WINGAMES INVESTMENTS LTD AND OTHERS v. MASCOT LAND LTD AND OTHERS

HCMP 2039/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO.2039 OF 2011

(ON AN INTENDED APPEAL FROM HCA No.907 of 2011)

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REASONS FOR DECISION

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Hon. Yuen JA:

1.  This is an application for security for costs. The 2^nd - 6^th Defendants (whom I will for convenience refer to as “the Defendants”) have applied for leave to appeal a direction given at an interlocutory hearing before Reyes J on 3 October 2011. Tang V-P has directed that the application for leave to appeal be dealt with at an oral hearing. The Plaintiffs have sought security for the costs of that application.

2.  At the conclusion of the hearing on 25 November 2011, I gave an order that the Defendants provide security by paying into court within 14 days a sum of $300,000, failing which the application for leave to appeal would stand dismissed without further order.  I also gave costs of the application for security to the Plaintiffs, but declined to make an order that they be paid forthwith. These are the reasons for that order.

Residence out of the jurisdiction

3.  The principles governing an application for security for costs are well-established.  Where appellants (or in this case, the applicants for leave to appeal) are resident out of the jurisdiction, or where the respondentswould be likely to encounter undue delay or be put to undue expense in enforcing an order for costs, security for costs would usually be ordered (Hong Kong Civil Procedure 2012 pp.1061-2, paras. 59/10/27-28).

4.  In the present case, all the Defendants are out of the jurisdiction.  However Miss Catrina Lam counsel for the Defendants has referred to an affirmation of the 5^th Defendant to which there is exhibited his Hong Kong bank statement with a credit balance of about $1.5m.  She says that would be more than sufficient to cover any costs order which may be ordered in favour of the Plaintiffs.   The difficulty with that argument is, of course, that the 5^th Defendant can withdraw the funds at any time before a costs order can be enforced.

5.  I had considered whether an undertaking on the part of the 5^th Defendant to maintain a balance of $300,000 would be sufficient for the present purpose.  However as the 5^th Defendant is resident out of the jurisdiction, an undertaking would be difficult to enforce and so it would not, in this case, be an adequate substitute for payment into court.

Probability of success on application for leave to appeal

6.  Miss Lam also argued that, for the reasons detailed in the Defendants’ skeleton attached to their summons for leave to appeal, the Court could form a preliminary view that they have a high degree of probability of success in the application and so security should not be ordered.  I have therefore had to consider the merits of the application.  

7.  Unfortunately Reyes J has not given reasons for the direction he gave, and he also refused leave to appeal extemporaneously.  So the history of events and proceedings that I will be referring to here have had to be derived from the documents in the hearing bundle only.   As I understand it, the dispute between the parties arose in the following circumstances.

Factual background

8.  In 2010 there were negotiations between the 2^nd Plaintiff, which is a Hong Kong listed company, and the 2^nd Defendant, which is a PRC company.  The negotiations were for the 2^nd Defendant to sell its shares in a PRC company (“Shanghai FSY”) to the 2^nd Plaintiff, in consideration for $3,360,000,000 which was to be provided by way of convertible notes which could be converted into shares of the 2^nd Plaintiff. 

9.  According to the Plaintiffs, it was agreed that the transaction was to be structured in such a way that the convertible notes would be provided, not directly to the 2^nd Defendant, but to the Procurer, a BVI company wholly owned by a Thai company which had been set up by the 2^nd Defendant with the approval of the PRC Ministry of Commerce.  According to the Plaintiffs, that approval was essential as it affected the legality of the implementation of the transaction.

10.  According to the Plaintiffs, the 2^nd Plaintiff entered into a Sale and Purchase Agreement on or about 19 August 2010 (“the August SPA”).  This was supplemented by 4 Supplemental Agreements (collectively referred to as “the SPA”).  Suffice it to say that the Defendants’ case is that the SPA had not been concluded and that documents had not been duly executed in accordance with their terms.

Exchange of deposits

11.  On 3 November 2010, the 2^nd Defendant and the 2^nd Plaintiff signed an agreement in Chinese which has been called “the Deposit Agreement”. It provided (in its English translation):

“Pursuant to the terms stipulated in the ‘Very Substantial Acquisition Agreement’ [the 2^nd Plaintiff] pays HK$44,000,000 to the [2^nd Defendant] as deposit; [the 2^nd Defendant] promises the performance of this Agreement, and pays [the 2^nd Plaintiff] or the designated accounts of the [2^nd Plaintiff] an amount of RMB37,928,000, equivalent to HK$44,000,000.

Upon the Completion of the transaction, [the 2^nd Plaintiff] would return the security deposit of RMB37, 928,000 to [the 2^nd Defendant].

If for any objective reasons, the transaction cannot be completed, then both parties have to return the above deposit and security deposit”.       

12.  Pursuant to this Deposit Agreement, the 2^nd Plaintiff paid HK$44m (“the HKD sum”) to the 2^nd Defendant, and the 2^nd Defendant paid RMB37,928,000 (“the RMB sum”) to the 2^nd Plaintiff.

13.  According to the Plaintiffs, the 2^nd Defendant failed to proceed with the transaction. 

Proceedings issued

14.  On 31 May 2011 the Plaintiffs issued proceedings in Hong Kong asking for specific performance.  They also sought an interlocutory injunction against the Defendants restraining them from dealing with shares in various associated companies (“the Shares”). 

3 June 2011 - Chung J’s order

15.  On 3 June 2011 (summons day), there was a hearing before Chung J. 

(1) The Defendants produced a 3-page document in Chinese purporting to show “imminent pending transactions which form part of the ordinary course of business” (which I will for convenience call “the Transactions document”).  However no affirmation had been filed in relation to that document.  The learned judge adjourned the hearing to 17 June 2011 to enable that document to be considered.   

(2) As far as the Shares were concerned, the Defendants (except for the 4^th Defendant) gave undertakings not to deal with the Shares.  The learned judge gave an injunction against the 4^th Defendant along the same lines.

(3) As far as the HKD and the RMB sums were concerned, the 2^nd Defendant gave an undertaking not to deal with the HKD sum it had received from the 2^nd Plaintiff, and the 2^nd Plaintiff gave an undertaking to deposit the RMB sum in an escrow account with its solicitors King & Wood (“KW”).

17   June 2011 - Chung J’s order

16.  (1)  On 17 June 2011, at the resumed hearing, the Defendants opposed the grant of injunctions against them but apparently did not file affidavit evidence, not even to support the contents of the Transactions document. 

(2)  The learned judge found that the Plaintiffs had “enough merits in their case to justify the grant of an interim order” and that “because of the failure to disclose further information, very little was known about the transactions set out in the [Transactions document]; in particular both the supporting documents and the factual details were lacking” (see Chung J’s Decision handed down on 23 June 2011)

(3)  Accordingly the learned judge granted injunctions against the Defendants from dealing with the Shares and the HKD sum until the hearing scheduled for 15 July 2011.

15 July 2011 - Reyes J’s order - “early warning system”

17.  (1) On 15 July 2011 the parties appeared before Reyes J.  The learned judge gave an order “dismissing” (or setting aside) the injunction orders given by Chung J, on the Defendants’ undertaking that their solicitors provide 96 hours’ notice to the Plaintiffs’ solicitors of “any contemplated transaction in breach of clause 8.1 of the [August SPA]”.

(2)     Clause 8.1 provided that the business of the group companies would be operated in a normal and prudent basis and in the ordinary course of business.  In particular, no group companies would, without prior written consent, borrow or raised money exceeding RMB20,000,000 other than on normal commercial terms in the ordinary course of its business.

(3)     The provision for 96 hours’ notice has been referred to as “the early warning system”.

18.  The learned judge also ordered that the RMB sum in KW’s escrow account be paid into a joint stakeholders account in the joint names of the Plaintiff’s solicitors and the Defendant’s solicitors in Beijing.

19.  Pausing there, it is clear that the Plaintiffs’ position then was that there was a valid and binding agreement to acquire Shanghai FSY from the 2^nd Defendant, and they wanted specific performance of that agreement.  The Defendants’ case throughout was that the SPA had not been concluded.

Plaintiffs’ change of position

20.  It is the Plaintiffs’ case that a few days after Reyes J’s order of 15 July 2011, they received information that no approval from the PRC authorities had been obtained for the Thai company purportedly set up by the 2^nd Defendant, the subsidiary of which was to receive the convertible notes.  The Plaintiffs asserted that in those circumstances the claim for specific performance could not proceed. 

21.  On 25 August 2011 the Plaintiffs, in a change of position from their prior claims, demanded (amongst other things) the return of the HKD sum instead. 

22.  On 9 September 2011 the Plaintiffs amended their Statement of Claim, deleting their claims for specific performance, and claiming instead a declaration that the Sale and Purchase Agreement had been rescinded, or further/alternatively, validly terminated; and claiming (amongst other things) damages, or further/alternatively return of the HKD sum.

Reyes J’s direction

23.  At the hearing of a summons issued by the Plaintiffs on 28 September 2011, Reyes J (presumably on the basis that on either side’s case, there was now no extant agreement) directed the parties to return the deposits to each other.

Defendants’ position

24.  This was opposed by the Defendants on the ground that the 2^nd Plaintiff was insolvent and that they had a counterclaim against it for damages sustained as a result of the injunction wrongly obtained by the Plaintiffs.

Discussion

25.  I have read the Amended Defence and Counterclaim filed after Reyes J’s direction was given.  It does not appear to be the Defendants’ case that they are entitled to forfeit the HKD sum pursuant to any agreement, or that they are entitled to hold onto it by way of any lien or security.  They assert only that as a result of the injunctions which they say have been wrongly obtained by the Plaintiffs, they have suffered loss and damage by reason of being restrained from using the Shares as collateral or security for raising working capital in the course of their business.

26.  In para. 70 of the Amended Defence and Counterclaim, the Defendants allege that “the Shanghai FSY group” had submitted a tender for the development of land in Chongqing in the PRC on the basis that the land would be acquired in June 2011.  A Letter of Intent was to have been executed on 18 June 2011, but as a result of the injunctions/undertakings in these proceedings, the execution was postponed, and the group was unable to pledge or charge the Shares to commercial lenders, as a result of which the group was unable to obtain financing to acquire the land.  It is alleged that the price of the land rose from RMB200m in June to approximately RMB350-400m in September, and as such the Defendants claim they have been “wrongly deprived of the opportunity to acquire the land in June and suffered an opportunity cost of RMB150m-200m in losses, being the difference in value of the land between June and September 2011".

27.  However as I have noted earlier, on 17 June 2011 (i.e. before the original date for the execution of the Letter of Intent), the parties had appeared before Chung J at the resumed hearing of the application for injunctions, and one would have expected an important item of business, such as the financing of the Chongqing development, to have been raised by the Defendants.  Instead, the judge remarked that “because of the failure to disclose further information, very little was known about the transactions set out in the [Transactions document]; in particular both the supporting documents and the factual details were lacking”. 

28.  After the injunctions were set aside on 15 July 2011, the Defendants were of course free to deal with the Shares in the ordinary course of business.  In any event it would appear that the financing of the Chongqing development was not sufficiently certain to be the subject of notification under the “early warning system” provided under Reyes J’s order of 15 July 2011.

29.  Thus it seemed to me that, without in any way pre-judging the matter, the argument for loss of opportunity cost is a difficult one, and for that reason, I concluded that security for costs should be given for the hearing of the application for leave to appeal.