at HK$6,666,500 (CB loan #2) plus accrued interest as GAC preferred shares (the Preferred Shares) on the following understanding:

(i) The Guarantors will help selling (the Preferred Shares) at a price above (Inspiring’s) cost (target at 1.5X the cost) by or before 31^st December 2012. All premium above the cost will go to (Inspiring).

(ii) (Dexter), …, has signed an Assignment Letter of (the Canadian Property) until (the Preferred Shares), converted from the CB Loan #2, is successfully sold to another investor.

3. Guarantors of CB loan principal amount

The guarantors, being founders of GAC, agree to provide personal guarantees that (Inspiring) will not lose any principal amount, i.e. HK$13,333,000 for CB #1 and HK$6,666,500 for CB #2.  The above guarantee is provided to the earlier date of either (Inspiring) will have sold (its) holding of (the Preferred Shares) or GAC hits Qualifying Public Offering … on or before 30th June 2016.”

42.  Furthermore, Dexter had, before the Sale of Shares Agreement was made, already signed the letter of assignment of his interest in the Canadian property to Edmond Ip on 22 June (B153) which referred to the 1st Obligation to sell the Preferred Shares though without the deadline of 31 December 2012.

43.  Edmond Ip in his cross-examination maintained that the “put” (i.e. the 2nd Obligation) was referred to by Dexter in his e-mail of 25 June and this condition was cemented in the meeting of 26 June.  

44.  Regarding whether William was also liable for the 2nd Obligation, Edmond Ip’s oral evidence cited below is relevant:

“Ho (counsel) - Whether William was there is not relevant, because he admitted that he had agreed to our terms on this occasion.

William - Mr Ip, you say that I did not say anything and that meant I agreed.

Ip - I just said you didn’t say anything.

William - What was the time that Dexter agreed to purchase the Preferred Shares?

Ip - Somewhere between 20^th and 26^th.

Court - That’s agreeing to the “put”.

Ip - There was a meeting on 21^st June. We talked about they sell the shares for me. That’s very clear. I thought it would be a workable solution.

After that, I think on 25^th we had lunch. At that moment, I also proposed a security for the sale, in case they cannot sell that I’m entitled to “put” to them. So if you like, it started during that discussion over lunch on the 25^th.

William - Who attended that meeting?

Ip - 25^th over lunch and 26^th all parties.

Ho - That was reflected in the e-mail at B2-584 (25^th June).

Court - Was Mr William Chun there in this lunch meeting?

Ip - Probably not.

Court - You mentioned the “put” to Dexter in this meeting.

Ip - Correct.

Court - And then in the 3^rd meeting on 26^th June, everybody was there including William.

Ip - Correct.

Court - And what was agreed?

Ip - The “put”, as far as I’m concerned, I asked Jason So, if he had read about this e-mail too. And I said “if one day I would be the major shareholder would you be agreeable?” He said “no problem.

Court - Was there any discussion in this last meeting on 26^th that both Dexter and William were going to accept the “put” arrangement?

Ip - Well, for a start, the e-mail on the 25^th, William was copied. So he should know about my requirement at the time to “put” the Preferred Shares to Dexter.

Court - But it didn’t include William Chun?

Ip - According to this, no.

Court - So William Chun was not affected by this arrangement?

Ip - On 26 when we talked, he was there.

Court - So it was talked about again, discussed again?

Ip - Yes.

Court - Not simply that after everybody had taken his seat, you just asked Jason So “whether you would mind if I one day would become the biggest shareholder?” And he nodded his head and said “ok”. Not as simple as that?

Ip - I did explain to him why I needed the “put”.

Court - You explained to Jason So.

Ip - I presume they heard it.

Court - Of course, they were in the meeting.

Ip - Right.

Court - You explained to Jason So why you needed the “put” from?

Ip - From? Well technically two of them, but I guess in writing, it’s only to Dexter. So I can only rely on the writing to say the “put” is to Dexter. And that’s ok, that’s acceptable to me.

Court - So you are not insisting that William Chun has also agreed to the “put” arrangement.

Ip - Well, I think in my mind the “put” is to them. But if he said he never agreed to it and I have no evidence to support it. I’m prepared to accept that as well.

Court - Alright.

Ip - But the “put” to Dexter is definitely agreed in my view.

Court - Because he has written it in the e-mail.

Ip - Correct.

(Morning Break)

Court - Ms Ho, it seems that there is only good evidence against Dexter. Do you take a different view of that? From the evidence of Mr Ip.

Ho - In relation to the 2^nd obligation?

Court - Yes.

Ho - Yes, can I do a re-examination on that part and try to see whether I can clarify that.

Court - What I’m considering is that, and of course it is ... It seems that Mr Ip is only keen on going after Dexter.

Ho - I think he is shaking his head, and that is not my instructions.

Court - Alright. Then let’s carry on.

Ho - Yes.

Ip - 我可唔可以補充吓呢，我唔係being inconsistent吓。我昨日都講咗呢個 “put” ，個26號個meeting呢就係同Jason So講，就我又 “put” 我要攞個 shares 做security。我昨日都講咗 William 嘅shares係 relatively small. Didn’t talk about getting his shares as collateral security。所以我頭先講 in my own mind呢，個 “put” 係to both of them嘅，不過你問我有無strict evidence呢，我就話technically I can only say我無 documentary evidence 話specially同有講過 “put”，但唔等如in my own mind at the time when I talked about the “put”, it’s to both of them. It’s being consistent. I need protection from both of them. Right?

(Free translation: Ip - May I make a supplement? I am not being inconsistent. I said already yesterday that this “put”, at the 26^th meeting it was said to Jason So, that I also “put”, I had to take the shares as security. I had already said yesterday, William’s shares are relatively small. Didn’t talk about getting his shares as collateral security. Therefore, I just said that in my own mind, the “put” was to both of them, but you ask me if there is strict evidence, I therefore say technically I can only say I do not have documentary evidence that says specially (I) had talked with him on “put”, but it is not the same as in my own mind at the time when I talked about the “put”, it’s to both of them. It’s being consistent. I need protection from both of them. Right?)

Court - Alright.

(The 2nd obligation in relation to William was not canvassed in the re-examination of Edmond Ip.)” (emphasis supplied)

The defendants’ evidence on the terms of the agreement they pleaded

45.  Dexter and William deny that there was the Sale of Shares Agreement as alleged by Inspiring whether orally or in writing.  But they agreed that there was an agreement that Inspiring would convert the 13 million and 6 million loans into GAC’s preferred shares subject to a pre-condition that Dexter and William would endeavour to arrange to sell the Preferred Shares to a third party at a premium (or at least for HK$6,666,500) and Dexter would provide a personal guarantee to Inspiring (and his Letter of Assignment of his interest in the Canadian property).  

46.  Dexter also said in his supplemental statement that he was forced by Edmond Ip to give the personal guarantee as his refusal to do so would result in the blocking by Edmond Ip of the fund injection from SAIF.  In the circumstances, he thought that he had no alternative but to provide the personal guarantee to Inspiring. 

47.  I see no problem in his being forced to sign the personal guarantee on the ground that his refusal would result in Edmond Ip not agreeing to the conversion of the 13 million and 6 million loans into GAC’s preferred shares and hence the stopping of SAIF’s investment.  Inspiring had all the liberty to decide whether to convert the two loans into GAC’s preferred shares.  It was within its rights not to go ahead with the conversion without Dexter’s personal guarantee.  The fact that the guarantee was demanded by Edmond Ip or Inspiring would not have affected its validity or enforceability. 

48.  Dexter further said in his supplemental witness statement that he provided the personal guarantee to Inspiring on the mutual understanding that he would maintain management control over the GAC Group and that both he and William would use their best endeavours to help selling the Preferred Shares at a premium.  He further said that he lost control of the GAC Group when one Ms Sunny Lam was appointed the Chief Operating Officer of GAC (on about 13 January 2014).  The personal guarantee thereupon became void and he was no longer bound by it.  He also said that he only agreed to use his best endeavours to help sell the Preferred Shares.  When he was no longer in management control of GAC, he could no longer help sell the Preferred Shares.  I however consider that Dexter cannot rely on these two grounds of defence as they are unpleaded (see Kwok Chin Wing v 21 Holdings Limited (2013) 16 HKCFAR 663 at §§21-27). 

49.  Dexter and William also denied that they or either of them had undertaken the 2nd Obligation.  Dexter reiterated in oral evidence that the 2nd Obligation of giving him the “put” of the Preferred Shares was not mentioned in any written agreement. 

50.  Dexter also mentioned for the first time in oral evidence in chief that during the meeting of 26 June 2012, Jason So had disagreed with the “put” being given to him as the “put” required approval from SAIF’s investment committee and there was insufficient time for Jason So to take this through the committee.  This is contrary to §10 of Dexter’s supplemental statement where he denied that Edmond Ip had mentioned to Jason So and him during this meeting that Edmond Ip would like to “put” the Preferred Shares to him.  He also mentioned for the first time in oral evidence that if there was the “put” arrangement, he would have to make a statement of disclosure of it pursuant to SAIF’s share purchase agreement.  However, these matters are also unpleaded and have not even been mentioned previously.  I therefore cannot take them into consideration but would ignore them.

51.  William adopted Dexter’s witness statement as his witness statement.  He further denied in his supplemental witness statement that Dexter and he had agreed with Edmond Ip that the conversion of the 6 million loan into the Preferred Shares was on condition that Edmond Ip would be entitled to “put” the Preferred Shares to Dexter or him.

Analysis of and decision on the 1st Obligation

52.  It is common ground that the 6 million loan was due on 21 July 2012.  The loan was guaranteed by Dexter and William and was secured by Dexter’s interest in the Canadian property.  Of the 6 million loan, HK$2.5 million was part of the 5 million loan that GAC failed to repay Edmond Ip on 15 May 2011.  GAC anticipated in June 2012 that it was unable to repay Inspiring the 6 million loan on 21 July 2012. Dexter had by an e-mail of 5 June 2012 asked Edmond Ip to extend the repayment date to 30 June 2013 (B2/569).  Edmond Ip thus knew that GAC had difficulty repaying the loan on time in July 2012.  Further, from the e-mails exchanged between the parties, it is clear that Edmond Ip was not keen to keep the Preferred Shares for a long term if he should go for conversion.  Otherwise, there would not be the agreement that Dexter and William would sell them for Inspiring by 31 December 2012.

53.  GAC needed SAIF’s investment at that time.  But SAIF was not going to let its money to be used by GAC to repay Inspiring.  SAIF instead proposed that the obligation to repay the 6 million loan could be assigned by GAC to Dexter so that Dexter would be personally liable for it.  Dexter proposed to Edmond Ip in an e-mail of 17 June to have the liability of this loan assigned to him and he would repay it to inspiring on 31 December 2012 though he and William hoped to repay it on 31 October (B2/571). 

54.  I think it was obvious to Edmond Ip, a seasoned investor in businesses, that if the SAIF investment did not come, there was a risk that Inspiring would not be able to get back its 13 million and 6 million loans.  In that event, Inspiring would have to rely on the personal guarantees given by Dexter and William and Dexter’s assignment of interest in the Canadian property to secure their repayment.  However, if Inspiring should agree to the proposed conversion of loans into preferred shares, GAC would have the SAIF funds to continue with its operation.  There was a better chance that the two loans might be repaid.  This should be an incentive for Inspiring to co-operate with Dexter in securing SAIF’s investment to GAC.

55.  For the same reason that if Inspiring did not agree to convert the two loans into preferred shares, GAC would not be able to obtain SAIF’s funding.  Its operation might be gravely affected.  Hence, SAIF’s investment was more important to Dexter and William then Edmond Ip as GAC was basically the business of Dexter and William while Edmond Ip was just one of the outside investors.  Furthermore, Dexter and William had guaranteed the timely repayment of the two loans.  Hence, it was important that Dexter and William should be able to convince Edmond Ip to agree to the conversion.  They had to provide Edmond Ip with assurances that the loans and in particular the 6 million loan would be repaid soon as this loan was scheduled to be repaid on 21 July 2012.  Their efforts to this end are demonstrated by what they had promised to Edmond Ip in meetings and their e-mails to him. 

56.  Dexter had proposed on behalf of himself and William to Edmond Ip in the meeting of 21 June that they would look for a third party buyer or buyers to purchase the Preferred Shares from Inspiring no later than 31 December 2012.  This proposal was repeated in William’s e-mail to Edmond Ip dated 22 June and embodied in Dexter’s personal guarantee dated 28 June.

57.  There is in fact no dispute that Dexter and William were bound assist Inspiring to sell the Preferred Shares on or before 31 December 2012, the dispute is on the exact meaning and extent of this obligation.  Ms Ho, counsel for Inspiring emphasised the wordings of the e-mailand in particular the words “will sell” and “should complete”:

“([w]e) will sell your 6.66M HKD shares at Premium (aim at 2X of the current valuation of 66M HKD). We should complete this transaction the latest by Dec 31^st 2012.” (emphasis added)

58.  Ms Ho further referred to the wording of Dexter’s Letter of Assignment dated 22 June in which he assigned his interest in the Canadian property:

“In order to support your conversion of the second CB at HK$6,666,500 to preferred shares of (GAC), at similar terms as SAIF, I, (Dexter), have agreed to unconditionally assign to you my property in Toronto, Canada, at the following address:

…

This unconditional assignment terminates when I successfully sell your above GAC preferred shares, current value at HK$6,666,500, to another investor. As discussed, I will try to sell your above preferred shares at a premium, which will be totally for your account.” (emphasis added)

59.  Ms Ho submitted that these wording show that Dexter and William were not merely offering to “help sell”, but were undertaking an absolute obligation to accomplish the sale of the Preferred Shares by 31 December 2012.

60.  In contrast to those wording, Dexter’s personal guarantee dated 28 June spelt out the 1st Obligation in terms that:

“(Inspiring) agrees to convert the CB Loan at HK$6,666,500 (CB Loan #2) plus accrued interest as GAC preferred shares on the following understanding:

(i) The Guarantors will help selling (the Preferred Shares) at a price above (Inspiring’s) cost (target at 1.5X the cost) by or before 31^st December 2012. All premium above the cost will go to (Inspiring).

(ii) (Dexter), one of the guarantors, has signed an Assignment Letter of (the Canadian property) until (the Preferred Shares), converted from the CB Loan #2, is successfully sold to another investor.” (emphasis added)

61.  The expressions of Dexter and William in the e-mail and Letter of Assignment were used at the stage of persuasion or negotiation.  Though they were not expressions used casually as there were several drafts of the 22 June e-mail, I would consider the wording used in Dexter’s guarantee as more precise in reflecting the exact extent of the obligation to assist in selling the Preferred Shares as the guarantee was the document legally binding on Dexter.  Furthermore, the guarantee in draft form had been sent to Edmond Ip for comment on 28 June and Edmond Ip did not give any comment at all (B2/586-588).  This shows that he was happy with the formulation of the obligation by Dexter in the guarantee.  I also do not consider clause (ii) of the guarantee cited above would turn the obligation in clause (i) of the guarantee into an absolute obligation.  Clause (ii) just referred to Dexter’s previous Letter of Assignment.  The terms of the obligation to assist in the sale had not been cemented when the letter was signed.

62.  Though William did not sign the personal guarantee, I hold that he had assumed the same obligation to assist in the sale as the intention for him to assume this obligation is clearly shown in the previous discussions and e-mail exchanges. 

63.  I therefore find that both Dexter and William have undertaken the obligation to assist in the sale of the Preferred Shares as formulated in Dexter’s personal guarantee dated 28 June 2012; namely that they:

“will help selling (the Preferred Shares) at a price above (Inspiring’s) cost (target at 1.5X the cost) by or before 31^st December 2012”. (emphasis added)

Analysis of and decision on whether Dexter had assumed the 2nd Obligation

64.  Though Dexter and William had assumed the obligation to assist in the sale of the Preferred Shares, if, despite their endeavours, the shares were not sold to any third party by 31 December 2012, there was before the 25 June meeting no provision on what was to happen next.  Hence, there was good reason for Edmond Ip to propose in his meeting with Dexter on 25 June that he would give Dexter a “put” of the Preferred Shares if they were not sold by the deadline.  With Dexter’s assumption of the 2nd Obligation, the matter would not be left open ended and the Preferred Shares would be disposed of with the capital of the 6 million loan returned to Inspiring. 

65.  Dexter also spelt out the 2nd Obligation in his 25 June e-mail to Edmond Ip and the representatives of SAIF in which he sought the confirmation of SAIF to the “put” as follows:

“The Second CB (the 6 million Loan) Converted into (the Preferred Shares) – (Edmond Ip) proposed that he will give (Dexter) a “put” on (the Preferred Shares) and (Dexter) could put this in the market place at the price HK$10M until 31st December 2012 for which (Dexter) have to pledge (his) shares as security…Kindly confirm.”

66.  Though this statement by Dexter is not a clear expression of the 2nd Obligation, it did refer in the first part to Edmond Ip giving him a “put” on the Preferred Shares.  There was no “put” of the Preferred Shares to Dexter in the obligation to assist in selling these shares.  The next part of the statement saying that Dexter could put the Preferred Shares in the market place at a higher price until 31st December 2012 is just a confusion of the 2nd Obligation with the 1st Obligation as 31st December 2012 was the deadline of the obligation to assist selling and the 2nd Obligation would only commence on the next day.

67.  I have mentioned above Dexter’s denial that Edmond Ip had during the 26 June meeting mentioned to Jason So about his giving a “put” of the Preferred Shares to Dexter.  I would hold on a balance of probability that Edmond Ip had done so.  The reason being that Dexter had clearly asked for Jason So’s confirmation to the “put” in his 25 June e-mail.  Furthermore, as I have explained above, Edmond Ip had a good reason to propose the “put” of the Preferred Shares to Dexter if they were not sold to a third party by 31 December 2012.  Since Dexter had asked Jason So for confirmation in the 25 June e-mail, it was only natural that Edmond Ip would have followed it up in the discussion in the meeting on 26 June.

68.  Furthermore, if I have to decide whether Jason So had during the 26 June meeting disagreed with the “put” on the ground of insufficient time for it to be approved by SAIF’s investment committee, I would decide the issue against Dexter.  I would instead hold that Jason So had agreed to it.  If Jason So should have disagreed with the “put” for any reason, I cannot see why this was not pleaded in the defence or stated in the defendants’ witness statements.

69.  The fact that Dexter had assumed the 2nd Obligation is also proved by the exchange of e-mails between him and Edmond Ip after 31 December 2012. 

70.  Edmond Ipemailed Dexter on 28 February 2013 and said:

“…we clearly need to sort out the outstanding matter between us. Please provide me with a firm and acceptable proposal before the end of next week, i.e. by March 8…” (B2/612). (emphasis added)

71.  Dexter did not deny that there was anything outstanding between them.  He instead replied on 3 March:

“Thank you for your e-mail and the kind reminder. I have not forgotten that. Please give me another week to respond to you …” (B2/611). (emphasis added)

72.  If there was just the obligation to assist selling the Preferred Shares but no 2nd Obligation, I cannot see what it was that Dexter was being reminded of by Edmond Ip which Dexter had also not forgotten about.  The obligation to assist selling had become spent well before 3 March 2013.

73.  Edmond Ip sent another e-mail to Dexter on 15 July 2013 and asked him to settle the “put”.  Edmond Ip said:

“Dear Dexter, just wonder how you propose settling your obligation to me in respect of the put option to you of the HK$6.6 Million convertible preference shares which you promised to make good before the end of 2013!!! (Which should probably be 2012.) Somewhat long overdue already, I believe. Your early response would be much appreciated”(B2/633).

There is no evidence to show that Dexter had responded to this e-mail.

74.  Edmond Ip then sent another e-mail to Dexter on 13 August 2013 asking for Dexter’s shares in GAC as security for Dexter’s obligation to buy out the Preferred Shares.  Edmond Ip said:

“Hi Dexter, it does not seem likely that the preference shares meant to be taken back by you at the end of 2012 is going to happen in the short term. In order to more adequately protect my interest, I have to ask you to legally offer your shares in the company as security to your obligation to me at this juncture. Please can you start the process immediately. Of course, any time you have the cash, you have the option to take back the shares at any time.”(B2/635)

75.  Dexter replied on 10 September and 1 October 2013 that he would arrange the pledge of his shares (B2/651 and 662).

76.  Edmond Ip sent another e-mail to Dexter on 14 May 2014 asking for a realistic repayment schedule (B3/730).  Dexter replied on the same day.  He did not deny liability, but said:

“At the moment, I am indeed not in any position to repay your loan because I do not have any financial revenue or financial resources to do it. …

I really wish to give you a realistic repayment schedule of your loan but at the moment I am not in such a position to do it. I am really very sorry.” (B3/729-730).

77.  When being confronted with these e-mails in cross-examination, Dexter said that he gave the pledge to Edmond Ip solely to appease Edmond Ip as there might be other potential cooperation between them in the future.  Further, while Dexter considered that he had no legal obligation to Inspiring since 31 December 2012, he felt that he still had a moral obligation to help sell the Preferred Share.  His pledge was to secure the moral obligation.  However, I regard such excuse as unbelievable as it cannot sit comfortably with his e-mail replies to Edmond Ip.  It also does not make sense that he would pledge his shares to Inspiring just to secure his moral but not legal obligation to the latter.  The exchange of e-mails referred to above provide clear support to the fact that he had assumed the 2nd Obligation towards Inspiring.  I therefore hold Dexter had assumed the 2nd Obligation as pleaded by Inspiring.

78.  Ms Ho also relied on clause 3 of Dexter’s guarantee as evidence in support of the existence of the 2nd Obligation.  She submitted that it was a reference to the 2nd Obligation because if Inspiring could not sell the Preferred Shares, Dexter would guarantee that Inspiring would not lose out on the HK$6.66 million.  Clause 3 says:

“The guarantors, being founders of GAC, agree to provide personal guarantees that (Inspiring) will not lose any principal amount, i.e. HK$13,333,000 for CB #1 and HK$6,666,500 for CB #2. The above guarantee is provided to the earlier date of either (Inspiring) will have sold (its) holding of the GAC preferred shares or GAC hits Qualifying Public Offering … on or before 30th June 2016.”

79.  I find that clause 3 purported to secure not just the 6 million loan but also the 13 million loan. It did so in the same terms too.  But the 2nd Obligation only related to the 6 million loan and had nothing to do with the 13 million loan.  Clause 3 also does not make any mention about the sale of the Preferred Shares.  It cannot be a reference to the 2nd Obligation.  I hold that clause 3 of the guarantee is a separate protection to Inspiring and is not related to the 2nd Obligation.

Analysis of and decision on whether William had assumed the 2nd Obligation

80.  Edmond Ip’s oral evidence excerpted above shows that he was asked from whom did he seek the obligation of the “put”, his answer was that it was from “technically two of them”.  He did not say directly that it was from both of them.  He further conceded, as he knew it very well, that there was nothing in writing that bound William to the 2nd Obligation.  He said it was acceptable to him that only Dexter was found liable for the 2nd Obligation.  He never said that he had asked William or both Dexter and

81.  Edmond Ip probably did not consider it worthwhile to give the “put” to William because William was not a significant shareholder of GAC.  William was however required to shoulder the obligation to assist the sale of the Preferred Shares probably because he was very much involved in the fund raising for GAC and the proposed sale of the Preferred Shares was also to investors.

82.  I also doubt if it was indeed in Edmond Ip’s mind at the time when he talked about the “put” that it was to both of Dexter and William.  I doubt it for the following reasons. First, I refer to Dexter’s email of 25 June.  It referred to the “put” for the first time, but it only mentioned Dexter and not William.  Dexter’s statement on the “put” was supposed to reflect what had been discussed between him and Edmond Ip in the meeting of 25 June (B2/584-585). 

83.  Second, the emails from Edmond Ip asking for fulfilment of the outstanding “put” obligation were only addressed to Dexter but not William.  These e-mails did not even mention William. If William was also bound by the 2nd Obligation, I cannot see why Edmond Ip would have omitted William from his mails. 

84.  Thirdly, I also note that in the statement of claim, which was settled by Ms Ho on 20th day of October 2014, the obligation to assist selling was pleaded in §24(3) against both Dexter and William, but the 2nd Obligation was only pleaded against Dexter.  William was included in the 2nd Obligation not by way of amendment but by way of re-amendment made over 20 months later on 5th day of September 2016.  §24(3)(i) and (ii) as re-amended are as follows:

“24 (3) In consideration for Inspiring’s obligations pleaded in paragraphs 24 23 (1) and 24 23 (2) above:

(i) Dexter and/or William would arrange Inspiring to sell the preferred shares to third parties for at least HK$6,666,500 by 31 December 2012.

(ii) In the event that Dexter and William fail to sell the preferred shares to third parties by 31 December 2012, Dexter and/or William would purchase the preferred shares from Inspiring at HK$6,666,500.” (underlining and striking through indicate re-amendments)

85.  The repudiation of the 2nd Obligation was pleaded in §§29 and 33 of the statement of claim but only against Dexter.  William was only included in the re-amendment. 

86.  The omission of William from the 2nd Obligation and the repudiation of it in the original and amended versions of the statement of claim does not appear to be a matter of oversight.

87.  Ms Ho submitted that it was inherently probable for William to have agreed to both the 1st and 2nd Obligations.  I agree.  I also do not accept that William did not understand the meaning of the “put”.  It was mentioned in the 25 June e-mail in which Dexter sought Jason So’s confirmation to it.  The mail was copied to William. If it should have involved William and he did not understand it, he would have asked Dexter for explanation before the 26 June meeting which he also attended and in which the 2nd Obligation was discussed.  I also agree that if he was asked to shoulder the 2nd Obligation, he would have agreed as he needed Edmond IP’s agreement to the conversion of the two loans to preferred shares without which SAIF’s investment would not come. 

88.  Ms Ho also referred to authorities showing that a contract could be made or varied even when one of the parties did not positively acknowledge the making or variation (Shanghai Tongji Science & Technology Industrial Company Limited v Casil Clearing Limited (2004) 7 HKCFAR 79 §§36-46, Shogun Finance Ltd v Hudson [2003] 3 WLR 1371 at 1406, §123 and Yeung Kin Ha v El Grande Holdings Ltd HCLA 158/2003 (unrep., 28/7/2004 at §15). 

89.  However, what is missing here is the evidence that Edmond Ip had required William to shoulder the 2nd Obligation or that William had agreed to do so.  There is not even any subsequent conduct by either of them that can support the case that William had assumed the 2nd Obligation.  No contract can be made in a vacuum.  The authorities Ms Ho referred to are irrelevant.

90.  In the circumstances, I hold that William was not liable under the 2nd Obligation.

Whether Dexter and William have breached the obligation to assist in selling the Preferred Shares

91.  I have already held that the obligation to assist in the sale was not an absolute obligation.  The mere fact that the Preferred Shares were not sold by 31 December 2012 did not mean that Dexter and William had breached it.  I therefore have to consider whether Dexter and William had made reasonable endeavours within the six months from say 28 June to 31 December 2012 to procure the sale of the Preferred Shares so that, despite these shares remain unsold, it can be said that they had discharged the obligation.  Ms Ho has submitted that they had failed to discharge this obligation even if it is not an absolute obligation.

92.  Dexter mentioned in his witness statement that there was an offer from one Susanne Choo, a shareholder of GAC, to purchase 2,000 of the Preferred Shares.  However, the offer was made on 24 June 2012 and was too early (B2/579).  The obligation to assist in the sale was only formed at the 26 June meeting.  Dexter’s personal guarantee was only made on 28 June and had not come into effect on 24 June.  The 6 million loan had also not been converted into Preferred Shares on 24 June.  The conversion was on 5 July 2012.  Hence, this offer was too early to be of use for the partial discharge of the obligation to assist in the sale.  Dexter had also not provided any update to Edmond Ip on this offer which he had promised in his e-mail of 24 June 2012.  Furthermore, this offer was not pleaded in the defence.  It therefore did not assist Dexter or William in the discharge of this obligation. 

93.  Ms Ho also referred to cases like Steadman v Steadman [1976] AC 536 (HL) at 561C, Ciavarella v Polimeni[2008] NSWSC 234 at §126 and In Cromwell Property Holdings and Development Ltd v Minister of Lands M55/95 (26 July 1995) p. 3 at §3.   But these are cases on the doctrine of part performance in the law of sale and purchase of interest in land.  They are not applicable here.   

94.  Dexter and William have pleaded in §20 of their defence that they had assisted Inspiring in selling the Preferred Shares by negotiating the terms of sale with three investors with a view to procure the sale of the Preferred Shares to them.  The three investors were (i) one Legend Capital; (ii) a listed company in Hong Kong; and (iii) a private equity fund called “深圳前海元通基金管理有限公司”.  Legend Capital had discussed with them the terms of a term sheet in November 2012, but did not proceed thereafter as the investment size was too small for them.  The transaction with the Hong Kong listed company failed as Edmond Ip disagreed with the deal structure in March 2013. GAC entered into a term sheet with the equity fund on 22 August 2013.  But the deal did not go through because the fund considered GAC’s development stage too early to meet its investment criteria.

95.  Dexter had indeed tried to procure Legend Capital to invest in GAC.  He sent an e-mail on 27 November 2012 to one Gus Chow, a representative of a lender of HK$2 million to GAC, discussing the proposed investment from Legend Capital as follows (B2/605):

“…, we have started another round of fund raising since mid October, 2012 and so far have received rather positive responses. A number of PE firms have expressed interest in our market sector and our company. One of these is Legend Capital, who will give us a term sheet within a day or two. We understand that time is of essence and will work very hard to close this round of funding by the of January, 2013 (before CNY).

We are raising about USD 5M for this around, with about USD 1.3M for repayment of existing loans, including yours, USD 3M for the Company’s operating funds and USD 0.7 for contingencies.”

96.  He also sent an email to Edmond Ip on 13 December 2013 discussing the Legend Capital investment and the sale of the Preferred Shares as follows (B2/607):

“We are talking to various funds for another round of investment, with the support of SAIF this time, for the business growth in 2013+2014 (target to have 80+ stores by the end of 2014). Total fund requirement is at US$5M.

Legend Capital has sent us a term sheet one week ago and we are negotiating with them on the details of the term sheet.

Meanwhile, we are talking to some private investors to take over part of your preferred shares (HK$6.66M to target at HK$10M)” (emphasis added)

97.  These two e-mails show that the proposed funding from Legend Capital was not for the purchase of the Preferred Shares.  Dexter also said he was talking to some undisclosed private investors on the sale of these shares.  The undisclosed private investors obviously did not include Legend Capital as the funds which might come from Legend Capital already had designated uses and not for the purchase of the Preferred Shares. 

98.  Though Dexter and William had repeatedly said in evidence that of the US$5 million that they were trying to raise, only US$2 million to US$3 million was intended for GAC’s use and the remaining US$2 million was intended for repayment of debts including the purchase of the Preferred Shares, such evidence given in this action cannot qualify what Dexter had said in the contemporaneous e-mails.  I do not accept their explanation.  I therefore reject their claim that they had tried to sell the Preferred Shares to Legend Capital. 

99.  Regarding the Hong Kong listed company, Dexter’s explanation was that he was discussing a deal with the company for his family to sell a big chunk of ordinary shares of GAC to the company.  He would then use some of the proceeds of sale to purchase the Preferred Shares.  It was possible that the Preferred Shares might have been involved in the discussion on the investment by the listed company, but the transaction ultimately only involved the ordinary shares of GAC as Dexter admitted it in his e-mail to Edmond Ip on 13 July 2013 (B2/627-633).  Dexter had also not advised Edmond Ip that he intended to use the proceeds of sale of his family’s ordinary shares of GAC to fund his purchase of the Preferred Shares.  If he had such intention, I see no reason why he would not have told Edmond Ip about it as Edmond Ip was chasing after him for the purchase of these shares or repayment of the 6 million loan.  I therefore do not accept that the deal that Dexter discussed with the listed company had anything to do with the Preferred Shares.

100.  Finally, regarding the private equity fund “深圳前海元通基金管理有限公司”, William had indeed sent on 21 August 2013 an investment term sheet from this fund to GAC’s board member (B2/639-647).  It was about the raising of US$5 million.  This was before the raising of fund from Legend Capital.  It was to raise the same amount of fund.  It was thus likely to be for the same purposes as referred to in the two e-mails relating to Legend Capital referred to above. This fund raising exercise was thus unlikely to have anything to do with the sale of the Preferred Shares.  In any case, Dexter had never advised Edmond Ip about the possibility of this fund buying the Preferred Shares.

101.  In the premises, I hold that Dexter and William had not made reasonable endeavours to fulfil the obligation to assist in the sale of the Preferred Shares whether by or after 31 December 2012.  They were in breach of the same.

Consequence of the breach of the obligation to assist in selling the Preferred Shares

102.  The next question is what would follow upon the breach of the obligation to assist in selling the Preferred Shares by Dexter and William.  Ms Ho’s position is that both of them were liable to pay damages for their breach whilst at the same time they had to fulfil their 2nd Obligation.  Since I have ruled that William was not bound by the 2nd Obligation, that means if Ms Ho is right, Dexter and William would be liable to pay damages for the breach of the obligation to assist in the sale and Dexter would simultaneously be liable to discharge the 2nd Obligation.  It is however not easy to visualize how the two liabilities could exist simultaneously and operate independently.

103.  If Dexter and/or William should pay adequate damages to cover their breach of the obligation to assist the sale, then there was no need for Dexter to discharge the 2nd Obligation.  Likewise, if Dexter should purchase from Inspiring the Preferred Shares at HK$6,666,500, then there would be no need for Dexter or William to pay any damages to cover their breach of the obligation to assist in the sale. Thus the two obligations were not independent from each other but interdependent.

104.  I am of the view that the two obligations together constitute a composite mechanism or remedy for Inspiring to dispose of the Preferred Shares for at least HK$6,666,500.  The scheme operates as the two obligations were pleaded in the original sub-paragraphs (i) and (ii) of paragraph 24 of the statement of claim:

“24 (3) In consideration for Inspiring’s obligations pleaded in paragraphs 24 23 (1) and 24 23 (2) above:

(i) Dexter and/or William would arrange Inspiring to sell the preferred shares to third parties for at least HK$6,666,500 by 31 December 2012.

(ii) In the event that Dexter and William fail to sell the preferred shares to third parties by 31 December 2012, Dexter would purchase the preferred shares from Inspiring at HK$6,666,500.”

105.  Dexter and William would firstly come under the obligation to assist in selling the Preferred Shares for Inspiring to third parties for at least HK$6,666,500.  If they should fail to do so by 31 December 2012, Dexter would come under the 2nd Obligation to buy those shares from Inspiring at HK$6,666,500.  The discharge of the 2nd Obligation by Dexter would completely satisfy any loss of Inspiring and their breach of the obligation to assist in the sale.  If the 2nd Obligation should also be left in default, Inspiring could sue Dexter for specific performance or there could be the assessment of damages to cover the loss caused by this repudiation.  The two obligations thus worked together neatly with the second following upon the failure of the first.  There is no need to assess the quantum of damages payable upon the breach of the first. 

106.  The disadvantage of the scheme to Inspiring is that William would never be under any liability to compensate Inspiring for his failure to sell the Preferred Shares to others. But that was the result of Edmond Ip’s decision to pursue only Dexter for the 2nd Obligation and not considering William wealthy enough to discharge this obligation as his holding of GAC shares was not of a significant size.

107.  In the premises, I hold that the failure of Dexter and William to discharge the obligation to assist in selling the Preferred Shares would result in the onset of the 2nd Obligation on Dexter and without any liability on the part of Dexter or William to pay any damages for their breach of the obligation to assist in the sale.

The implied term on when Dexter should buy the Preferred Shares and the date of assessment of Inspiring’s loss

108.  Inspiring pleaded in §24A of the amended statement of claim that Dexter should discharge the 2nd Obligation by buying the Preferred Shares from Inspiring within a reasonable time from 31 December 2012.  This must be correct.  However, Inspiring further pleaded that the reasonable time extended to the date of the writ and statement of claim herein on 20 October 2014. That was over 1 year and 9 months from 31 December 2012. 

109.  There was no need to go through any complicated procedure for Dexter to buy the Preferred Shares from Inspiring and to pay Inspiring HK$6,666,500.  The whole thing could be completed in less than an hour.  The fact that Dexter had to look for the money to complete the purchase cannot be a ground for extending the time for his discharge of this obligation.  I therefore cannot see how the reasonable time for Dexter to discharge this obligation could be as long as 1 year and 9 months.  Such time should have expired and Dexter should have repudiated his 2nd Obligation long before 20 October 2014.  Inspiring could have sued him for specific performance or accepted his repudiation and sued him for damages much earlier on.

110.  However, it can be seen from the e-mails exchanged between Edmond Ip and Dexter from 28 February 2013 onwards that Dexter was keeping the 2nd Obligation alive by promising Edmond Ip that he would be doing something to discharge it.  Hence, Edmond Ip continued to give him indulgence.  It was only until 14 May 2014 that Dexter replied to Edmond Ip that he was not in any position to repay the 6 million loan because he did not have any financial resources to do so.  That amounted to a repudiation of the 2nd Obligation.  However, “an unaccepted repudiation is a thing writ in water” (Dictum of Asquith LJ in Howard v Pickford Tool Co. [1951] 1 K. B. 417 at p. 420 and Chitty on Contracts(32^nd ed) §24-013).  The 2nd Obligation continued until its repudiation was accepted by Inspiring by the service of the writ and statement of claim on Dexter on about 20 October 2014.  The value of the Preferred Shares should therefore be assessed on 20 October 2014.

Value of the Preferred Shares on about 20 October 2014

111.  Ms Ho submitted that it was apparent from the evidence that GAC’s financial condition and operation had declined since late 2012.  The business of GAC was very poor and on the verge of closing down in the third quarter of 2013.  For the following reasons, I agree with her.

112.  GAC’s financial position was tight near the end of 2012 despite the investment by SAIF. Anthony Au, PW2, was a good friend of Dexter.  He had repaid HK$2.5 million of the 5 million on behalf of GAC to Edmond Ip.  His gave evidence that Dexter had asked him for assistance as GAC had encountered difficulty in operation in early February 2012.  He then introduced Gus Chow of Plowright Investments Ltd (“Plowright”) to Dexter to in February 2012 for funding.  Plowright then lent HK$2 million to GAC.  That was due for repayment on 30 November 2012. However, GAC was unable to repay the loan on time. 

113.  Dexter asked Gus Chow in an e-mail dated 27 November 2012 for extension of the repayment date to 28 February 2013.  Dexter promised on 6 December 2012 to give Plowright in the following week a repayment schedule.  He did not.  Plowright then pressed him on 11 January 2013 for the schedule.  He promised on 17 January 2013 to give a more definite answer on the following week.  Plowright pressed him again on 6 February 2013 as he did not give any answer in January 2013.  He replied on the same day saying that GAC at that time did not have the capital to repay the loan to Plowright.  He asked for an extension until the coming in of a new investor and he expected that to happen before the end of March.  Plowright asked him on 4 March for an update of the information of his new investor.  He replied on the same day that things were progressing and promised another update by or before 11 March.  Plowright asked him again on 22 March on the repayability of the loan.  He replied on 17 April that a listed company in Hong Kong was interested in investing in GAC and based on which (being realized), he proposed to repay HK$300,000 on or before 15 April and the rest of HK$1,700,000 plus accrued interest upon signing the share purchase agreement with the investor.  Plowright asked again on 17 April if GAC was repaying HK$300,000 on 15 April.  Dexter did not reply.  Plowright asked again on 21 May for the progress of the loan repayment.  Dexter replied on 23 May that it was more or less firm that the new investor was coming in to GAC.  He promised a further update on 29 May 2013 (B2/598-606).  This loan was remained unpaid on 31 July 2016 when Anthony Au made his witness statement for this action.

114.  Dexter also e-mailed GAC’s board and major shareholders on 4 December 2013 advising them of Guy Laroche’s intended termination of the licence to GAC on 21 December 2013 if GAC should fail to pay the outstanding royalties at €334,408.34 for the year 2013 by 21 December 2013.  In January 2014, Dexter managed to persuade Guy Laroche to postpone the termination to 21 February 2014 subject to weekly report by GAC regarding fund raising.  However, in the end, the licence was still terminated as GAC was unable to provide any meaningful update on fund raising to Guy Laroche (B2/673-676 and B3/957).

115.  The minutes of a board meeting of GAC held on 16 December 2013 stated that there was delayed salary payments and therefore low morale (of the staff) (B3/957).  The outstanding employee salary issue persisted.  A board meeting held on 13 January 2014 resolved to appoint a PRC lawyer Mr. Stephen Wong to negotiate payment terms with staff and creditors (B3/717).

116.  GAC’s board also appointed on 13 January 2014 one Ms Sunny Lam as its Chief Operating Officer effective from 18 January.  Ms Lam had ample experience in retails sales.  She was appointed to implement a survival plan for GAC.  Her immediate task was to implement a plan to effectively clear GAC’s inventory of a value of RMB11.7 million so as to bring in as much cash as possible to GAC.  Dexter had agreed to her appointment (B2/707-708).

117.  Anthony Au also testified that Sunny Lam went to Guangzhou in February 2014 to realize the assets and inventories of GAC’s related companies in the Mainland to meet GAC’s immediate financial needs. She found out many issues confronting these companies including failure to pay staff salaries.  Some employees of these companies told Sunny Lam that they had mounted claims against these companies.  Sunny Lam also told Anthony Au that there was a protest by some employees near the factories of these companies because they had not been paid their salaries. Owing to the chaotic situation, Sunny Lam was unable to obtain the assets and inventories of these companies.

118.  Anthony Au further said in cross-examination that on 25 February 2014, the staff of the office and warehouse had laid siege to the office and Sunny Lam had to be rescued from the office at some time after 8:00 p.m.  (She passed away later.)

119.  Dexter also admitted in cross-examination that after Sunny Lam had left GAC in February 2014, he did not know where GAC’s inventory had gone.  He accepted in cross-examination that at the time, there were more employees who were not loyal to him than those who were.  It is highly likely that the inventory had been seized by the angry employees who were not paid their salaries.  Dexter also agreed in cross-examination that the security officers would not stop the angry employees from moving the inventory away.

120.  Dexter also said in his witness statement that in or about late February 2014, Anthony Au had advised him that Sunny Lam had resigned as Chief Operating Officer of GAC and her proposed revival plan had been abandoned.  Anthony Au also advised him not to be involved in the GAC’s operation anymore and simply let the group’s operations in the Mainland to melt down.

121.  Dexter further said that on about 28 February 2014, the operation of the GAC group in the Mainland was in chaos and eventually ceased.  The group’s employees became restless because of their outstanding salaries.  He understood that some factory workers of a related company had even marched and protested on the main road near the factory.  He said he did not have a chance to return to the Mainland since then to look after the GAC group’s affairs as he was afraid of his personal safety. He regarded that if Sunny Lam had not left the group abruptly, or if she should have handed over her duties back to him before her sudden resignation, he would have a chance to salvage the group’s operation and its business.  He thought that GAC failed because of her appointment and sudden departure.

122.  There is no evidence that GAC had any asset since the end of February 2014.  Its only asset was the inventory which had been seized by the employees.  Even Dexter did not know where it had gone.  The board minutes of the meeting held on 16 December 2013 recorded that there were outstanding loans totalling RMB12.8 million (B3/957). There were also the outstanding royalties due to Guy Laroche at €334,408.34 for the year 2013.  These sums should still be outstanding in October 2014.  Though Inspiring say that the Preferred Shares still had their face value of HK$1 per share, I think these shares are simply worthless and were so as at 20 October 2014.

123.  Dexter maintained that the value of the Preferred Shares should have been substantial and should be no less than HK$6,666,500.  His argument is that the stripping off of his management role in and the appointment of Sunny Lam as the Chief Operating Officer of GAC was wrongly imposed on him by Edmond Ip and Anthony Au.  The loss of the inventory and its value was caused by their appointee Sunny Lam.  If Sunny Lam had not been appointed or she had returned the management of GAC to him, he could have realized the inventory into cash with no less than HK$6,666,500 for the Preferred Shares or Inspiring. 

124.  Regardless of whether Dexter was forced to handover the management of GAC to Sunny Lam, it was a decision of GAC’s board and its validity has not been challenged.  In fact, Dexter himself agreed to it (B2/707-708).

125.  Even if the value of the Preferred Shares had dwindled as a result of the management by Sunny Lam, Dexter still cannot argue that the value of such shares should be assessed on the assumption that Sunny Lam had not been appointed or that the inventory was still there.   He cannot argue on the ground that but for his replacement, the Preferred Shares would have a higher value.  He cannot deny the reality that as at 20 October 2014, the Preferred Shares had no value.  In any case, I do not think he has proved with proper evidence that the Preferred Shares had lost their value because Sunny Lam’s appointment or her management of GAC.

126.  Furthermore, if Dexter has to pay HK$6,666,500 to Inspiring now for the worthless Preferred Shares, he has only himself to blame as he should have bought these shares shortly after 1 January 2013 when they still had some value.

127.  Before I leave this issue of valuation of the Preferred Shares, I would also add that if I were wrong in my view that the two obligations constituted one composite machinery but that they operated independently from one another, then Dexter and William would have been liable on or about 1 January 2013 to pay Inspiring damages for their breach of the obligation to assist in the sale of the Preferred Shares whilst Dexter would simultaneously be obliged to discharge the 2nd Obligation.  However, such damages would only be payable upon Inspiring accepting this repudiatory breach by Dexter and William.  Upon such acceptance, Inspiring would be entitled to payment by Dexter and William the difference between HK$6,666,500 and the value of the Preferred Shares as at or about 1 January 2013.  Inspiring could not also ask Dexter to buy the same shares at HK$6,666,500 as the payment of or the entitlement to the damages would put Inspiring into the position as if the obligation of Dexter and William to assist selling had been accomplished.  That means the 2nd Obligation on Dexter would end upon the acceptance by Inspiring of the repudiatory breach.  This analysis reinforces my view that the two obligations were not independent from one another but operated as a composite machinery. 

128.  In any event, there is no evidence on the worth of the Preferred Shares as at or about 1 January 2013.  I therefore cannot assess how much damages Dexter and William had to pay for their breach of the obligation to assist in selling these shares.

Mitigation by Inspiring

129.  Dexter pleaded that Inspiring had failed to mitigate its loss upon the breach of the obligation by Dexter and William to assist the sale of the Preferred Shares.  The onus of proof is on Dexter.  It is for him to show that Inspiring ought reasonably to have taken certain mitigating steps but failed to do so (McGregor on Damages (20^th ed) §9-020). 

130.  Ms Ho submitted that GAC is a private company and its shares were not traded in the stock exchange.  Given GAC’s poor business condition since late 2012, there was no market for the Preferred Shares.  In such circumstances, it was futile for Inspiring to approach other investors and offer them the Preferred Shares.  I agree with Ms Ho if the two obligations operated independently from one another and damages could be assessed on or about 1 January 2013 for the breach by Dexter and William of their obligation to assist selling.

131.  However, on my ruling that upon the breach of their obligation to assist selling the Preferred Shares, the 2nd Obligation would immediately commence.  There was no need for Inspiring to do anything to mitigate its loss as Dexter was obliged to purchase the Preferred Shares at HK$6,666,500.  If Inspiring should sell these shares to a third party for mitigation whilst Dexter was entitled under the 2nd Obligation to purchase them at the fixed price of HK$6,666,500, Inspiring might be held liable to pay damages to Dexter for breach of its part in the 2nd Obligation; namely to handover these shares to Dexter upon his payment of HK$6,666,500.

132.  I would instead consider the issue of mitigation upon Dexter’s breach of the 2nd Obligation.  I further note that there was no need for Inspiring to mitigate its loss unless and until Dexter’s repudiation of the obligation had been accepted by Inspiring (see McGregor on Damages (20^th ed) §9-021).  Since Inspiring only accepted Dexter’s repudiation of the 2nd Obligation on 20 October 2014, the question of mitigation only arose on that day. However, the value of the Preferred Shares as at 20 October 2014 was already nil, there was no step of mitigation that Inspiring could take. 

133.  I am also of the view that Inspiring could have refrained from accepting Dexter’s repudiation of the 2nd Obligation and instead sued him for specific performance of the obligation. In that event, there would be no need to assess the value of the Preferred Shares or to consider the question of mitigation.  The performance of the 2nd Obligation does not depend on the value of the Preferred Shares.

Credibility of witnesses

134.  Both Edmond Ip and Anthony Au were straight forward witnesses.  What they said was in line with and supported by contemporaneous documents and e-mails.  Their evidence is also reasonable save and except Edmond Ip’s evidence on what was in his mind about William’s assumption of the 2nd Obligation. 

135.  The evidence of Dexter and William very often consists of oral assertions which are often contrary to what are recorded in the contemporary documents and e-mails.  His grounds for denying the 2nd Obligation and his evidence on GAC’s assets and inventory were tenuous.

136.  I reject the evidence of Dexter and William to the extent of its conflict with the evidence of Edmond Ip and Anthony Au save and except on whether William was bound by the 2nd Obligation.

Judgment

137.  In the premises, I give judgment to Inspiring on the claim in the sum of HK$6,666,500.  I also order Dexter to pay Inspiring interest at the judgment rate from the date of the writ to today.

138.  I also make a costs orders nisi thatDexter do pay Inspiring the costs of this action to be taxed. 

139.  Since William has succeeded in defending this action, I also make a costs order nisi that Inspiring do pay William the costs of this action to be taxed.