PRINCE GOOD LTD. v. KO FEI and Another

1997, CL No.63

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

_______________

_______________

_______________

J U D G M E N T

_______________

1. The plaintiff in this action, Prince Good Limited ("Prince Good"), is one of a number of companies in a group of companies owned by one Lau Hei Wing ("Mr Lau"). One of Prince Good's associated companies within that group is a company called Waygood Investments Limited ("Waygood"). The defendants are one Ko Fei ("Mr Ko") and a company called Asia Corporate Services Limited ("ACS"). Mr Ko is an employee of Kwai Gang Finance Company Limited ("Kwai Gang") a company associated with a number of mainland banks. Mr Ko told me, and I accept, that he participated in the events which have given rise to this action as an employee of Kwai Gang, not for himself beneficially.

2. ACS is a company providing services of the nature which its name describes, but it acts as Mr Ko's nominee and associates itself completely with Mr Ko in this action.

3. The dispute between the parties concerns the beneficial ownership of shares in a company called Unionix Development Limited ("Unionix"). The rights of the parties, so far as the documents go, in relation to these shares, are as defined in a Memorandum of Agreement dated 28 December 1996 and a Memorandum made supplemental thereto dated 13 January 1997.

4. The Memorandum of Agreement of 28 December 1996 was made between Mr Ko of the one part and Prince Good of the other part. At this date, one company associated with Mr Ko's principals was indebted to Waygood in the sum of approximately HK$66 million; and another such company was indebted to a company called United Wide Investment Limited ("United Wide") in the sum of approximately HK$73 million.

5. The debtor companies were in default under their arrangements with these creditors. Mr Ko was anxious to find a way out of this problem. He was introduced to Mr Lau, who was apparently prepared to enter into the arrangement with Mr Ko which eventually became the subject of the Memorandum of Agreement of 28 December 1996.

6. The attraction of this arrangement, from the point of view of Mr Lau, was the interest of Mr Ko and ACS (Mr Ko's nominee) in the shares in Unionix, in which they owned 99 shares and 1 share respectively. That company, Unionix, had a 20% interest in a company called Team Base Development Ltd ("Team Base"), the owner of a property known as Block B, Repulse Bay Mansions, Hong Kong. The remaining 80% interest was held by a company called Roe Investments Limited ("Roe"). These parties, together with a company called Kowloon Development Company Limited ("Kowloon Development"), as guarantor, were parties to a Shareholders Agreement made on 7 October 1996 to regulate their relationship in respect of the property at Repulse Bay. An important clause in that Agreement gave Unionix an option, which remains exercisable, to purchase Roe's 80% interest.

7. The Memorandum of Agreement of 28 December 1996 is expressed as an agreement of sale and purchase. (It provided for the signature by the parties of a formal agreement for sale and purchase, though that was never done.) It provided for completion of the sale and purchase on or before 3 January 1997, when, in effect, Mr Ko was to part with all his interests in Unionix (including the ACS share) and Prince Good was to pay the consideration as defined in the Agreement.

8. The Agreement contained the following Clause (18) :

"(18) This Memorandum constitutes a legally binding agreement and represents the whole agreement between the parties relating to the sale and purchase of the Sale Shares and the Debt and to the property (no party having relied on any representation made by any other party which is not a term of this Memorandum) and no future variation shall be effective unless made in writing and signed by each of the parties."

Clause (20) provided that time should be of the essence. Clause (22) contained an option granted to Mr Ko to re-purchase the shares and the above-mentioned debt (which was a debt of HK$160 million owed by Unionix to Mr Ko). The option was to be exercisable, at any time after completion, and on or before 25 June 1997, by Mr Ko serving on Prince Good not less than five days' notice in writing of the exercise of the option. The option would lapse if the option notice was not duly served on or before 25 June 1997 (it was not so served). The sum to be paid by Mr Ko on exercise of the option to re-purchase was to differ according to whether or not Prince Good had exercised the other option, to which I have already referred, which enabled Unionix to purchase Roe's 80% interest in Team Base. Obviously, if that option were exercised, the amount which Mr Ko would have to pay would reflect the sum which had had to be paid for the exercise of this earlier option. In any case, the sum which Mr Ko would have to pay would net Prince Good a profit of 20% on the transaction.

9. I find that after 28 December 1996, Mr Ko had second thoughts about this transaction with Prince Good. He dragged his feet. He was unwilling to assist in performing the various acts that were required to put Prince Good into his shoes as the controlling shareholder of Unionix.

10. On 13 January 1997, there were two meetings in Shanghai, one in the morning without lawyers and one in the afternoon with lawyers, at which this transaction was the subject of some discussion between the parties and others.

11. In the meeting in the morning, according to Mr Ko, Mr Lau agreed to an arrangement whereby, if the indebtedness of the debtor companies to Waygood and United Wide was discharged within 14 days, that is to say by 27 January 1997, the whole transaction would be treated as null and void.

12. In the meeting in the afternoon, however, the parties proceeded on the footing that the transaction was going ahead, and signed the Supplemental Memorandum of Agreement, to which I have already referred, containing the following provision :

"The vendor [Mr Ko] warrants and undertakes to sign execute all documents and do or perform all acts and deeds necessary to enable the Purchaser [Prince Good] to become the beneficial owner of the Debt and Sale Shares (as defined in the Memorandum), including without limitation, the title deeds and documents to the property."

It provided also that completion of the transaction should take place on or before a day later to be determined, and subsequently fixed as 20 January 1997. But Mr Ko continues to resist Prince Good's attempts to perfect its legal title to the shares in Unionix and exercise its rights as the owner of such shares. Hence this action.

13. It is said for Mr Ko (as I have indicated) that a contract was made, in the course of the morning meeting to which I have referred, under which Prince Good became bound to accept that the whole transaction would become null and void if Mr Ko had, before 27 January 1997, paid off the debts owed to Waygood and United Wide. Mr Ko told me that, by 27 January, he had been put in funds by Kowloon Development to enable him to do so and that accordingly he was able to pay off those debts. He proved that he had indeed made enquires of United Wide to ascertain just how much United Wide claimed was owing to it. However, Mr Lau told me that he had never come to any such agreement with Mr Ko. Mr Ko tendered no evidence from those present at the meetings, other than his own evidence, which I found unconvincing. The burden of proving such a collateral contract rests of course on Mr Ko. I am not satisfied that he has discharged it. Even if something was said in the morning meeting to the effect that if payment was made promptly, the whole deal could be considered as off, that would have come nowhere near satisfying me, as I would require to be satisfied, that the alleged collateral contract had indeed been sufficiently proved. The court is always careful to examine an allegation of collateral contract, and requires such a collateral contract to be strictly proved. Its effect usually is to contradict or vary (as here) the effect of a written agreement made between the parties. There is no reason why as a matter of law that should not from time to time happen. Occasions when the courts will recognise that it has happened will however be rare. In what I regard as the absence of clear and cogent evidence to support the plea of collateral contract here, I reject this part of the defence.

14. I now turn to the remaining issues between the parties.

15. The next issue concerns the obligation, assumed by Prince Good under the Memorandum of Agreement of 28 December 1996, to assume and discharge, following completion, the debts payable to Waygood and United Wide by the debtor companies. Mr Ko says that these debts had not been assumed or discharged by Prince Good before 24 January, on which date, treating that failure as a repudiatory breach of contract by Prince Good, his solicitors accepted that breach as putting an end to the contract.

16. I do not accept this defence either.

17. I am satisfied that Prince Good has at all times been ready, willing and able to discharge these debts. There was no evidence to suggest that after 28 December 1996 the debtor companies were liable to be chased by their former creditors for the money. Waygood is associated with Prince Good, as I have explained; United Wide confirmed, though admittedly not until 31 January 1997, that it did not look to the original debtor for payment of the debt. I can find nothing at all to suggest that Prince Good has repudiated its agreement to assume and discharge these debts. It may well not have paid off Waygood; but that is no real concern of Mr Ko so long as Waygood has not sought and is not seeking to chase the original debtor for payment. It may not have paid off United Wide; but, again, that is a matter between Prince Good and United Wide. There is no substance in the suggestion that Prince Good has committed a repudiatory breach of its obligations in this respect under the Memorandum of Agreement of 28 December 1996.

18. There remains a final point, taken by the defendants after the close of the evidence after some encouragement from the Bench. The new point, for which I gave leave to amend the Defence (in the face of opposition by Prince Good) is to the effect that the Memorandum of Agreement of 28 December 1996 was, and is, in equity a mortgage by Mr Ko of the shares in Unionix and of the debt mentioned in the Memorandum of Agreement. Mr Ko says that in the premises he has and is entitled to exercise his equitable right of redemption.

19. It is sometimes the case that an agreement which appears on its face to be an agreement for an absolute conveyance may nevertheless be shown by extrinsic evidence to have been intended only as an agreement to create a mortgage. (An example of a case in which the court received extrinsic evidence to prove that an absolute conveyance was in fact a mortgage, under which the conveying party retained the equity of redemption is In re Duke of Marlborough [1894] 2 Ch.133.)

20. But in the present case, not surprisingly, no evidence at all was tendered by either side upon the question, which had not originally been raised on the pleadings, whether or not the Memorandum of Agreement of 28 December 1996 ought to be treated as an agreement for a mortgage rather than as an agreement for sale and purchase. Although it is true that the option to re-purchase contained in Clause (22) gives this instrument some affinity with a form of mortgage, it seems to me, in the end, that it is essential, if the court is to hold that an agreement which on its face purports to be an agreement of sale and purchase is in fact an agreement of a different nature, that is to say, an agreement by way of mortgage, that the party seeking to assert that should prove it by convincing evidence as to the real intention of the parties. In the absence, as I have said, of any such evidence, I am quite unable to uphold this defence.

21. In these circumstances all three defences now urged on the court by the defendants fail and I must give judgment for the plaintiff.

22. I will hear counsel on the form of the order and on costs.