LOW TUCK KWONG AND OTHERS v. DYNASTY LINE LTD.

HCA9505/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.9505 OF 1999

--------------------

----------------------

J U D G M E N T

----------------------

1. By the various Sale and Purchase Agreements dated 5 February 1996 ("the Agreements") between the seven plaintiffs herein and the defendant, the defendant agreed to buy and the plaintiffs agreed to sell shares of China Development Corporation Ltd in quantities as stated therein and at the prices stated therein. All the shares to be sold under the Agreements were transferred by each of the seven plaintiffs to the defendant. The defendant however only paid to the plaintiffs part of the purchase price (in the case of the 5th and 7th plaintiff nothing) with the outstanding balance unpaid which form the subject of the claim by each plaintiff against the defendant.

2. The pleadings originally reveal a large number of issues between the parties. At trial, after the 1st plaintiff, Low Tuck Kwong, gave his evidence-in-chief, the defendant elected :

(a) not to cross-examine the 1st plaintiff;

(b) to agree to the admission of the witness statements of the remaining plaintiffs as hearsay evidence; and

(c) not to call Mr Sukamto Sia of the defendant to give evidence or to be cross-examined and, thereby, resulting in the witness statement for the defendant not being admitted into evidence.

Although Mr Kat for the defendant said that there was no formal concession on the defence or the counterclaim, the net result of the aforesaid election by the defendant was that the case of the defendant on misrepresentation and collateral contract collapsed. The only live issue left for the court to decide (after the plaintiffs indicated that they had abandoned the resulting trust point) was the claim of the plaintiffs for declaration of equitable lien. The amount of the equitable lien of course depends on what the court holds to be still owing by the defendant to each of the plaintiffs.

3. The pleadings and the Amended Table in Bundle H show that the amount outstanding to each plaintiff by the defendant were as follows :

1st plaintiff	$71,836,580.31
2nd plaintiff	$24,739,357.50
3rd plaintiff	$ 7,722,000.00
4th plaintiff	$26,023,140.00
5th plaintiff	$ 4,839,135.60
6th plaintiff	$24,642,723.38
7th plaintiff	$ 6,240,000.00

4. The interest on the amount outstanding claimed by each plaintiff up to 21 July 2000 (the last day of the actual hearing of the trial) calculated on the modest basis of 1% above prime interest rate shows the following :

1st plaintiff	$36,541,257.82
2nd plaintiff	$10,405,703.42
3rd plaintiff	$ 3,247,976.10
4th plaintiff	$10,945,679.47
5th plaintiff	$ 1,824,704.13
6th plaintiff	$10,366,923.67
7th plaintiff	$ 2,850,080.91

5. The daily interest from 22 July 2000 until judgment today on the outstanding amount owing to each plaintiff calculated at 10.5% interest rate (I regard this 10.5% as a reasonable rate even though the prime rate has moved from 9.5% on 21 July 2000 through various stages in early 2001 to the present prime rate of 8%) which I award against the defendant is as follows :

1st plaintiff	$20,290.82
2nd plaintiff	$ 7,097.36
3rd plaintiff	$ 2,215.33
4th plaintiff	$ 7,465.65
5th plaintiff	$ 1,388.28
6th plaintiff	$ 7,069.63
7th plaintiff	$ 1,790.16

6. The judgment I give against the defendant and in favour of each of the plaintiffs is therefore the total of the amounts shown in paragraphs 3, 4 and 5 above, and for ease of reference I will hereinafter refer to the judgment hereby so given to each plaintiff as "the 1st plaintiff judgment", "the 2nd plaintiff judgment", etc.

7. The serious dispute between the parties is on the claim by the plaintiffs for the equitable lien on the shares transferred to the defendant. The foundation of the plaintiffs' case for equitable lien is the undisputed fact that the defendant, having received from each of the plaintiffs the following shares (taking into account the 1 for 5 split) of China Development Corporation Ltd :

1st plaintiff	17,349,215 x 5
2nd plaintiff	3,203,750 x 5
3rd plaintiff	1,000,000 x 5
4th plaintiff	3,370,000 x 5
5th plaintiff	620,402 x 5
6th plaintiff	3,194,000 x 5
7th plaintiff	800,000 x 5

(hereinafter referred to respectively as "the 1st plaintiff's shares", "the 2nd plaintiff's shares", etc., or collectively as "the seven plaintiffs' shares") has not paid to the plaintiffs the outstanding amounts due under the Agreements. The plaintiffs therefore submit that this is the familiar situation of vendor's lien.

8. Equitable lien "is an equitable charge arising by operation of law and attaching to property belonging to another until certain specific claims have been satisfied. These claims are those which equity considers the other party is in conscience bound to perform. In the context of a contract of sale, for example, a vendor's lien over the sale property secures payment by the purchaser of the price .... Such liens are founded on a desire to do justice between the vendor and the purchaser." (Worthington, Proprietary Interests in Commercial Transactions, 1996, page 223). In the Chapters of the two leading textbooks on the subject of equitable lien :

(a) Chapter 9 on Equitable Security Interests of Worthington; and

(b) Chapter 39 on Equitable Liens-A Search for a Unifying Principle (Palmer & McKendrick on Interests in Goods, 2nd Edition, 1998)

suggestion was made that the two requirements of equitable lien are specific enforceability and identification of property.

9. The Agreements provided by Clause 5.2 for specific performance. As for the identification of the property, there is again no issue that identifiable and identified blocks of shares were transferred from the plaintiffs to the defendant (see the Plaintiffs' Big Table presented at trial).

10. Accepting everything said by the plaintiffs in the evidence before me, I also find established what might be called the third requirement of equitable lien, namely that in the circumstances of this case it was unconscionable for the defendant to dispose of the seven plaintiffs' shares without having discharged the obligation of the defendant under the Agreements to pay in full for these seven plaintiffs' shares.

11. I have therefore no difficulty in reaching the conclusion that when the plaintiffs caused to be delivered to the defendant the seven plaintiffs' shares, with the defendant not having paid for them in full, there came into being by operation of law, the equitable lien on the seven plaintiffs' shares, and that in respect of each plaintiff, the equitable lien covers all the shares transferred by that plaintiff to the defendant to the extent of the amount outstanding to that plaintiff. At the trial, Mr Kat did not in fact seriously dispute this conclusion of equitable lien at the time of the transfer of the seven plaintiffs' shares in April or May 1996. The argument of Mr Kat is that such equitable lien was lost subsequently because of steps taken in relation to these seven plaintiffs' shares by the defendant and/or its bankers.

12. The first line of defence to equitable lien mounted by Mr Kat at the trial is that the identification of the seven plaintiffs' shares was lost or could not be ascertained after they came into the possession of the defendant by reason of the defendant's dealings with them. But is this unpleaded and unparticularised case of the defendant relevant to the plaintiffs' claim for equitable lien against the defendant? In my view, it is not because, as was said by Mr Reyes for the plaintiffs, the plaintiffs are not seeking reliefs against other persons such as the various Singapore banks to whom the defendant alleged that it had pledged some of these seven plaintiffs' shares. The plaintiffs are seeking equitable lien against only the defendant and it is identification of these seven plaintiffs' shares when they came into possession of the defendant that is relevant. Secondly, having regard to the way the case was conducted by the defendant without calling any live witnesses for the defendant, there was simply totally inadequate material for the court to make any kind of favourable finding in favour of the defendant.

13. The second line of defence put up by Mr Kat is that by reason of the alleged pledging of the seven plaintiffs' shares by the defendant or by others to the various Singapore banks therefore these banks have a higher priority over the plaintiffs, and that, as the court in the exercise of its equitable jurisdiction would not do anything in vain, the court should not make the order of equitable lien. This unpleaded and unparticularised case of priority is again no ground for the court refusing to make the appropriate equitable lien order because, as Mr Reyes said, this aspect would only be of relevance in Round Two when the plaintiffs sought to enforce the equitable lien against the Singapore banks. Having regard to the non binding effect on the Singapore Banks of any finding of priority or non-priority (or identification/non-identification of seven plaintiffs' shares), in my view, the court should not indulge in such fruitless exercise specially having regard to the very limited credible evidence on priority the defendant has adduced at the trial.

14. In the course of the final submissions of Mr Kat, he referred extensively to different documents in the bundles and sought to draw inferences or conclusions from these documents without the benefit of any live witnesses to explain them or link them up, and without even having taking the elementary task of putting his case to the plaintiffs' witness. I have looked at and struggled with the materials he wished to rely on and it is simply not possible on the case as pleaded, and suffering his handicap of no witness and no cross-examination for Mr Kat to show a case of equitable lien, being so clearly lost that the court should refuse to give its equitable help to the plaintiffs. In my judgment, the plaintiffs have amply made out their case for equitable lien.

15. There is one final point on equitable lien which Mr Kat asked the court to consider, that is, whether the extent of the equitable lien should cover all the seven plaintiffs' shares or a percentage of the seven plaintiffs' shares having regard to the fact that part payments had been made. In my view, each plaintiff is entitled to a declaration of equitable lien against the defendant in respect of all the shares of that particular plaintiff transferred to the defendant to the extent of the full judgment sum (amount outstanding plus interests). Each plaintiff under each Agreement agreed to sell a block of shares to the defendant for a total consideration and until the full consideration is paid, the whole block of shares stand charged with the equitable lien of payment of the balance outstanding under the Agreement. In this way, the question of separate identification of the whole block of shares becomes not material upon partial payments by installments. The suggested method of reducing number of shares, being the subject of equitable lien, as progressive payments were made to the seller, is simply not a formula for justice or equity but a formula to give to the guilty purchaser the best of both worlds. Firstly, a substantial block of shares has its own intrinsic value and therefore gives far greater security than a reduced smaller block of shares. Secondly, when there is dropping of the market value of shares, the seller will be put into a deteriorating position of having a reduced block of shares with reduced value as security. No authority has been cited to me where a court has held that equitable lien is to cover a reduced number of shares by reference to the proportion of contractual price paid. Equity points the other way for the proper protection of the plaintiffs.

16. Having regard to my conclusion that each plaintiff is entitled to equitable lien, it seems to me that equity also must assist the plaintiff by the grant of the permanent injunction restraining the defendant and/or its servants or agents from disposing or dealing with the seven plaintiffs' shares until full payment had been made by the defendant. I therefore allow the amendment of the Re-Amended Statement of Claim to add relief for permanent injunction.

17. I conclude therefore that the each of the plaintiff is entitled to :

(a) judgment in the amount of contractual price outstanding under paragraph 4 above;

(b) judgment in the amounts of interests up to today under paragraphs 5 and 6 above;

(c) order of equitable lien over the Shares transferred by that Plaintiff to the Defendant to the extent of the Judgments under (a) and (b) above;

(d) permanent Injunction in terms of the Prayer on page 14 of the Re-Amended Statement of Claim; and

(e) the costs of the action.

The $10 million paid into court on 21 February 2000, in fortification of the grating of interlocutory injunction, with its accrued interests is hereby ordered to be released to the plaintiffs. I also order that there shall be liberty to apply generally so that thc parties can seek further directions from the court consequential upon the handing down of this judgment.