WAN MING SUN v. WONG HOI KWAN AND ANOTHER

HCMP 1408/2023

[2025] HKCFI 394

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1408 OF 2023

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JUDGMENT

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Introduction

1.  The dispute of the parties in these proceedings arose from an aborted sale of the entire issued shares of Marco Gainer Limited (“MG”), a local incorporated company.

2.  By an originating summons dated 29 August 2023 (“the OS”), P asks for the following reliefs:

(1)  A declaration that Ds have repudiated the Provisional Agreement for Sale and Purchase dated 11.3.2023 for sale and purchase of the entire issued share capital of MG (being a company incorporated in HK) with Company Number 0961768 (“PASP”) made between Ds as vendor and P as purchaser;

(2)  A declaration that P has lawfully accepted Ds’ repudiation of PASP and is entitled to the return of the deposit in the total sum of HK$7,777,600 which was held by Messrs. Jal N. Karbhari & Co solicitors (“JNK”) as stakeholder;

(3)  An order for the return of the deposit to P in the total sum of HK$7,777,600 (“the Paid Deposits”) which was held by JNK as stakeholder;

(4)  Liquidated damages in the amount of HK$7,777,600 (“the Liquidated Damages”);

(5)  A declaration that P is entitled to a lien on entire issued share capital of MG for the Paid Deposits, the Liquidated Damages, interest on the Paid Deposits and the Liquidated Damages, costs incurred by P in his due diligence and/or title investigations under the PASP, and the costs of these proceedings; and

(6)  Costs.

3.  P claims that Ds have repudiated the PASP and he has validly accepted their repudiation.

4.  Ds say that P has affirmed the PASP despite their breach, if any and it is P who has repudiated the PASP by non-payment of purchase monies on or before 10 May 2023. Ds further contend that in any event the provision in the PASP relating to the Liquidated Damages is a penalty clause in nature and hence is not enforceable.

Undisputed Background facts

5.  There is no significant factual disputes raised by the parties. The following narrative of the background facts leading to the commencement of these proceedings is largely taken from the skeleton submission of Ms Yang, for Ds and those matters are largely supported by contemporaneous documents.

6.  D1 and D2 were and are the directors and shareholders of MG. MG is a property holding company.

7.  At the material time, MG is the sole registered owner of the following properties (collectively “the Properties”) known as:

(1)  Flat A on the 12^th Floor, Shiu Fai Terrace Garden, Nos. 3 & 4 Shiu Fai Terrace, Hong Kong;

(2)  Roof A, Shiu Fai Terrace Garden, Nos. 3 & 4 Shiu Fai Terrace, Hong Kong;

(3)  Car Parking Space No. 8 on the Ground Floor, Shiu Fai Terrace Garden, Nos. 3 & 4 Shiu Fai Terrace, Hong Kong; and

(4)  Garden A on the Ground Floor, Shiu Fai Terrace Garden, Nos. 3 & 4 Shiu Fai Terrace, Hong Kong.

8.  Through the arrangement of an estate agent, P viewed the Properties twice. On 11 March 2023, after the second viewing, P and Ds entered into the PASP with Ds as vendor and P as purchaser in respect of the entire issued share capital of MG.

9.  The PASP contained the following terms pertinent to the present dispute:

(1)  Clause 1:

On and subject to the terms conditions contained in this Agreement, the Vendor agrees to sell and the Purchaser agrees to purchase the Sale Share with all the benefit thereof together with all rights attached thereto free from all encumbrances and third party rights.

(2)  Clause 2: The aggregate purchase price for the Sale Share shall be HK$38,888,000.00 (“the Purchase Price”) which shall be paid by the Purchaser to the Vendor in the manner as follows:

(a)  The Purchaser shall pay an initial deposit of HK$3,888,800.00 upon signing of this Agreement;

(b)  The Purchaser shall pay a further deposit of HK$3,888,800 on or before 25 March 2023;

(c)  The Purchaser shall pay a further deposit of HK$1,944,400.00 on or before 10 May 2023;

(d)  Completion of the sale and purchase of the Sale Share shall take place at the office of the Vendor’s Solicitors on 10 July 2023 (“the Completion Date”) at or before 5:00 p.m.

The Purchaser shall pay the balance of purchase price of HK$29,166,000.00 (“Balance of Purchase Price”) on completion. All deposits payable by the Purchaser shall be paid to the Vendor’s solicitor as stakeholder who shall not release the same to the Vendor unless it is proved that the Balance of Purchase Price is sufficient to repay and discharge the existing mortgage and charge of the Property.

(3)  Clause 4: Completion is conditional upon the following:

(a)  The Purchaser having completed his due diligence investigation on the business, financial, legal and all other aspects of the Company and satisfied with the results thereof;

(b)  The Vendor, shall at the Vendor’s own cost, procure the Company to prove and give a good title to the Property in accordance with Sections 13 and 13A of the Conveyancing and Property Ordinance (Cap. 219 of the Laws of Hong Kong); and

(c)  All the representations, undertakings and warranties given by the Vendor under the Agreement and the Formal Agreement are and shall remain true, accurate, correct and complete and not misleading in all respects up to the Completion.

If any of the foregoing conditions is not fulfilled (or waived by the Purchaser) on or before the Completion Date, the Purchaser shall be entitled to cancel the transaction under this Agreement whereupon the Vendor shall return all the deposit paid to the Purchaser forthwith.

(4)  Clause 5:

To facilitate the carrying out of the due diligence investigation by the Purchaser, the Vendor hereby undertakes to deliver to the Purchaser or the Purchaser’s solicitors all documents relating to the Company within 14 days from the date of this Agreement. The Purchaser shall carry out the due diligence investigation and confirm in writing to the Vendor or the Vendor’s solicitors whether he is satisfied with the results of such due diligence investigation within 14 days after the date of delivery of all documents by the Vendor or the date of delivery of such further documents reasonably requested by the Purchaser. If it is discovered during the due diligence investigation that there is any problem, the Vendor shall remedy the same as soon as possible before the Completion Date.

(5)  Clause 16(b):

Should the Vendor after receiving the deposits paid hereunder fail to complete the sale in accordance with the terms of this Agreement, the Vendor shall immediately refund the deposits paid to the Purchaser and compensate the Purchaser with a sum equivalent to the amount of the deposits as liquidated damages and the Purchaser shall not take any further action to claim for damages or enforce specific performance.

(6)  Clause 20:

Unless otherwise specified herein, time shall in every respect be of the essence of this Agreement.

10.  The parties agreed that a formal sale and purchase agreement was not necessary and completion should be taken place in accordance with the terms of the PASP.

11.  In this transaction, P was represented by Messrs. Marie Tsang, Dustin Chan & Co. (“MTDC”) and Ds were represented by JNK.

12.  By a letter from MTDC to JNK dated 31 March 2023 (“the 31/3/23 Letter”), MTDC requested Ds to provide documents relating to MG for the purpose of due diligence exercise pursuant to Clause 5 of PASP. Such documents included all the title deeds and documents of the Properties, all relevant documents and share certificates to prove Ds’ ownership of the subject shares, all the audited accounts and accounting documents and statutory books of MG, and all other documents and records of MG.

13.  Under the cover of a reply letter from JNK to MTDC dated 3 April 2023, Ds only provided to P the title documents of the Properties and no documents relating to MG was given.

14.  By a letter dated 12 April 2023, MTDC raised requisitions on the title documents.

15.  By another letter dated 26 April 2023 (“the 26/4/23 Letter”), MTDC made the request again for the documents relating to MG. Ds were urged to provide such documents without further delay.

16.  Ds did not comply with the request and failed to provide the documents of MG. By a letter dated 8 May 2023 (“the 8/5/23 Letter”), MTDC indicated to JNK the acceptance of P of Ds’ repudiation of the PASP by their repudiatory breach of Clauses 5 and 20 of the PASP. MTDC further asked for the return of the deposits paid in the aggregate amount of HK$7,777,600.00 forthwith.

17.  By a letter of the same date, JNK denied any breach on the part of Ds and asked P to pay the further deposit of HK$1,944,400 on or before 10 May 2023 pursuant to the PASP.

18.  There were further correspondences exchanged between MTDC and JNK on 8 and 9 May 2023 and each of them insisted on its own position.

19.  Eventually, by a letter dated 11 May 2023, JNK informed MTDC that Ds exercised their rights to terminate the PASP and to forfeit the Paid Deposits on account of P’s breach of the PASP by his refusal to pay the further deposit on or before 10 May 2023.

Issues

20.  The core issue is whether Ds or P repudiated the PASP.

21.  Mr Liu, for P, submits that by Ds’ breach of Clauses 5 and 20, which are the conditions, and not warranties, of the PASP, D repudiated the PASP. P accepted the repudiation by the 8/5/23 Letter.

22.  Ms Yang confirms that the primary case of Ds is that Clause 5 of the PASP is not a condition and Ds’ non-compliance of the same would not entitle P to terminate the PASP.

23.  Ms Yang further submits that P waived the requirement of “time is of the essence” under Clause 20 and the time for delivery of documents relating to Clause 5 ceased to be of the essence. She submits that the obligation of providing documents was required to be performed only within a reasonable time after their receipt of the 26/4/23 Letter in which P last demanded the documents of MG thereby affirming the PASP.

24.  Ms Yang submits that having affirmed the PASP, P was bound to perform the PASP. P failed to do so by refusing to pay the further deposit. Thus, P repudiated the PASP.

25.  Lastly, Ms Yang submits that Clause 16(b) is a penalty clause and thus not enforceable.

Discussion

26.  Though the subject matters of the intended sale are essentially the Properties, they were to be sold to P by the sale of the entire issued share capital of MG. To acquire a company, due diligence is a must. As a purchaser, P should have a thorough insight of the internal affairs and conditions of MG though apparently it merely held the Properties for Ds. For example, P had to find out whether MG had any outstanding liabilities.

27.  Clause 4 of the PASP made it clear that P was only required to complete the sale after completion of due diligence investigation on MG. Clause 5 stipulated the essential obligation of Ds to assist P in the due diligence exercise by the production of the documents of MG. No due diligence investigation could be carried out when the company documents were unavailable.

28.  Ms Yang submits that there is no mention of “condition” in Clause 5. This cannot be an exclusive indicator of its true nature, however.

29.  A term of the contract will be held to be a condition if the nature of the contract or the subject matter or the circumstances of the case lead to the conclusion that the parties must, by necessary implication, have intended that the innocent party would be discharged from further performance of its obligations in the event that the term was not fully and precisely complied with: see Chitty on Contracts (35^th ed.) Vol.1 §28-017.

30.  Without the documents relating to MG to be given pursuant to Clause 5, P could not carry out the due diligence investigation under Clause 4(b) and he was not obliged to complete the transaction. When the completion was expressly conditional upon the satisfaction of the results of the due diligence investigation undertaken by P, Clause 5 must be a condition.

31.  The wording of Clause 20 is intolerably clear. The performance of the obligation of Ds under Clause 5 to deliver documents of MG to P must be done by the deadline of 25 March 2023, 14 days after the date of the PASP. Time must be of the essence in respect of this obligation.

32.  Ms Yang argues that Ds have provided P with the Memorandum and Articles of Association. She submits that P could have carry out due diligence investigation with public sources, i.e. information from the Companies Registry. With respect, this submission is devoid of merit and shows a lack of understanding of the due diligence process.

33.  I do not think Ds can rely on the doctrine of waiver and affirmation on the evidence.

34.  Ds did not perform their obligation under Clause 5 by 25 March 2023 and it was a repudiatory breach. Then P had two options. He could either affirm the PASP or discharge the PASP and there is no halfway house: Fercometal SARL v Mediterranean Shipping Co SA, The Simona [1989] AC 788 per Lord Ackner at p.805D-F, applied by Ma JA (as he then was) in Chao Keh Lung v Don Xia [2004] 2 HKLRD 11.

35.  The mere fact that the innocent party has called on the party in breach to change his mind, accept his obligations and perform the contract will not generally, of itself, amount to an affirmation: Chitty on Contracts §28-056.

36.  In Castle Global Limited v Ip Tai Hoi Paul [2021] HKCA 1540 at §19, Au JA also accepted that the innocent is not bound to accept a repudiation once a breach is committed by the other side. He is entitled to consider his position and keep his options open. Hence, the fact that the innocent party complains about the breach of the defaulting party and urges the rectification of such breach, without more, generally would not be regarded as conduct amounting to an election to affirm.

37.  An act relied on as an affirmation needs to sufficiently unequivocal to enable the inference to be drawn that the innocent party intends to go on with the contract regardless of the breach, or that he will not exercise his right to treat the contract as repudiated: Castle Global Limited v Ip Tai Hoi Paul [2020] HKCFI 1106 per Recorder Yvonne Cheng SC (as she then was) at §35.

38.  In the present case, after the repudiatory breach committed by Ds, there was never any unequivocal act on the part of P to lead Ds to believe that he intended to complete the transaction despite their failure or refusal to provide him with the documents of MG. Such documents were indispensable to his due diligence exercise and the completion was agreed to be dependent on whether he was satisfied with the result of his due diligence exercise.

39.  Indeed by the 31/3/23 Letter and the 26/4/23 Letter, P asked for Ds’ provision of such documents of MG. In my judgment, P neither waived such a breach of Clause 5 nor affirmed the PASP notwithstanding such a breach.

40.  Ds had not ever indicated that they would provide the documents. The repudiatory breach was continuing and amounted to an open offer to terminate. P was entitled to accept the repudiation to terminate the PASP by the 8/5/23 Letter.

41.  In the premises, I come to the conclusion that the defence of waiver and affirmation must fail and the PASP was terminated because of the repudiation on the part of Ds.

42.  Then I turn to the enforceability of Clause 16(b) of PASP. Mr Liu helpfully cites to me Madam Justice Queeny Au-Yeung in Dragon Access Holdings Limited v Lo Chu Hung [2020] HKCFI 2895. There, the judge had to determine the enforceability of an almost-identical clause in a strikingly similar transaction in which the purchaser agreed to purchase the entire issued share capital of a company owned by the vendor. The target company was the registered owner of a landed property.

43.  The judge at §95 pointed out that the burden is on the defendant to establish that a clause is a penalty clause referring to Brio Electronic Commerce Ltd v Tradelink Electronic Commerce Ltd [2016] 2 HKLRD 1449, per Barma JA at §14.

44.  The judge at §97 continued to state the test adopted in England for a penalty is “whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract”: see Cavendish Square Holding BV v Makdessi [2015] UKSC 67, [2016] AC 1172, Lord Hodge JSC at §255. This test was adopted by the Court of Appeal in Bank of China (Hong Kong) Ltd v Eddy Technology Co Ltd [2019] 2 HKLRD 493, Lam VP (as he then was) at §38.

45.  The judge took into account that (1) the defendant adduced no evidence to show the compensation payable under the provision was a penalty in nature, (2) the plaintiff had a legitimate interest in the completion of the transaction, (3) the consideration for the sale and purchase, (4) the uncommon 6-month period for completion, the 20% deposit (which was double the usual deposit amount), (5) the need for the plaintiff to do due diligence investigation of the company and conclude that the compensation was neither exorbitant nor unconscionable in nature and no judicial intervention was justified. Hence, the compensation provision was found to be enforceable.

46.  To start with, in the sole affirmation of D2, there is no evidence to show that the compensation payable under Clause 16(b) was a penalty in nature. On this ground alone, I should reject the contention of Ds.

47.  In any event, there is nothing causing me any concern about the enforceability of Clause 16(b). I can find very similar considerations in the present case.

48.  I am aware that the consideration in the PASP is substantially lesser and the lead period for completion was four months. The Paid Deposits amounted to 20% of the Purchase Price. P had to do due diligence investigation too.

49.  Mr Liu highlights the fact that similar provisions were held to be enforceable by other courts: Wong Lai-fan v Lee Ha [1992] 1 HKLR 125 and Castle Global Limited, supra, per Au JA.

50.  Having considered all the circumstances, I am not convinced by the evidence of D2 that Clause 16(b) is a penalty clause. Ds should pay P the Liquidated Damages pursuant to this provision.

51.  By reason of the conclusions I have come to, P should additionally be entitled to a lien arising by operation of law from the relationship of the parties: Shih Ching Yang v Tsoi On Pong [2011] 3 HKLRD 271 per To J at §20.

52.  In the affirmation of D2, it was alleged that P used entrapment to wriggle out of the PASP when the market was falling. Ms Yang very sensibly did not make any submissions on this allegation, which is totally irrelevant in P’s contractual claim.

Conclusion and order

53.  For the reasons given, I conclude that Ds repudiated the PASP by their refusal or failure to provide P with the documents relating to MG under Clause 5 of the PASP. The repudiation was validly accepted by P by the 8/5/23 Letter.

54.  I also conclude that Clause 16(b) of the PASP is enforceable and P is entitled to the Liquidated Damages pursuant thereto.

55.  In the premises, I enter judgment in favour of P and grant him all the reliefs claimed in the OS.

56.  Costs should follow the event. I make an order nisi that Ds should pay P costs of and occasioned by the OS including any costs reserved, to be taxed if not agreed.

57.  Lastly, I thank Mr Liu and Ms Yang for their able submissions.