TOP GEAR INVESTMENT LTD AND OTHERS v. PACM GROUP (HOLDINGS) LTD

HCA 1999/2023

[2024] HKCFI 2347

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1999 OF 2023

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D E C I S I O N

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A.  INTRODUCTION

1.  By a notice of appeal dated 13th June 2024, the Defendant (“PACM”) appeals against the Master’s decision dated 3rd June 2024.  The Master had dismissed PACM’s summons of 11th March 2024 (“the Summons”), seeking summary judgment against the Plaintiffs and striking out of the Plaintiffs’ writ and Statement of Claim, and had ordered that unconditional leave to defend be given to the Plaintiffs against PACM’s counterclaim.

2.  PACM’s counterclaim against the Plaintiffs is for the sum of $6.8m, being a 1% “Break Fee” for an intended loan of $680m from PACM to the Plaintiffs (“the Intended Loan”) which did not come to fruition.  The Plaintiffs had originally issued a writ seeking a declaration, inter alia, that PACM was not entitled to the Break Fee.

B.  THE FACTS

3.  Much of the factual background is undisputed.  I take the following in part from the parties’ submissions and agreed chronology.

B1.  The parties and the Intended Loan

4.  The 1st Plaintiff (“P1”) owns a property (“the Property”) on Prince Edward Road West.  P1 owed the Bank of China (Hong Kong) Limited (“BOC”) a loan of approximately $550m secured, inter alia, by a first mortgage on the Property (“the BOC Mortgage Loan”) and the personal guarantee of the 3rd Plaintiff (“P3”). P1 was wholly owned by Chit Sen Company Limited (“Chit Sen”).

5.  P3 sought to acquire from Chit Sen the entirety of the shareholding in P1 (thus indirectly acquiring the Property), using the 2nd Plaintiff (“P2”), his wholly-owned corporate vehicle, as the acquiring entity (“the Intended Acquisition”).

6.  The Plaintiffs sought to obtain the Intended Loan to pay off the BOC Mortgage Loan and to finance the Intended Acquisition.

B2.  The Term Sheet

7.  On 2nd November 2023, the Plaintiffs and PACM signed a term sheet for the Intended Loan (“the Term Sheet”).  Under the Term Sheet, P2 was to be the Borrower, P1 was to be the Mortgagor, and P3 was to be the Guarantor (collectively termed the “Obligors”); PACM and/or its affiliates or subsidiaries was to be the Lender.

8.  The Term Sheet began as follows.

“The undersigned parties to this Term Sheet … intend that the provisions of Part B of this Term Sheet … will be binding on and enforceable against each Party. Except for the Binding Terms: (a) none of the provisions of this Term Sheet shall constitute an obligation binding on any Party and all such provisions are subject to market conditions, internal approvals and completion of financial, commercial and legal due diligence satisfactory to the Lender; and (b) there is no obligation on any Party until the execution and delivery of definitive loan documents … .

9.  Part A, entitled “Principal Transaction Terms”, provided in part as follows.

“…

Target date of On or before 16 November 2023

drawdown of

Tranche A Facility

…

Security Package The securities shall be in a form and substance satisfactory to the Lender. In particular, the Lender shall receive the following securities, inter-alia, the following:

1. 1st ranking registered mortgage over the title to the Property;

2. Debenture over the Borrower and Mortgagor…

3. A subordination deed in relation to the subordination of, inter alia, all shareholder’s loans and advances by the Borrower;

4. Share Charge of the Borrower and Mortgagor;

5. Personal Guarantee provided by the Guarantor;

6. Any other securities at the request of the Lender’s legal counsel(s).

…

Conditions Precedent Standard conditions precedent for transactions of this type, including but not limited to, inter alia, the following:

1. Legal, tax, business, and financial due diligence results…

2. Satisfactory Valuation report of the Property…

3. Legal opinions … in form and substance satisfactory to the Lender, including but not limited to the Lender’s ability to enforce on the Security Package…

4. The Lender has obtained all internal approvals and authorizations…

5. Execution of the Loan Documents…

6. Satisfactory background check of the Obligors;

7. Customary report on the title of the Property…

8. Satisfactory [sic] of the Property conditions…

9. Satisfactory purchase of all necessary insurance coverage…

10. Executed sale and purchase agreement in relation to 100% shareholding of the Mortgagor between the Borrower and Chit Sen Co Limited…

11. Completion of the Acquisition taking place simultaneously with Facility drawdown;

12. Finalisation of the repayment arrangements (including all relevant documentation) of the Existing Facility to BOC and all relevant release arrangements (including all relevant documentation) to the reasonable satisfaction of the Lender;

13. Evidence of the following actions pursuant to the requirements of s 284 of the Companies Ordinance…

14. Any other conditions at the request of the Lender’s legal counsel(s).

… ”

10.  Part B, the “Binding Terms”, provided in part as follows.

“Clear Market The Lender is to be granted an exclusivity period to conduct satisfactory due diligence commencing from the date of this Term Sheet and ending in the earlier of 1) 17 November 2023 (as may be extended by mutual written agreement… and 2) drawdown of the Facility…

During the Exclusivity period, the Borrower shall not and shall ensure that no other member, subsidiaries, and affiliates of the Borrower shall engage, raise, or attempt to raise finance, or commence in negotiation of terms in the international or domestic loan or capital markets or other financiers without the prior written consent of the Lender…

…

Break-up Fee If the Borrower fails to, is unable to, or elects not to execute the definitive documents contemplated in this Term Sheet and/or proceed with the transaction contemplated hereunder (including but not limited to failure to fulfill the Conditions Precedent) at any time for any reason after the execution of this Term Sheet, the Obligors shall reimburse the Lender for any and all amount of out-of-pocket expenses…, and in addition, the Obligors shall pay a Break Fee of 1% of the Total Facility Amount (being HK$6,800,000) to the Lender, unless the decision not to execute the definitive documents contemplated in this Term Sheet and/or proceed with the transaction contemplated hereunder is made by the Lender and notified to the Borrower in writing. The Parties acknowledge that: (1) the Break Fee, if triggered, represents a primary obligation to pay rather than a secondary obligation arising upon the breach of a primary obligation of performance and (2) the amount of Break Fee is reasonable and proportionate to the legitimate interests that the Lender sought to safeguard.

For the avoidance of doubt, the Lender reserves the right to pursue any part of or all Break-up Fee from [the Plaintiffs] within a period as long as permitted by law and such amount should be due and payable by [the Plaintiffs] (including the Borrower) immediately upon written demand by the Lender.

The payment obligations of the Obligors hereunder are joint and several. …

… ”

11.  There is no dispute that, if P2 is liable under the latter provision (“the Break Fee Clause”) to pay the Break Fee to PACM, P1 and P3 are jointly liable as well, given the terms of the Term Sheet and also the Deeds of Indemnity below.

B3.  The Deeds of Indemnity

12.  Each of P1 and P3 executed a deed of indemnity as Indemnifier in identical terms in favour of PACM as Indemnified Person (on 2nd and 1st November 2023 respectively) (“the Deeds of Indemnity”). Clause 3 of each of the Deeds of Indemnity provided as follows.

“3. UNDERTAKING TO PAY BREAK FEE

(a) The Indemnifier acknowledges that, once the Term Sheet is signed, the Indemnified Person … will, inter alia:

(i) devote significant time and resources towards the Transactions [defined to mean the transactions contemplated under the Term Sheet]; and

(ii) reserve an amount of HK$680,000,000 for the purpose of funding the Facility upon drawdown,

Accordingly, the Indemnified Person will be incurring, among other things, significant opportunity costs and costs of fund.

(b)  Under the Term Sheet, it is agreed that if the Borrower fails to, is unable to, or elects not to execute the Loan Documents and/or proceed with the Transactions … the Obligors shall pay [the Break Fee] to the Lender, unless the decision not to execute the Loan Documents and/or proceed with the Transactions is made by the Lender and notified to the Borrower in writing.

(c)  For the avoidance of doubt, it is agreed that if drawdown of the Facility does not take place by the end of November 2023, the Break Fee is considered triggered and becomes payable.

(d) The Indemnifier acknowledges that: (1) the Break Fee, if triggered, represents a primary obligation to pay rather than a secondary obligation arising upon the breach of a primary obligation of performance and (2) the amount of Break Fee is reasonable and proportionate to the legitimate interests that Indemnified Person sought to safeguard.

(e)  The Indemnifier hereby irrevocably and unconditionally undertakes to pay to the Indemnified Person the Break Fee within 5 Business Days after the written demand from the Indemnified Person to the Indemnifier notifying the Break Fee is triggered.”

B4.  Events after the signing of the Term Sheet

5th November 2023

13.  On 5th November 2023, PACM’s solicitors, Messrs Herbert Smith Freehills (“PACM’s solicitors”), emailed P2’s solicitors, Messrs Ma Tang & Co (“P2’s solicitors”), enclosing a draft Facility Agreement which proposed, inter alia, that Chit Sen executed a Deed of Subordination.

8th November 2023

14.  On 8th November 2023, P2’s solicitors emailed their proposed amendments to the Facility Agreement to PACM’s solicitors, making no objection to the Deed of Subordination.

9th November 2023

15.  On 9th November 2023, PACM’s solicitors emailed P2’s solicitors with, inter alia, a draft Deed of Subordination.

10th November 2023

16.  On 10th November 2023, P2’s solicitors indicated that they were taking instructions on the Deed of Subordination and other matters.

17.  PACM tried but was unable to arrange an all-parties’ call. PACM says that the Plaintiffs did not make themselves available; the Plaintiffs say that this was due to the short notice given.  PACM told P3 that delay of the call would affect project timing.  The Plaintiffs proposed a call on 13th November 2023.

18.  P2’s solicitors emailed PACM’s solicitors, stating that BOC would not be issuing a “payoff letter” and indicating that if it was necessary to provide confirmation of full repayment in an email form, they would try to ask for this.  PACM’s solicitors indicated that an email confirmation from BOC would be fine.

11th November 2023

19.  On 11th November 2023, PACM’s solicitors sent to P2’s solicitors a revised draft Facility Agreement.  One of the amendments was a condition subsequent in cl.4.4.2, requiring in general terms evidence from BOC, in form and substance satisfactory to the Lender, a confirmation that all amounts under the BOC Mortgage Loan had been repaid, rather than specifically requiring a payoff letter.

20.  The draft facility Agreement also provided for the Borrower’s solicitors to give an undertaking to provide the original deed of release or receipt of discharge in respect of the BOC Mortgage Loan, within a timeframe yet to be agreed.

13th November 2023

21.  On 13th November 2023, an all-parties’ call took place.

22.  PACM’s solicitors emailed P2’s solicitors attaching a revised draft Facility Agreement proposing a new transaction document at item 6.12 of Schedule 1 (conditions precedent), namely, a signed but undated release from BOC.

14th November 2023

23.  On 14th November 2023, P2’s solicitors emailed PACM’s solicitors stating that BOC was not agreeable to issuing an email confirmation regarding having been paid (under cl.4.4.2 of the Facility Agreement), and indicating that their respective clients were still negotiating over the Deed of Subordination.

24.  As set out in BOC’s solicitors’ letter of the same date to Messrs DLA Piper (“Chit Sen’s solicitors”) who were acting for Chit Sen in redeeming the BOC Mortgage Loan, BOC would not execute releases of the Security Documents (defined to include the BOC Mortgage) prior to receipt of documentary evidence showing that rates, Government Rent and management fees in respect of the Property had been fully paid for the entire duration of the Security Documents, or Messrs DLA Piper’s to settle any arrears on demand.

15th November 2023

25.  On 15th November 2023 at 5:29pm, PACM’s solicitors emailed P2’s solicitors with a revised draft Facility Agreement, maintaining cl.6.12 of Schedule 1 (requiring BOC to sign releases before making the Intended Loan).

26.  At 11:20pm, P2’s solicitors emailed PACM’s solicitors, saying that BOC would not sign the releases before it had been paid, and asking for the removal of the Deed of Subordination and related documents. P2’s solicitors further indicated that the BOC releases would be prepared by BOCs lawyers, sent to BOC for signing after repayment of the BOC Mortgage Loan, then sent to Chit Sen’s solicitors, then sent to P2’s solicitors for further handling, so that 21 days was sought for providing the releases.

16th November 2023

27.  16th November 2023 had been the parties’ target date for drawdown of the Intended Loan.

28.  At 4:26pm, P2’s solicitors emailed PACM’s solicitors with revised drafts of the BOC deeds of release.

29.  At 4:38pm, P2’s solicitors chased for further comments regarding the draft deeds of release.

30.  At 6:24pm, P2’s solicitors indicated that BOC sought to sign the releases after repayment of the BOC Mortgage Loan, with undertakings to be given for their provision.  PACM’s solicitors did not respond.

31.  The parties continued to take various actions towards closing the transaction.

32.  At 10:50pm, P2’s solicitors emailed PACM’s solicitors, asking for the arrangement for drawdown the next day.

33.  At 11:04pm, Mr Tok Li of PACM emailed P2’s solicitors saying that while they wanted to get the Facility Agreement finalised, there were several key elements that needed to be resolved first.  One of these was described as follows.

“It is also one of the CPs [conditions precedent] under the Term Sheet that the repayment arrangements of the Existing Facility to BOC and all relevant release arrangements are finalised to the satisfaction of the Lender. We can see that most of our lawyers’ proposals have been rejected by BOC – it seems to us there is a need to find an arrangement that works for both BOC and us, instead of just letting us know BOC’s position which is not very helpful. I hope you can appreciate that we need to ensure the security package is properly in place at the time before the loan proceeds is out.”

34.  The email continued:

“It seems to us there are some divergence that cannot be resolved by simply turning revised draft FA (it would simply be a repetition of our position that you have rejected). To efficiently and effectively address the issue, we may need to sit down with BOC, Vendors and you to sort out closing mechanics that is acceptable to all the relevant parties.”

Friday 17th November 2023

35.  There was no drawdown of the Intended Loan by noon, which was the time at which the BOC Mortgage Loan was due for repayment.

Tuesday 21st November 2023

36.  PACM’s representatives emailed P2’s solicitors with a draft mortgage for their review.

37.  PACM’s solicitors emailed P2’s solicitors with an update following the call with Chit Sen’s solicitors discussing the release documents.  PACM’s solicitors indicated that as the deal was structured as a shared deal rather than the pure sale of a property, it was market practice that releases of the existing security (signed but undated) were delivered to the Lender as conditions precedent and the releases would then be filed at the Companies Registry on the same day as drawdown or, in the case of the property, be dealt with by undertakings to manage the release and registrations; Chit Sen’s solicitors would be discussing this with Chit Sen and BOC’s counsel.  PACM’s solicitors went on:

“We have suggested that the easiest way to manage this is through a closed completion meeting where signed but undated documents are cited on a completion table and then the money is transferred (noting that [Chit Sen’s solicitors] also agreed in the call that this is the most ideal way of closing). Please do keep us posted if you hear anything further from [Chit Sen’s solicitors] and BOC’s counsel and how your client wishes to proceed in the meantime.”

38.  PACM’s solicitors also attached a draft conditions precedent checklist, said to be drafted on the basis of the last-circulated Finance Agreement and therefore subject to change.

Friday 24th November 2023

39.  At 6:50pm, P2’s solicitors sent an email to PACM’s solicitors (copied inter alia to Mr Tok Li of PACM) which read as follows.

“Our client is extremely surprised that you still have instructions to proceed with the transaction, as this is completely incompatible and contrary to your client’s inaction after Mr. Tok Li’s email dated 16th November 2023 (“your client’s email”), despite the imminence of our client’s circumstances.

According to the Term Sheet between our respective clients, the target date of drawdown was on or before 16th November 2023 and the exclusivity period has already been expired on 17th November 2023.  Despite having at all times been fully conversant that meeting such deadline is our client’s paramount and fundamental requirement in the transaction, your client has still at the very last moment refused to finalize the definitive documents with the various excuses in your client’s email, none of which are procedurally viable or within our client’s reasonable control.

Given the lapse of the target drawdown date and exclusivity period (and indeed all reasonable time) and our client’s full cooperation all along, your client was still dissatisfied with the due diligent result, and with your client’s inaction thereafter (not to mention any attempt to extend the exclusivity period), our client was given to understand and has no alternative but to accept that your client has treated the Term Sheet and the transaction as duly terminated and expired.

In this regard, kindly confirm with your client and cease all further actions in respect of the transaction accordingly.”

Monday 27th November 2023

40.  If drawdown was to be achieved by 30th November 2023, the deadline for P2 to serve a drawdown notice was 11:00 am on 27th November 2023.

41.  At 3:56pm on 27th November 2023, Mr Tok Li of PACM replied to P2’s solicitors’ email of 24th November 2023, saying that 16th November 2023 was the target drawdown date and not a long stop date or deadline; PACM and its lawyers had worked diligently whereas the Plaintiffs had been the “sluggish” ones; the exclusivity period simply restricted the borrower from seeking finance from third parties during the period and did not dictate the timing of drawdown at all; there had been key outstanding items which PACM could not simply have just abandoned and gone ahead with providing funding; on 16th November 2023 PACM had had a call with BOC and its lawyers, and on 17th November PACM had had a call with Chit Sen’s lawyers; the latter had indicated that BOC might be amenable to mutually satisfactory closing arrangements, and PACM’s solicitors had proposed a closing mechanism which Chit Sen’s lawyers had said would be discussed with Chit Sen and BOC’s counsel; PACM had expected the parties to the existing (BOC Mortgage Loan) to engage in discussions in the week of 20th November as to whether the proposal worked - if there were no such discussions or agreement could not be reached with BOC, that was not inaction on the part of PACM, which was not a party to the BOC financing arrangement.

42.  The email went on to point out that P2 had insisted that Chit Sen would not sign the subordination deed, but no solution a proposal had been proposed in its place.

43.  The email also noted that PACM had never treated the Term Sheet and the transactions thereunder being terminated or expired.

B5.  PACM’s claim for the Break Fee

44.  On 7th December 2023, PACM issued an invoice to the Plaintiffs for the Break Fee.

45.  On 12th December 2023, the Plaintiffs issued the present proceedings, seeking a declaration that the Term Sheet had expired or had been terminated by PACM, and a declaration that PACM was not entitled to charge the Break Fee.

46.  PACM counterclaimed for the payment of the Break Fee.

C.  THE PLAINTIFFS’ DEFENCES

47.  The Plaintiffs have advanced a number of defences to PACM’s counterclaim.^[1]

Penalty

47.1  First, the Plaintiffs say that the Break Fee Clause is a penalty clause, or at least involves a point of law of complexity and uncertainty that is controversial and unsettled.

The conditions imposed by PACM

47.2  Second, the Plaintiffs raise a number of points in relation to the Deed of Subordination and the signed release from BOC which PACM asked for.  They say that:

47.2.1  the failure to complete the transaction was “purely caused” by PACM in insisting on the provision of the Deed of Subordination and a signed release from BOC, which it knew that the Plaintiff could not have fulfilled as they required third-party cooperation.  It is said that PACM should not be allowed to reap the benefit of its own wrongdoings;

47.2.2  the Break Fee Clause was not triggered, as the two conditions had not been contemplated by the Plaintiffs;

47.2.3  the signed release was belatedly imposed by PACM to sabotage the deal;

47.2.4  the Deed of Subordination was a new requirement and that PACM’s dispute over this point is a matter for trial; and

47.2.5  PACM’s real reason and motive for not proceeding with the Intended Loan should be investigated at trial.

Uncertainty

47.3  Third, the Plaintiffs say that the clauses in the Term Sheet which provide for the provision of satisfactory security and the repayment arrangements are void or unenforceable for uncertainty.

C1.  Penalty

48.  In Cavendish v Makdessi [2016] AC 1172 at [12] to [13], Lord Neuberger PSC and Lord Sumption JSC addressed the question of the circumstances in which the penalty rule was engaged.  They pointed out since a contractual provision could not be a penalty unless it provided an exorbitant alternative to common law damages, such a provision could not be a penalty unless it operated on a breach of contract.  There was a fundamental difference between a jurisdiction to review the fairness of a contractual obligation, and a jurisdiction to regulate the remedy for each breach.  The courts did not review the fairness of men’s bargains either at law or in equity.  The penalty rule regulated only the remedies available for breach of a party’s primary obligation is, and not the primary obligations themselves.

49.  This was applied in Law Ting Pong Secondary School v Chen Wai Wah [2021] 3 HKLRD 185.  At [71] and [74], Chu JA, as she then was, observed that the doctrine of penalty was not applicable to a contractual provision which stipulated an obligation to pay a certain amount of money by way of a primary obligation.  Rather, the provision constituted a means of termination of the parties’ contract.

50.  Counsel for the Plaintiffs, Mrs Dora Chan (appearing with Mr Julian Chan) accepted that this is the applicable principle relating to penalty clauses which I am bound to follow.

51.  It therefore does not advance her case to say that the High Court of Australia has held that a clause can be a penalty even if it is expressed to operate in the absence of a breach of contract.

52.  In the present case, the obligation to pay the Break Fee is expressed to be a primary obligation and not a secondary obligation arising on the breach of contract.  It was the agreed cost of bringing the parties’ dealings to an end, if the Plaintiffs so chose or if it transpired that the Plaintiffs were unable to proceed further.

53.  Mrs Chan submits that one should look at the substance rather than the form.  She says that the Break Fee Clause is a penalty clause because it imposes a secondary obligation to pay the Break Fee upon the Plaintiffs’ failure to perform the “primary obligation” of entering into an agreement for the Intended Loan.  However, in the present case, I do not agree that it is reasonably arguable that the Break Fee Clause is a penalty clause in substance.

53.1  There was no obligation on the parties to enter into an agreement for the making of the Intended Loan.  It was made very clear that there was no obligation on either party regarding the loan until definitive loan documents were executed.  Thus PACM could walk away if (for example) it was not satisfied with the security being offered; and beyond the exclusivity period, P2 could approach other financiers.  If P2 approached other financiers within the exclusivity period, that would have been a breach of contract; if P2 did so outside the exclusivity period, that would not have been a breach of contract, but if P2 eventually chose to conclude a loan with another lender, then it would have to pay the agreed price (the Break Fee) for doing so.

53.2  Mrs Chan submitted that P2 was in fact contractually obligated to enter into a loan agreement since if it failed to do so, it would be penalised with the Break Fee.  It seems to me that the argument fails to distinguish between a primary and a secondary obligation.  As a matter of analysis, the Break Fee Clause imposed the obligation to pay the Break Fee in the event that P2 chose not to proceed with the transaction (as it was entitled to do), or where the conditions precedent for the transaction were not met (and P2 had no obligation to ensure that they would be met – indeed the precise terms were still under negotiation).  The obligation to pay the Break Fee was not imposed for any breach of contract.  P2 had committed itself to paying the Break Fee in the event that the Intended Loan did not materialise (save where this was PACM’s decision), but it had not committed itself to going through with the Intended Loan.

C2.  The conditions imposed by PACM

54.  The Plaintiffs make a number of factual allegations in relation to the conditions imposed by PACM.  As counsel for PACM, Mr Christopher Chain SC (leading Ms Jacquelyn Ng) submitted, for the most part, they seem to be raised without any particular legal consequence being identified.  In any event, I consider that the factual allegations are not reasonably arguable, and I first deal with this aspect.

55.  The Plaintiffs complain that the requirement of a signed release from BOC was a wholly unreasonable condition imposed by PACM belatedly to sabotage the transaction.  Mrs Chan submitted that BOC would not have provided such a release as it was “ludicrous” and “commercially suicidal”.  However:

55.1  the provision of a signed but undated release was just one of the proposals put forward.  PACM had initially suggested a “payoff” letter, and when that was rejected by BOC, P2 had suggested email confirmation of repayment, which was then also rejected by BOC;

55.2  when BOC also rejected the provision of a signed but undated release in advance of repayment, PACM’s solicitors indicated on 16th November 2023 that there was a need to find an arrangement which was mutually agreeable.  According to Mr Tok Li’s email of 27th November 2023 and the 2nd Affirmation of Ng Francis Chi Yin (“Ng 2nd”), PACM took matters into its own hands by arranging calls with BOC and its lawyers and Chit Sen’s lawyers on 16th and 17th November 2023, and had been making progress with agreeing on a closed completion meeting which would have been agreeable to both PACM and BOC, but then the Plaintiffs aborted the transaction with P2’s solicitors’ email of 24th November 2023. Although the Plaintiffs have said that it was a self-serving, ex post facto claim from PACM that promising discussions were under way with BOC regarding the completion mechanism, no evidence has been adduced to contradict it;

55.3  in other words, it is not reasonably arguable on the facts that PACM belatedly insisted on the provision of a signed release and that this scuppered the transaction.  The uncontradicted evidence is that PACM was not rigidly insisting on this particular mode of being satisfied about repayment of the BOC Mortgage Loan, that it had been working with BOC to find a mutually acceptable alternative, and that good progress was being made in this regard.

56.  Mrs Chan placed much emphasis on the fact that the draft Facility Agreement of 13th November 2023 contained a requirement for the provision of a signed release from BOC.  She said that “practically put an end to the transaction” and asked “What was the agenda behind the imposition of this new condition?”; it was said that this was a matter for discovery and trial.^[2]  However, as the chronology earlier set out shows, the context is that there were various proposals put forward to find one that was mutually acceptable to BOC and PACM, and in any event the draft had been superseded by the discussions of 16th and 17th November 2023.  I do not see how investigation at trial of the earlier proposal of 13th November 2023 could assist the Plaintiffs.

57.  Nor is it reasonably arguable that the provision of the signed release, or some alternative method of showing that the BOC Mortgage Loan had been repaid, was something outside the Plaintiffs’ contemplation. Item 12 of the Conditions Precedent in the Term Sheet had provided that there would be a condition precedent providing for the finalisation of the repayment arrangements of the BOC Mortgage Loan, and release arrangements including documentation, to PACM’s reasonable satisfaction.

58.  As for the Deed of Subordination, the Plaintiffs complained, for the first time in their Reply of 21st March 2024, that this was a “new request”.  Mrs Chan argued that this was incorrect, pointing to P2’s solicitors’ email of 15th November 2023.  But that email had simply set out P2’s request to remove the requirement for a Deed of Subordination; it was not suggested at the time that the request was a “new” one or that it had not been contemplated by the parties.

59.  It is not reasonably arguable, on the evidence, that it was a new requirement not contemplated by the parties.  The terms for the “Security Package” in the Term Sheet had referred to the need to provide “a subordination deed in relation to the subordination of, inter alia, all shareholder’s loans and advances by the Borrower [P2]”.  As the Affirmation of Ng Francis Chi Yin (“Ng 1st”) explained, the requirement was partly directed at Chit Sen, which according to P2 would become P2’s creditor upon the completion of the sale and purchase of the entire shareholding in P1 to P2, as part of the consideration for the sale and purchase was to be deferred in accordance with the proposed terms of sale.^[3] In opposition, the Affirmation of Wong Kai Cheong George (for the Plaintiffs) (“Wong”) argued that the terms of the “Security Package” in the Term Sheet did not require a subordination deed from Chit Sen as Chit Sen was not a shareholder of P2.  However, this ignores the words “inter alia” in the terms for the Security Package.  More importantly, Wong did not deny the explanation in Ng 1st as to why the requirement of a subordination deed was partly directed at Chit Sen.  As Ng 2nd further explained, the Subordination Deed from Chit Sen was required as PACM would be repaying the BOC Mortgage Loan and replacing BOC as lender; the BOC Mortgage Loan had ranked ahead of other debts and liabilities owed by the borrower thereunder and PACM had essentially sought such priority.

60.  That the requirement was not new or outside the parties’ contemplation is clear from the contemporaneous correspondence.

60.1  The first draft Facility Agreement provided to P2’s solicitors on 5th November 2023 defined “Deed of Subordination” to mean the deed of subordination to be entered into between PACM, P2 and the Subordinated Creditor; “Subordinated Creditor” to mean Chit Sen; “Subordinated Debt” to mean any loan or credit provided to P2 by the Subordinated Creditor which was subordinated in accordance with the Deed of Subordination; and contained a condition precedent providing for the Deed of Subordination as a transaction document to be provided to PACM. 

60.2  P2’s solicitors’ comments of 8th November 2023 on the draft did not make any complaint about this requirement.  On the contrary, in relation to cl.18.20 which stated that no Obligor had incurred any Financial Indebtedness of more than $1m and set out exceptions including the Subordinated Debt, P2’s solicitors they asked whether the Subordinated Debt included the balance of the purchase price.  In relation to cl.23.5, P2’s solicitors commented that “Chit Sen’s obligations [are] limited to agreeing to subordinate its debt!”

60.3  Subsequent drafts of the Facility Agreement continued to require the Deed of Subordination as a condition precedent to PACM making the Intended Loan available.

60.4  Furthermore, as mentioned, there was never any suggestion in the contemporaneous correspondence that the requirement was new or outside the parties’ contemplation.  Even when P2’s solicitors asked for the removal of the Deed of Subordination on 15th November 2023, it was not suggested that this was because it was new or not within the parties’ contemplation.

61.  Mrs Chan argued that the position of Chit Sen in 2019 (as owner of P1, the then borrower) was different from that of Chit Sen in 2023 (as seller of the shareholding in P1), so that Chit Sen would not have been interested in signing any deed of subordination.  Whatever Chit Sen’s inclinations may have been, however, do not shed light on what PACM wanted by way of security for granting the Intended Loan. 

62.  It therefore does not seem to me to be reasonably arguable that the Deed of Subordination was a new requirement imposed by PACM, that the Deed of Subordination and the signed release from BOC were outside the contemplation of the Plaintiffs, or that they were requirements deliberately imposed by PACM in order^[4] to make it impossible for the transaction to proceed.

63.  It also does not seem to me to be reasonably arguable that the failure to complete the transaction was caused by PACM in insisting on the two conditions.  The undisputed evidence is that PACM was seeking to work towards overcoming the remaining issues standing in the way of completing the transaction, but P2’s solicitors then sent their email of 24th November 2023 alleging inaction on the part of PACM, lapse of the drawdown date of 16th November 2023, and lapse of the exclusivity period, and requesting the cessation of further actions in relation to the transaction. However, whilst 16th November 2023 was the target drawdown date, it was not a deadline, which P2’s solicitors must have accepted since they were continuing to negotiate at the time and there would still have been the need to serve a three-day notice in advance of drawdown.  The exclusivity period was merely the period in which P2 was restricted from seeking finance from others, so that its lapse did not affect the completion of the transaction.  It is not reasonably arguable that the failure to complete the transaction was “purely caused” by PACM.

64.  As earlier mentioned, for the most part, the factual allegations raised by the Plaintiffs were not said to be accompanied by any particular legal consequence.  To the extent that legal consequences were identified, those arguments can be summarised as follows.

64.1  It was said that the failure of the transaction was “purely caused” by PACM in insisting on the two conditions which it knew could not be fulfilled, and PACM should not be allowed to reap the benefit of its own wrongdoing.

64.2  It was said that that the Break Fee Clause was not triggered as the two conditions imposed by PACM had not been contemplated by the Plaintiffs.

65.  In relation to the first argument, it appears to be suggested that there should be an implied term by reason of business efficacy that the parties should use their best endeavours to complete the transaction^[5] or that there should be an implied term that a party would not deliberately prevent the occurrence of a condition precedent.^[6]  They hint at an application of the prevention principle in Kensland Realty Ltd v Whale View Investment Ltd & another (2001) 4 HKCFAR 381.  Neither was developed in oral submissions.

66.  The first suggested implied term is contrary to the express (albeit non-binding) provision in the Term Sheet that there is no obligation on any party until the execution and delivery of the definitive loan documents, and the express provision in the Break Fee Clause entitling either party not to proceed with the transaction.  The parties were not obliged to proceed with the transaction.

67.  As regards the second suggested implied term, assuming that it is arguable that such a term could be implied as part of the binding terms of the Term Sheet, it is nevertheless not reasonably arguable that there was any breach of such a term, as analysed above.

68.  In relation to the second argument, again assuming that it is arguable that there could be implied into the binding terms of the Term Sheet a term that (for example) the conditions precedent imposed should not be ones wholly outside the parties’ contemplation, such as something completely unrelated to the subject matter of the Intended Loan, it is again nevertheless not reasonably arguable that there was any breach of such a term.

C3.  Uncertainty

69.  The Plaintiffs say that the description of the Security Package in the Term Sheet (“The securities shall be in a form and substance satisfactory to the Lender.”) and item 12 of the Conditions Precedent (“Finalisation of the repayment arrangements … and all relevant release arrangements … to the reasonable satisfaction of the Lender”) were merely vague and general phrases, and “if” the terms were binding, they would be void for uncertainty.

70.  The short answer is that the two phrases complained of did not, in fact, form part of the binding terms of the Term Sheet.  They have no contractual effect and therefore cannot be void for uncertainty.

D.  DISPOSITION

71.  I therefore allow PACM’s appeal and order that the Master’s order of 3rd June 2024 be set aside, that judgment be entered against the Plaintiffs on the counterclaim pursuant to paragraph 1 of the Summons, and that the Plaintiffs’ claim against PACM be struck out pursuant to paragraph 2 of the Summons.

72.  I further order that the Plaintiffs pay the costs of and occasioned by the Summons and PACM’s appeal, to be assessed summarily on the papers.  PACM has lodged a statement of costs.  A breakdown of item E3 should be provided to the Plaintiffs and to the court within 3 days. The Plaintiffs are to lodge and serve a list of objections within 7 days thereafter, in bullet point form limited to three pages, and PACM is to lodge and serve a reply within 4 days thereafter, in bullet point form limited to three pages.