ALFRED SIU WING FUNG v. PROSPER eVISION LTD

HCA3136/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3136 OF 2002

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J U D G M E N T

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1. This is the defendant's appeal against the Master's decision made on 4 July 2003 granting summary judgment against the defendant in the sum of $18,787,500 together with interest and costs. At the conclusion of the submissions, I dismissed the appeal and gave oral reasons for my decision. I now reduce them into writing.

Background

2. The defendant is a public company first listed on the Hong Kong Stock Exchange on 26 June 1997. On 30 April 1999, it changed its name from OLS Group Ltd to China Prosperity Holdings (Hong Kong) Ltd. On 5 June 2001, it further changed its name to Proper eVision Ltd.

3. Previously, the plaintiff was the single largest shareholder in the defendant and a director of the defendant. From late 1998 onwards, a "reverse takeover" of the defendant occurred, which was completed on 12 April 1999. As a result of this, one Best Fortune Capital Limited ("Best Fortune") became the single largest shareholder of the defendant in lieu of the plaintiff. Since 18 December 1999, the defendant ceased to be a director of the defendant.

4. On 11 June 1997, the defendant adopted a share option scheme. On 27 October 1997, the plaintiff was granted an option to purchase 7,500,000 shares of the defendant at a subscription price of HK$0.77 per share ("the Option"), which was evidenced by an Option Certificate No.001. The Option would expire three months after the plaintiff ceased to be a director of the defendant.

5. On 2 December 1999, the plaintiff wrote to the defendant to exercise the Option, and also delivered to the defendant the Option Certificate duly completed together with a cheque for the subscription price in the amount of $5,775,000. Mr Gareth Tang ("Tang"), a director of the defendant at the time, signed on a copy of the plaintiff's letter acknowledging receipt of it and of the Option Certificate and cheque.

6. On 16 December 1999, the plaintiff wrote again to the defendant requesting for allotment of shares pursuant to the Option. The defendant did not make any allotment to the plaintiff. On 12 November 2001, the plaintiff wrote further to the defendant indicating that he no longer wished to have the shares and reserved his right to claim against the defendant for damages. On 15 August 2002, the plaintiff commenced these proceedings.

The action

7. In this action, the plaintiff claims against the defendant damages in the sum of HK$18,787,500, being the difference between the subscription price and the market price of 7,500,000 of the defendant's shares as at 30 December 1999. It is the plaintiff's case that the defendant was obliged by the terms of the Option Certificate to issue the shares within 28 days from 2 December 1999. Alternatively, the plaintiff says that the defendant was obliged to issue the shares within a reasonable time, which was 28 days from 2 December 1999. The plaintiff therefore takes 30 December 1999 as the date on which the breach occurred. There is no issue as to the choice of 30 December 1999.

8. By the Defence and Counterclaim filed on 5 November 2002, the defendant denies that the plaintiff is entitled to exercise the Option. The defendant's pleaded case is that the plaintiff had during 1997 and 1998 authorized certain construction contracts involving two of the defendant's subsidiaries. In about May 1999, the directors of the defendant discovered that a number of sums due under these contracts were non-recoverable. As a result, provisions for doubtful debts in the sums of about $54 million and $90 million were made in the defendant's audited financial statements for the years ending 31 December 1998 and 31 December 1999. In recognition of his responsibility for the provisions of doubtful debts and in consideration of the defendant not taking legal action against him for breach of duties, it was orally agreed between the plaintiff and the defendant, acting by Tang and Mr Rahman ("Rahman"), the defendant's financial director, that the plaintiff would not exercise the Option. Alternatively, it is pleaded that the plaintiff is estopped from exercising the Option. In reliance on these matters, the defendant counterclaims against the plaintiff for damages in breach of director's duties in the sum of $144 million.

9. On 11 January 2003, the plaintiff applied for summary judgment. On 4 July 2003, Master granted the application and entered summary judgment against the defendant on the plaintiff's claim. The defendant now appeals against the decision.

The appeal

10. In this appeal, three defences were raised on behalf of the defendant as giving rise to triable issues, namely :

(1) The plaintiff had orally agreed that he would not exercise the Option.

(2) Under the Counterclaim, which also operates as a set-off, the plaintiff is liable to the defendant for damages in breach of director's duties and/or breach of agreement.

(3) The plaintiff has suffered no loss and is not entitled to judgment on damages.

Applicable principles

11. On the applicable principles for a summary judgment application, there are no broad differences between counsel. I accept that the court should not in an Order 14 embark on a trial on affidavits for the purpose of resolving disputes of facts. But it does not follow that whenever there is a factual dispute, no summary judgment can or will be given. In deciding whether there is a triable issue, the court must be satisfied that there is a real and reasonable probability of a bona fide defence. In this connection, the court is entitled to have regard to commercial reality as well as to contemporaneous documents before the court. With these principles in mind, I turn to the specific defence raised by the defendant.

The oral agreement

12. The first defence relied upon by the defendant is that by reason of the plaintiff's oral agreement(s) with the defendant, the plaintiff's rights under the share options scheme had lapsed such that the plaintiff is not entitled now to rely on it to claim for damages.

13. In my view, there are tremendous difficulties with regard to the defendant's evidence on the alleged oral agreement(s). In the Defence and Counterclaim, it was pleaded as a single agreement made orally between the plaintiff and Tang and Rahman for the defendant, after it was discovered that there were problems about the recoverability of sums due under some construction contracts entered into by two of the defendant's subsidiaries. While the date on which the oral agreement was reached was not pleaded, the discovery was said to have taken place in May 1999. The earliest time this agreement could have taken place must therefore be in or after May 1999. In the Further and Better Particulars of the Defence and Counterclaim filed on 24 March 2003, it was stated that Tang had no recollection of the exact date and contents of the discussions and agreement.

14. In the course of opposing the summary judgment application, the defendant had filed several affirmations. These affirmations suggest that there were two oral agreements rather than one. In the first affirmation of Tang filed on 21 February 2003, he referred to an oral agreement made in the end of 1998 as part of the reverse takeover deal. It was said to be an agreement involving the plaintiff, the defendant and Best Fortune, under which the plaintiff agreed not to exercise the Option and also to procure other directors not to exercise their respective share options so as not to dilute Best Fortune's interest in the defendant. It was also said that the plaintiff had guaranteed that "all the existing contract values and account receivables by the defendant were correct and accurate and should be collected in accordance with the terms of the contracts".

15. In the same affirmation, Tang went on to say that in March 1999, he discovered that the values of the contracts of the defendant's two subsidiaries were significantly different from those guaranteed by the plaintiff, leading eventually to the provisions of doubtful debts in the defendant's financial statements. It was said that the provisions were attributable to inaccurate or over-statement by the plaintiff of the contract values. The matter was then discussed with the plaintiff, during which, apart from Tang and Rahman, two other of the defendant's directors were also present. Subsequent to the discussions, the plaintiff orally agreed with Tang, Rahman and Mr Zhang Daxiang, another executive director of the defendant, that he would not exercise the Option and further reconfirmed his commitment under the 1998 agreement. Tang said that the plaintiff made this oral agreement in recognition of his responsibility for the provisions of doubtful debts in the defendant's accounts and in consideration of the defendant not taking legal action against him.

16. Plainly the account given in Tang's 1st affirmation is vastly different from that pleaded in the Defence. There is however no explanation for the variations. It is to be noted that the defendant is throughout legally represented. When Tang's 1st affirmation was filed, the defendant was represented by the same firm of solicitors who prepared the Defence and Counterclaim.

17. I pause here to note that the defendant had pleaded in the Further and Better Particulars that Tang could not remember the dates and details of the discussions and agreement pleaded in the Defence and Counterclaim. The only other person pleaded to be present at the discussions leading to the oral agreement in 1999 was Rahman, who had replied to the plaintiff's enquiry that he no longer had any recollection of the events. In the circumstances, it is difficult to see how can be said that there is a clear and reasonable probability of the defendant making good its pleaded defence at the trial.

18. Secondly, on the 1998 oral agreement mentioned in the affirmations, it is less than clear what the defendant's case on it is. On the one hand, Tang's 1st affirmation referred to discussions involving the plaintiff, the defendant and Best Fortune. On the other hand, according to the affirmation of Mr David Town, the broker involved in the reverse takeover exercise, the 1998 agreement involved only the plaintiff and Best Fortune. Mr Town stated that the plaintiff gave the covenants relating to the Option and the values of the construction contracts to Best Fortune. Mr Smith submits at the appeal that the covenants were given to both Best Fortune and the defendant. The inconsistencies aside, the submission overlooks the fact that, as at the end of 1998, the plaintiff was still the majority shareholder and a director of the defendant. The evidence before the court does not show that, other than the plaintiff, there were other people representing the defendant in these discussions. The submission that the plaintiff gave the covenants to the defendant is not borne out by the evidence. In any event, given that the contracts that form the subject matter of the alleged guarantees were contracts of the defendant and/or its subsidiaries, it is entirely artificial if not superfluous for the plaintiff to guarantee their values and receivables to the defendant.

19. The third difficulty in this defence of oral agreement(s) relates to the affirmation of Mr David Town. Mr Town did not depose to his source of information, which is contrary to the requirement of the Rules. More importantly, he repeatedly prefaced his statements by the words "I understand". It seems he does not have personal knowledge of the things that he was stating. In particular, when he described the mechanism of the reverse takeover arrangement, he did not relate it to any of the parties involved. The affirmation gives a distinct impression that Mr Town was not personally present at or privy to the arrangement and the agreement mentioned therein. In particular, he did not say that he was present when the plaintiff made the oral agreement with Best Fortune. In my view, very little weight or no weight can be attached to what Mr Town said in his affirmation about the parties' agreement.

20. Fourthly, apart from the difficulties mentioned above, this defence of oral agreement(s) is wholly devoid of commercial reality. On the defendant's case, under the oral agreement in 1998, the plaintiff had already agreed not to exercise the Option in addition to giving guarantees on the values of the defendant's and its subsidiaries' contracts. Hence by 1999, the Option was no longer a valid option or one available to the plaintiff. That being the case, the defendant had nothing to gain in return for its agreement not to claim against the plaintiff for breach of duties or breach of the guarantees. Why would the defendant be prepared to give up its claim against the plaintiff then?

21. Further, contrary to the defendant's case that the plaintiff had given up the Option in as early as 1998, the 1999 Annual Report of the defendant continued to record that the plaintiff held a share option. The defendant had offered no explanation for this in the affirmations filed. There is also no explanation as to why the Option was not cancelled after the plaintiff gave the oral agreement in 1998 and/or 1999.

22. Mr Smith seeks to explain this on the basis that the plaintiff was anxious not to document the surrender of the Option because of the previous censure from the Stock Exchange. It is said that the plaintiff was keen to avoid any censure from the Stock Exchange. Firstly, I note this is only a submission suggested by counsel and is not an explanation stated in any of the affirmations filed on behalf of the defendant. Secondly, it begs the question of why Best Fortune was willing to accommodate the plaintiff's wish of not documenting the agreement. The materials before the court give no clue on Best Fortune's behaviour. To the extent that Best Fortune considered it was necessary to prevent dilution of its interests in the defendant by securing the 1998 oral agreement, there is no commercial reason for it to have accepted the position or not to take any step to protect itself against the risks of a dilution. This is particularly so with the discoveries of the irregularities in the contract values and receivables in March or May 1999. Yet the 1999 Annual Report of the defendant continued to record that the plaintiff held the Option.

23. This defence of oral agreement(s) also contains other aspects that make it difficult to maintain. When the plaintiff tried to exercise the Option on 2 December 1999 by delivering the shares certificate and a cheque to the defendant with a covering letter, Tang signed on a copy of the letter acknowledging receipt of the cheque and the certificate. It is rather unusual that Tang simply signed but did not in anyway qualify the position nor raise any protest to the plaintiff's act, if indeed the plaintiff had twice agreed not to exercise the Option. It was pleaded in the Defence and Counterclaim and stated in Tang's 1st affirmation that Tang had orally reminded the plaintiff that he was not entitled to exercise the Option when the letter and the cheque were delivered. If this were the case, it is all the stranger for Tang to accept the share certificate and the cheque and to sign to acknowledge receipt of them. The more natural reaction in those circumstances was simply not to accept or to take into delivery the shares certificate and the cheque. At the very least, one would have expected Tang to raise a protest or to qualify his signature in some way.

24. Not only that, when the plaintiff subsequently wrote again on 16 December 1999 requesting allotment of shares, neither Tang nor anyone within the defendant or Best Fortune responded by disputing or denying the plaintiff's entitlement to seek an allotment of shares. As a matter of fact, no response was given to that letter and the subsequent letters. The first time it was said that the plaintiff was not entitled to exercise the Option was when the Defence and Counterclaim was filed in November 2002. The various explanations now given for the inaction or lack of response at those times are, in my view, simply incredible.

25. There is also the letter dated 8 January 2002 from Moores Rowland, the defendant's auditor responsible for the 1998 and 1999 audited financial statements, which indicates that the auditor, at the material times, had no knowledge that the plaintiff had given up the Option. There is no explanation for the company's auditor not to be informed of this, and I am not prepared to speculate on the reason. However, this shows that the oral agreement(s) was nothing other than the assertions of Tang and the deponents on behalf of the defendant. In my view, this defence of oral agreement(s) is incapable of belief when viewed against all the circumstances of the case, the contemporaneous documents as well as commercial reality.

Counterclaim and set-off

26. I is also submitted that the counterclaim will provide a complete defence to the claim. Apart from the pleaded case of breach of director's duties, it is said that the counterclaim is also based on breach of agreement. Given that the defendant's case is that the defendant had, by the 1999 oral agreement, agreed not to take legal action against the plaintiff for breach of duties, it would appear that the two pleas are raised by way of alternatives.

27. Similar to the defence of oral agreement(s), the counterclaim is fraught with difficulties. On the plea of breach of duties, the Counterclaim does not plead any particulars of either the duties or the breach. It is no more than a bare assertion that has no factual foundation on which to stand. Although Mr Smith refers to set-of in submissions, set-off was not pleaded. At any rate, the precise basis for giving rise to a set-off is not known. The mere fact that the plaintiff was the director of the defendant does not necessarily mean that there is a right to set-off. As to the damages for the breach, while the pleading refers to a counterclaim of $144 million, the affirmation evidence suggests that the loss attributable to inaccurate and over-statement by the plaintiff is only $114 million.

28. Secondly, according to paragraphs 16 to 23 of Tang's 1st affirmation, provisions for bad debts had to be made in the defendant's 1998 and 1999 financial statements because there had been over-statement of the contract values. Reference was made to an internal accounting document exhibited as TYS-4, which Tang said was drawn up by the plaintiff as part of the reverse takeover deal, and had been relied upon by Best Fortune in entering into the deal with the plaintiff. TYS-4 contained the estimated contract values and receivables as at June and November 998. As pointed out by Mr Liang, it is apparent from an examination of TYS-4 that the estimates given in June differed from that given in November 1998. For the China and Hong Kong construction projects, as at 5 November 1998, the defendant was expecting to receive $106,479,780 (i.e. $10,875,034 + $95,604,746) less than previously estimated. The difference approximates $114,673,092, the alleged amount of under value. Since the defendant's case is that TYS-4 was provided to Best Fortune and Best Fortune had relied on it in deciding on the reverse takeover deal, it is difficult to see on what basis can the counterclaim for breach of duties or breach of agreement be mounted. In my view, the counterclaim and set-off do not afford a triable issue of defence.

The plaintiff's loss

29. The defendant's third defence is that the plaintiff in fact suffers no loss because by the time he decided to seek damages in lieu of allotment, the value of the defendant's shares had fallen below the price of $0.77. The fundamental point in this defence rests on the submission that, despite the defendant's alleged breach, the plaintiff had affirmed the contract. But as submitted by Mr Liang, there is simply no evidence of an unequivocal election to affirm on the plaintiff's part.

30. On the plaintiff's case, the earliest time that there could be an affirmation must be after 30 December 1999. Mr Smith refers to a letter of 15 March 2000 from the plaintiff's former solicitors. Although this letter is not in evidence and its contents unknown, Mr Smith asks the court to infer from the subsequent letter of 12 November 2001 that this 15 March 2000 letter amounts to an affirmation by the plaintiff. In my view, this cannot be done. Firstly, the law requires evidence of an unequivocal act of affirmation : Yukong Line v. Rendsburg Investments Corporation [1996] 2 Lloyds' Rep. 604 at 608, and Chitty on Contracts (28th edition) para.25-002. Secondly, in the 12 November 2001 letter, the plaintiff merely said he no longer wished to have the shares and he reserved his rights to seek damages for the defendant's breach. It is a quantum leap to infer from it that the 15 March 2000 letter was an affirmation of the contract.

31. In opposing the summary judgment application, the defendant is under a duty to condescend upon particulars. To the extent that the defendant wishes to rely on affirmation and on this 15 March 2000 letter, it had simply not discharged his burden.

32. As to the case of Tai Hing Cotton Mill v. Kamsing Knitting Factory [1979] AC 91, it deals only with assessments of damages and repudiation but does not address the situation of having damages in addition to a decree of specific performance. The point is in any event immaterial given that the defendant has not made out a case of affirmation on the evidence.

33. Finally even if the defendant succeeds in showing a triable issue on the amount of damages, it does not provide a complete defence to the plaintiff's claim in breach of agreement. It only goes to the quantum of the award. It does not prevent the plaintiff from having a judgment on liability. The plaintiff would be entitled to judgment for damages to be assessed. Mr Smith submits that this should not be done in view of the possibility that the plaintiff may only recover nominal damages. I do not agree. There is nothing unusual to award nominal damages under a judgment for damages to be assessed.

Conclusion

34. For the reasons set out above, I agree with the Master's decision to grant summary judgment against the defendant. The appeal is therefore dismissed. There is no reason why costs should not follow event. Accordingly, the defendant is to pay the plaintiff the costs of the appeal, to be taxed if not agreed