G H PROPERTY HOLDINGS LTD v. ABLE PROFIT INVESTMENT LTD

HCA 878/2017

[2018] HKCFI 2480

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 878 OF 2017

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DECISION

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1.  The plaintiff submitted the following questions for the Court’s determination under Order 14A of the Rules of the High Court:

(1) Whether, as a matter of construction of the Agreement, the defendant’s obligation to transfer the Sale Shares and the SH Loan to the plaintiff under the Agreement was/is unenforceableon the ground that its performance would involve breaches ofthe Alleged PRC Law pleaded in paragraph 13 of the Defence & Counterclaim (“D&C”) (“First Question”).

(2) Whether the plaintiff’s claim or any part thereof is time barredby virtue of section 4(1) of the Limitation Ordinance (Cap 347) (“LO”) and/or doctrine of laches for those reasons pleaded in paragraph 14 of D&C premising upon the construction of clauses 1.01 and 5.01 of the Agreement (“Second Question 2”).

(3) Whether, as a matter of construction of the Agreement, the plaintiff is entitled to exercise the option under clause 2.05 of the Agreement (to accelerate the sale and purchase of the Remaining Shares and SH Loan) despite its refusal to make any further payment to the defendant under the Agreement after 26 December 2014 (“Third Question”).

2.  The application was heard by Master Phillis Loh on 30 July 2018 and she allowed the plaintiff’s application answering First and Second Questions in the negative and the Third Question in the affirmative.  This is the hearing of the defendant’s appeal against that decision.

BACKGROUND

3.  The factual background is largely undisputed. 

4.  The plaintiff and the defendant are both BVI companies and they, together with a Hong Kong company known as Gold Dragon Investments Limited (“Gold Dragon”), were the shareholders of Golden Horse Development (HK) Company Limited (“the Company”).  The plaintiff held 63 shares (39.62%), the defendant held 66 shares (41.51%) and Gold Dragon held 30 shares (18.87%).  Each of them advanced a shareholder’s loan to the Company.

5.  The defendant suggested that it is a subsidiary of Guangzhou Vanlead Group Co (廣州萬力集團有限公司), a state-owned enterprise authorised by the Guangzhou Municipal People’s Government to manage state-owned assets.  This suggestion is not accepted by the plaintiff.

6.  The only substantial asset of the Company is its interest in a Golf Club in Guangzhou (廣州九龍潭高爾夫球俱樂部有限公司).

7.  Pursuant to an agreement in Chinese dated 8 December 2003 entitled “關於金馬發展 (香港) 有限公司的買賣股份及股東貸款協議” (“Agreement”), the defendant agreed to sell its shares (“Sale Shares”) in the Company and its shareholder’s loan (“SH Loan”) to the plaintiff.  In addition the parties also entered into the following agreement on the same date:

(1) a Deed of Share Charge over the plaintiff’s 63 shares and Gold Dragon’s 3 shares in the Company (“Charged Shares”); and

(2) a Deed of Pledge of Shareholders’ Loan in respect of the shareholder’s loans of the plaintiff (HK$49,547,169) and Gold Dragon (HK$2,028,303) (“Pledged Loans”).  

8.  The governing law under the contractual documents is Hong Kong law.  Put briefly, the effect of the Agreement is for the plaintiff to pay a total of RMB 54,670,000 for the Sale Shares and the SH Loan, to be paid over a period of 16½ years from 30 June 2004 to 31 December 2020 by instalments.  Payments were to be paid every 6 months as per the schedule in clause 2.03.

9.  The performance of the Agreement is dependent upon payments to be made every 6 months.  The defendant was obliged to: (i) transfer a certain number of Sale Shares to the plaintiff and provide the “Completion Documents” within 7 days from the date of payment; and (ii) release a certain portion of the Charged Shares and Pledged Loans.  The discharge and release were to take place once a year.

10.  There are also provisions for acceleration of the sale and purchase of all the Sale Shares and SH Loan and the defendant is obliged to agree to this if the plaintiff so request.

11.  From 29 June 2004 to 26 December 2014, the plaintiff made 22 payments in the total sum of RMB 22,500,000.  The payments were made in the PRC between “onshore companies” authorised by the parties and this represents 41.61% of the total consideration.  However, the defendant has failed to transfer any of the Sale Shares or SH Loan to the plaintiff.  Further, no attempt was made to release any portion of the Charged Shares and the Pledged Loans. 

12.  On 30 June 2015, the plaintiff demanded the defendant to complete the sale and transfer for payments made and refused to make any further payment until the defendant has done so.  It is unclear as to why the plaintiff did not make any demand for transfers since 2004.

13.  On 16 August 2017, the defendant attempted to terminate the Agreement under clause 5.01(c)(ii) on the ground that the plaintiff had failed to pay 4 consecutive instalments.

THE PLAINTIFF’S CLAIM

14.  The plaintiff’s claim is straightforward.  In light of the RMB 22,500,000 paid, the plaintiff sought the transfer of the corresponding portion of the Sale Shares (27 Shares) and the SH Loan (HK$23,850,000). It also sought the release of the corresponding portion of the Charged Sharesand Pledged Loans.  Further, by reason of the defendant’s failure to effectthe transfer and release, the plaintiff also sought compensation for its loss of interest income in the sum of RMB 8,462,393.40 arising from the loss of use of the RMB 22,500,000 paid.  In addition, the plaintiff further seeks toaccelerate the sale and purchase of the remaining Sale Shares and SH Loan.

THE DEFENDANT’S CASE

15.  The defendant contended that the Agreement is unenforceable because the transfer the Sale Shares and SH Loan to the plaintiff “would involve serious breaches of PRC law” and would result in loss of state-owned assets attracting civil and criminal liabilities of a serious nature.  In particular, the following matters are pleaded:

(1) By virtue of Article 2 of 《中华人民共和国企业国有资产法》, Article 2 of 《国有资产产权界定和产权纠纷处理暂行办法》, and Article 2 of 《企业国有产权转让管理暂行办法》, the Sale Shares and the SH Loan of the defendant are state-owned assets.

(2) Pursuant to Article 2 of 《国务院办公厅关于加强国有企业产权交易管理的通知》and Article 1 of 《广东省人民政府办公厅关于加强国有企业产权转让管理的通知》, the transfer of state-owned assets must first be approved by the Guangzhou Municipal People’s Government.  However, such approval has not been granted or obtained.

(3) Further, prior to the transfer of any state-owned assets, Article 3 of 《国务院办公厅关于加强国有企业产权交易管理的通知》, Article 2 of 《广东省人民政府办公厅关于加强国有企业产权转让管理的通知》and Article 5 of 《广州市人民政府办公厅关于加强我市国有产权转让管理的通知》require that a valuation must be conducted in accordance with 《国有资产评估管理办法》(1991年国务院第91号令).  The valuation must be confirmed by the relevant government department which supervises state-owned assets and be adopted as the minimum consideration for the transfer.  Failure to conduct such a valuation renders the transfer invalid.

(4) In addition, Article 3 of 《广东省人民政府办公厅关于加强国有企业产权转让管理的通知》provides that the consideration for the transfer of state-owned assets must, in principle, be settled in full by a one-off payment.  Although payment by instalment is permissible where the purchaser hasdifficulty in making a one-off payment in full (and is subject to the seller obtaining security and receiving the approval of the relevant management and finance department which supervisesstate-owned assets), the longest period for settlement must not exceed 3 years, and no transfer can take place until the full consideration has been paid.

(5) Further, pursuant to Article 2 of 《关于企业国有产权转让有关事项的通知》 and Articles 1 and 6 of 《广州市人民政府办公厅关于加强我市国有产权转让管理的通知》, the transfer of state-owned assets (and here, to the plaintiff which is an offshore entity) must be conducted through the Guangzhou Enterprises Mergers and Acquisition Services (广州产权交易服务中心) (“GEMAS”), and the parties must sign a transfer agreement which is in accordance with the relevant regulations of the PRC.  However, neither was the transfer conducted through GEMAS, nor did the Agreement comply with the relevant formalities prescribed by Article 6.

16.  Further, it is said that the plaintiff’s claim is time barred undersection 4(1) of the LO or by doctrine of laches.  They contended that thereis no obligation to transfer the 27 Sale Shares or the SH Loan by either 2 or 7 January 2015.  Alternatively, the obligation was no longer enforceable as the completion date for each payment is within 7 days thereof.

17.  Thirdly, the right to accelerate the sale and purchase of the remaining Sale Shares and SH Loan was lost since the plaintiff had acted inbreach of the Agreement by failing to make 4 consecutive payments.  Further, the defendant has in any event terminated the Agreement on 16 August 2017.    

18.  The 3 questions framed by the plaintiff address the 3 issues raised by the defendant as summarized above.

DISCUSSION

19.  Principles in respect of application under Order 14A is trite and not in dispute.  The procedure is not suitable if issues of facts are interwoven with the legal issues to be determined and the question of law or construction of document cannot be dealt with on assumed or hypothetical facts.  See Shell Hong Kong Ltd v Yeung Wai Man Kiu Yip Co Ltd & Another (2003) 6 HKCFAR 222 at paragraph 24 per Chan PJ.

20.  As explained by Recorder Ma SC (as Ma CJ then was) in Rockwin Enterprises Ltd v Shui Yee Ltd & Ors [2003] 3 HKC 174, once seized of an application under Order 14A, the court’s approach is essentially a three-step approach:

(1) Is the relevant question one of law or of the construction of a document?

(2) If so, is that question one that should be determined under Order 14A procedure?

(3) If the answer to (2) is ‘yes’, what is the determination of that question and what orders should the court make as a consequence of determining that question?

(A)   First Question

21.  Resolution of the First Question requires application of the principle of foreign illegality and foreign public policy as exceptions to the proper law as summarized by Lord Collins NPJ in Ryder Industries Ltd v Chan Shui Woo (2015) 18 HKCFAR 544.  In particular, reliance is placed on what is referred to as the second and fourth principles set out in paragraph 39 of the judgment where Lord Collins quoted from Johnston, Conflict of Laws in Hong Kong (2^nded, 2012) at paragraph 5-012:

(1) The second principle is expressed as follows: “if the performance of the contract requires or necessarily involves conduct which is illegal under the laws of the place where it is required to be performed, then it will not be given effect regardless of its proper law.”

(2) As to the fourth principle, it is said that: “violation of foreign laws in the actual performance of a contract may, even though not required or initially intended, lead to the unenforceability of the contract before a Hong Kong court, regardless of its proper law.  It has recently been stated in England at first instance that a contract will not be enforced if it has been ‘performed in such a way that one party (or both parties) commits a legal wrong’.  It is, however, respectfully suggested that this is to state the principle too rigidly, and that a more flexible approach having regard to the seriousness of the foreign illegality is required to determine whether public policy and comity really require enforcement of the contract to be denied in such a case.”

The defendant’s case

22.  Mr Pao SC (leading Mr Roger Phang) for the defendant argued that the First Question is not suitable for determination under Order 14A because of the serious disputes over PRC law. He referred to the provisionsunder PRC law suggesting that the obligation to transfer the Sale Shares and the SH Loan under the Agreement is unenforceable.

23.  He explained that the basis of the plea is based on the fourth principle and that it is a residual category of foreign illegality under which the courts have a discretion to refuse the enforcement of a contract where its actual performance involves serious breaches of foreign law. 

24.  Mr Pao places reliance on the fact that the payment of the 22 instalments were all made in the PRC.  According to the expert evidence on PRC law placed before me, the consideration for the transfer of state-owned assets must in principle be settled by a one-off payment.  Although payment by instalment is permissible where the purchaser has difficulty in making one-off payment in full, the longest period for settlement must not exceed 3 years, and no transfer can take place until full consideration has been paid.

25.  In addition, he also submitted that the transfer of the Sale Shares would, in substance, be a divestment of interest in the Golf Club, the contested evidence on PRC suggested that the transfer would be a violation amounting to a serious breach.

26.  As the PRC law pleaded by the defendant is disputed by the plaintiff, the plaintiff is plainly disputing the applicability and/or force of the foreign law.  The Court cannot determine this application on assumed facts and would need to resolve the expert evidence before the court can decide, as a matter of public policy, to enforce the Agreement in Hong Kong.  The First Question is therefore not suitable for determination by Order 14A.

The plaintiff’s case

27.  Mr Lui for the plaintiff contended that the disputed PRC legalopinion is irrelevant for the purpose of resolving this Order 14A application.  He relied on the second principle and argued that a contract is invalid or unenforceable where its performance is unlawful by the law of the country where it is to be performed: see Ralli Brothers v Compañia Naviera Sota Y Aznar [1920] 2 KB 287 at 291, 300.  The principle is applicable if the relevant obligation is, as a matter of proper interpretation, unlawful by the law of the foreign country where that obligation must be performed.  The Agreement does not require the defendant to perform in the PRC.  None of the clauses suggests or mandates the defendant to perform its completion obligations in the PRC and none of the parties to the Agreement are incorporated in the PRC or has its office in the PRC.  The Agreement in fact provides for completion of each instalment of the sale and transfer of the Sales Shares and SH Loan to take place at the defendant’s office or other mutually agreed time and location.  The parties therefore intended the completion to take place outside the PRC.

28.  Mr Lui criticised the plaintiff for misreading Ryder and contended that application of the fourth principle submitted by Mr Pao would create an inconsistency or contradiction between the second and fourth principles:

(1) He submitted that Ryder is a fourth principle case and PRC laws were relevant in that matter as the parties entered into a JV agreement for manufacturing mobile phones in the PRC.  There was no question that the agreement had to be performed in the PRC.

(2) He submitted that that it was not held in Ryder that even if the second principle “bites” to disallow the consideration of foreign illegality on the question of performance, the Court can still pursuant to a separate and distinct “fourth principle” exercise discretion to look at the same illegality, and if it sees fit, declare unenforceability.

(3) The defendant’s submission is against the rationale for the second principle as explained by the English Court of Appeal in Kleinwort, Sons & Co v Ungarische Baumwolle Industrie Aktiengesellschaft [1939] 2 KB 678.  If the defendant were correct, he could simply forum-shop the laws of any country and asks the Hong Kong courts to declare unenforceability of the Agreement on the basis that preforming its completion obligations will constitute serious breach of those laws.

29.  In respect of the reliance on the fact that the payments were made in the PRC, Mr Lui complained that this was not a point pleaded in the D&C and the relevant paragraph on breaches of PRC law (paragraph 13) did not alleged that the act of payment and receipt of funds in the PRC forms part of the illegality.  In particular, paragraph 13 of the D&C simply alleged that the defendant’s “obligation to transfer the Sale Shares and SH Loan under the Agreement” was unenforceable. 

Discussion

30.  Despite the persuasive argument of Mr Lui, I am of the view that the present situation is caught by the fourth principle.  The disputed PRC law are relevant and the matter is unsuitable for resolution by Order 14A.  

31.  Although it is common ground that nothing in the Agreement mandates any performance in the PRC, it is accepted that the 22 paymentsin question were all made in the PRC.  Therefore it cannot be disputed that the only obligations under the Agreement that were actually performed all took place within the PRC and there are PRC legal opinion supporting the defendant’s case on illegality. 

32.  The situation is also very different from what was discussed in Kleinwort, Sons & Co where the English Court of Appeal was considering a case where the proper law of the contract was English law and the performance of the contract was in England.  The Court enforce the contract despite the possibility a breach by defendants of the law of Hungary.

33.  If Mr Lui is correct, serious breaches in the actual performance(not required or initially intended) are irrelevant once the Court is satisfiedthat performance in the PRC is not mandatory on the face of the Agreement.  This cannot be correct.   I accept Mr Pao’s submissions that the fourth principle is a residual category of foreign illegality under which the courtshave a discretion to refuse enforcement where actual performance involvesserious breaches of foreign law and the narrow reading supported by Mr Lui is not supported by anything in Ryder or public policy and comity considerations.

34.  Further Lord Collins went on to explain in paragraph 56 of Ryder that the obiter suggestion in Barros Mattos Junior v MacDaniels Ltd [2005] 1 WLR 247, [30] that “a contract which is valid by the governing law of the forum … may be refused enforcement if it has been performed in such way that one party (or both parties) commits a legal wrong” states the principle much too widely.  At paragraph 57, he said:

“ There may nevertheless be cases in which a sufficiently serious breach of foreign law which reflects important policies of the foreign state or separate law district may be such that it would be contrary to public policy to enforce a contract. But there is no basis in authority or principle for holding that every breach of foreign law would come into this category. …”

(Original emphasis)

35.  Whether the breaches alleged in this case is sufficiently serious and the relevant public policy consideration involved are in dispute.  The court will have to form a view on this but given the disagreement on the nature and effect of the PRC law in question, this is a matter that will have to be considered at trial.

36.  As to the pleading point raised by Mr Lui (see paragraph 29 above), I agree with the defendant that the payment is part of the relevant transaction under the Agreement and paragraph 13.1.6 of the D&C where Article 3 of 《广东省人民政府办公厅关于加强国有企业产权转让管理的通知》 was pleaded dealt specifically with the payment for transfer of state-owned assets.  I have also been taken to the PRC law evidence where the issue of payment was specifically address.  I am therefore satisfied that the issue was raised properly and covered by the expert evidence.  The pleading point is not an answer.

37.  In addition, as submitted by Mr Pao, the learned Master proceeded to order specific performance once she was satisfied that the Agreement ought to be enforced.  No consideration was given as to whether specific performance is the appropriate remedy when damages was pleaded as an additional or alternative remedy.  This is to ignore the third step in the three- step approach explained in paragraph 18 of Rockwin.  Mr Lui suggested that it is not open to the defendant to take this point as it is not pleaded but I accept Mr Pao’s submission that paragraph 19 of the D&C (repeating paragraphs 13 to 18 thereof) makes this sufficiently clear.  The court will in any event have to be satisfied that specific performance is the appropriate remedy and the defendant is entitled to raise this as a matter of argument.

(B)   Third Question

38.  The Third Question is a question of law and/or construction and is, on the face of the it, suitable for determination by the Order 14A procedure.  However, my ability to resolve the Third Question is linked to the conclusion I reached on the First Question.  The plaintiff seeks an order that it is entitled to exercise the option under clause 2.05 to accelerate the sale and purchase of the remaining 39 Sale Shares and the remaining SH Loan.  As the option to accelerate is premised upon the enforceability of the Agreement, the matter cannot be resolved summarily given the conclusion I reached on the First Question.

(C)   Second Question

39.  The main battle between the parties is on the First Question.  The resolution of the Second Question (involving limitation/laches) is unnecessary if the defendant is successful on the First Question at trial.  The question is one that is not determinative of the action and which may at the end of the day be an academic.  In the circumstances, despite the strong arguments advanced by the plaintiff, I decline to determine the Second Question.

ORDER

40.  In light of my conclusions on the three questions, I will allowthe defendant’s appeal.  The Order of the learned Master dated 30 July 2018 is set aside and I also make an order nisi that the defendant is to have the costs of the appeal and below with certificate for two counsel.