MANDECLY LTD. AND ANOTHER v. HAO WEI AND OTHERS

HCA1216/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1216 OF 2002

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J U D G M E N T

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1) There are before the court two applications, one by the plaintiffs for an interlocutory injunction against the defendants essentially restraining them from disposing or dealing with shares in the 3rd defendant, the other a counter-application by the defendants that in the event any form of injunction is granted, there should be an order for fortification of the damages undertaking. In view of the urgency of the matter, I have decided to give judgment immediately with a summary of my reasons.

2) Beijing Mandas Real Estate Development Co., Ltd ("Beijing Mandas") is a Mainland incorporated company and represents a joint venture between the 3rd defendant which holds 52% of its shares and a Mainland company called Beijing Chaoyang Park Development and Operation Company ("Beijing Chaoyang") which holds the other 48%. Beijing Mandas is the developer of the Greenlake Garden Development in the Chaoyang District in Beijing ("the Development"). The Development was in two Phases.

3) The present action by the plaintiffs against the defendants arises out of a series of agreements dated variously between April and September 2001 between the plaintiffs and the 1st defendant under which the 1st defendant agreed to purchase the shares in the 3rd defendant from the 1st plaintiff (effectively therefore the 52% stake in Beijing Mandas).

4) It is not necessary set out all the terms in the various agreements, but I would merely highlight the following :

(1) The purchase price of the shares was payable in a number of instalments. The 1st defendant would also be responsible to transfer certain properties in the Development to the plaintiffs.

(2) Before the purchase price was fully paid, the 1st defendant would be able to take control of the shares of the 3rd defendant and effectively participate in the running of Beijing Mandas.

(3) There were numerous provisions dealing with the respective liabilities of the parties for the past and future indebtedness of Beijing Mandas and the Development. For this purpose, the agreements required on-going investigations and disclosures as to the true financial state of Beijing Mandas.

(4) As a result of the ongoing investigations and disclosures, agreements were made to define more precisely the respective liabilities of the parties, and adjustments were accordingly made to the liabilities to pay both on the part of the plaintiffs (for they were liable to meet certain existing indebtedness of Beijing Mandas) and the 1st defendant.

(5) On the plaintiffs' part, for example, they were liable to pay for the existing indebtedness of Beijing Mandas in relation to the payment of land grant fees to the Mainland authorities concerning Phase 1 of the Development. This is clear from a number of the agreements; amongst them, the 2nd Supplementary Agreement and what has come to be known as the 4-Party Agreement dated 27 September 2001. In the latter agreement (in clauses 9 and 10), it was assumed that the plaintiffs would be liable for any land grant fees payable in relation to Phase 1 of the Development beyond the sum of RMB32.2 million already paid by them. For this purpose, the plaintiffs were to make available some 22 units in the Development to go towards paying the shortfall in land grant fees, with other property to be made available should the value of the 22 units be insufficient to cover the shortfall. The value of the 22 units can be calculated to arrive at the figure of RMB16,727,025.

(6) On the 1st defendant's part, I have already referred to the payment of the purchase price for the shares in instalments. In the 3rd Supplementary Agreement dated 6 August 2001, it was stated that the sum of RMB12 million was to be paid by the 1st defendant to the plaintiffs on or before 28 September 2001. It was further stated that the 1st defendant should provide a Letter of Undertaking to guarantee payment of the sum. A Letter of Undertaking also dated 6 August 2001 was provided by the defendant.

(7) Clauses 3 and 4 of the Letter of Undertaking are important and state as follows (as translated) :

"3. If the period exceeded is more than three months, viz. before 28 December 2001, and I [the 1st defendant] have still failed to pay in full the balance of share transfer price, then I undertake that: the agent and I will unconditionally return the 100% shares in Mandas Real Estate Limited to Mandecly Limited and Mr. Chan Tat Man [the plaintiffs].

4. I undertake not to assign the shares in Mandas Real Estate Limited to any third party within the period when the balance of share transfer price has not been paid in full."

5) The plaintiffs' claim is simple. The RMB12 million was not paid either on due date or at all. In these circumstances, clauses 3 or 4 became operative. The interlocutory injunction sought by the plaintiffs directly relate to these clauses, in particular clause 4. Mr Alan Leong, SC submits in these circumstances since the shares in the 3rd defendant were intended to provide security to ensure payment by the 1st defendant of the said liability of RMB12 million, the defendants should be prevented from dealing with or disposing of the shares until trial.

6) The Court's approach in dealing with interlocutory injunctions is well known. In the present case, Mr Leong refers to a number of cases, amongst them Incorporated Owners of South Seas Centre, Mody Road v. Great Treasure Development Ltd [1994] 1 HKC 197 and Lea Tai Property Development Ltd v. Incorporated Owners of Leapoint Industrial Building [1996] 1 HKC 193, to suggest that where negative covenants are concerned, once a serious question to be tried is demonstrated, the court need not consider the balance of convenience factor. In my view, the cases do not make out this proposition in quite so stark terms. In my view whether or not an interlocutory injunction is to be granted depends on the justice of the situation confronting the Court. If I may, I would refer to some broad statements of principle that I made in Music Advance Ltd and Another v. The Incorporated Owners Of Argyle Centre Phase I , 30 August 2002, HCA 2574/2002.

Serious question to be tried

7) It is common ground that RMB12 million has not been paid, so one therefore must look to the defendants' case as a starting point. Mr Wong Yan Lung, SC submits that no liability to pay the RMB12 million exists since the plaintiffs have by a series of misrepresentations about the true extent of the liabilities of Beijing Mandas, breached the various agreements. Specifically, Mr Wong says that RMB12 million instalment was itself the product of what was then perceived (at the time the 3rd Supplementary Agreement was made on 6 August 2001) as being the balance due to the plaintiffs after taking into account their various liabilities. It is now clear (and indeed clear at the time of the 4-Party Agreement on 27 September 2001) that these liabilities had been understated and had they been known at the time of the 3rd Supplementary Agreement (and the Letter of Undertaking), the 1st defendant would not have agreed to pay the RMB12 million or any further sum to the plaintiffs. At least, Mr Wong argued, there should be a set-off and therefore, clause 4 of the Letter of Undertaking was inoperative. Clause 3 was in any event a penalty clause unenforceable in law according to Mr Wong.

8) Mr Wong submits in these circumstances that there was no serious question to be tried at all. I regret to say that I am unable to agree with him, forcefully and attractively put as the submissions were. I shall not go into all the submissions made (equally attractively) by Mr Leong. It is sufficient merely to point to the argument that at the time the 4-Party Agreement was made, which was the day before the deadline of 28 September 2001, even though, as Mr Wong submitted, breaches or misrepresentations might have been acknowledged by the plaintiffs, it was remarkable that the parties did not alter either the obligation to pay on 28 September 2001 or clause 4 of the Letter of Undertaking. The intention, it can reasonably be argued, was that these obligations remained intact.

9) The other arguments raised by Mr Wong in relation to the existence of serious questions to be tried, were not sufficient to point to the non-existence of such questions which should be tried.

Balance of convenience

10) This causes me more anxiety as far as the defendants are concerned.

11) The 1st defendant's affirmation evidence shows, reasonably clearly in my view, that if the present injunction were to be granted, this could have serious consequences for Beijing Mandas and hence the defendants. Even the plaintiffs would be adversely affected. I have taken the following matters into account in this context :

(1) The shares in the 3rd defendant have already been transferred to the 1st defendant and there has been for some considerable time a takeover of Beijing Mandas' operations by the 1st defendant from the plaintiffs. The 1st and 2nd defendants are effectively in control of the 3rd defendant.

(2) Much time and money has been invested by the 1st defendant in Beijing Mandas. Apart from the purchase price of the shares in the 3rd defendant (of which RMB30 million has been paid), he has deposed to the fact that he has invested over RMB50 million in relation to Beijing Mandas' liabilities.

(3) There is at the moment an asset preservation order over Beijing Mandas' assets imposed by the Beijing Second Intermediate People's Court in relation to a judgment that a company called China Xin Xing Construction and Development General Company Limited ("Xin Xing") has obtained against Beijing Mandas. The judgment was over a debt of some RMB60 million that Beijing Mandas was adjudged to owe to Xin Xing. Beijing Mandas' appeal from the judgment has been dismissed. On 10 July 2002, the Beijing Court served an execution notice on Beijing Mandas to pay the judgment debt by 30 September 2002, failing which execution would be levied on its assets by sale. These assets comprise on the whole both Phases of the Development. Quite apart from the threat of execution, the asset preservation order has prevented the utilization of Beijing Mandas' property to raise money to pay its liabilities.

(4) The forced sale of Beijing Mandas' assets would have a devastating effect on the company. It is reasonable to assume that the Development may never come to fruition and the 1st defendant's investment in Beijing Mandas, consequently lost.

(5) A forced sale would also affect the plaintiffs in that not only would payment of the indebtedness of RMB12 million be jeopardized (because the 1st defendant would be put in serious financial difficulties) but they would also not be able to have transferred to them certain properties that Beijing Mandas or the defendants still control (such as what have been termed the Schedule 1 properties) and for which the plaintiffs claim.

(6) The 1st defendant's financial difficulties are detailed in his affirmations. In particular, he refers to the difficulties even obtaining loans amounting to RMB5 million. The plaintiffs do not really contradict this. Indeed, on the contrary, it is part of their case that it is precisely because the 1st defendant is in a precarious financial position that an interlocutory injunction becomes necessary.

(7) However, the financial predicament that Beijing Mandas finds itself in arising from the Xin Xing judgment has some chance of being alleviated in that Xin Xing has apparently in principle agreed with the 1st defendant that upon payment of RMB40 million to it, presumably only as partial discharge of the judgment debt, it will procure the discharge of the asset preservation order. Xin Xing requires the RMB40 million to be paid to it by 15 October 2002 and that a signed agreement be made prior to 30 September 2002 (when as will be recalled, execution will be levied on Beijing Mandas' assets by the Beijing Court). The 1st defendant has managed to secure finance from a company called Hua Ke Industry and Development Company Limited ("Hua Ke"), under a loan agreement for the sum of RMB30 million. However, Hua Ke requires as security, not surprisingly, the shares held by the 1st defendant in the 3rd defendant.

(8) There is some dispute between the parties as to whether or not this loan might contravene PRC laws. I am unable to come to a conclusion on this issue on the material before me, but would wish merely to say that it is by no means obvious that it is illegal. In these circumstances, the existence of a lender who will enable Beijing Mandas effectively to pay the RMB40 million required by Xin Xing (RMB5 million I have already referred to and the 1st defendant deposes to his ability to raise another RMB5 million) is a major factor in my consideration. However, an interlocutory injunction would or might well stifle that lifeline offered to Beijing Mandas and the defendants. It seems to me it is in everyone's interest, including the plaintiffs, that the loan agreement goes through. The difficulties that Beijing Mandas would have in getting any loan is acknowledged by the plaintiffs in the third affirmation of the 2nd plaintiff.

12) Another point that has been raised by the defendants is that they have an unanswerable claim in relation to the liability of the plaintiffs to pay land grant fees in respect of Phase 1 of the Development. There is much factual dispute on the affidavit evidence before me but the contemporaneous documents show the following :

(1) The parties agreed that the plaintiffs were to be liable to pay the land grant fees for Phase 1 : see clause 1.13 of the 2nd Supplementary Agreement dated 12 July 2001; clauses 9 and 10 of the 4-Party Agreement.

(2) The land grant fees payable for phase 1 amounted to RMB39,757,300.

(3) Under the 4-Party Agreement, it was agreed between the parties that the plaintiffs had paid RMB32.2 million and that they were to be liable for the difference between this sum and the actual land grant fees payable for Phrase 1 of the Development.

(4) By a simple calculation the difference is therefore some RMB7,557,300.

13) There has been much argument from both sides as to the plaintiffs' liability in this respect. Mr Wong asserts that not only is the sum of RMB7,557,300 clearly due but that the plaintiffs are also clearly liable for substantial penalties payable in respect of the late payment of the land grant fees. Mr Leong argues the contrary, suggesting that a significant portion of the land grant fees were agreed to be for the defendants' account (specifically in relation to the 13,200 square metres aspect).

14) In my view, what documents there are suggest at this stage that the defendants have a reasonably strong case on the plaintiffs' liability to pay certainly the sum of RMB7,557,300. On penalties, while it might be a reasonable assumption that they may be due, at least the quantum is very much in dispute. I note there has been no demand from the PRC authorities for any particular sum and there is some opinion evidence on PRC law from lawyers in relation to this. While I was at one stage tempted to come to the conclusion that the defendants' case on the RMB7,557,300 was unanswerable, I have now concluded that in the end, it is a matter that ought to be ventilated at trial. The documents are not entirely consistent with each other and there will inevitably be a dispute of oral evidence. However unsatisfactory the way the plaintiffs have approached the matter, the credibility of in particular the 2nd defendant must be left for the trial judge. There is also the inevitability that more documents are bound to be disclosed in due course. The relevance of the land grant fees issue, though, is that the apparent strength of the defendants' case here is another factor that should be considered in the exercise of my discretion.

Conclusion

15) In the end, I have come to the conclusion that an injunction should be granted except that the defendants are to be at liberty to enter into the loan agreement with Hua Ke in relation to the loan of RMB30 million exhibited in HW-29 of the 3rd affirmation of the 1st defendant.

[Submissions on Costs]