HCA014192/1998
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 14192 OF 1998
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BETWEEN
KEEPGRAND LIMITED
Plaintiff
AND
RICH MILLION INTERNATIONAL LIMITED
1st Defendant
HO HIT PO
2nd Defendant
LEE CHOY SANG
3rd Defendant
LEE PAK WING PATRICK
4th Defendant
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Coram: The Hon. Mr. Justice Jackson in Chambers
Date of Hearing: 10 June 1999
Date of Judgment: 10 June 1999
Date of Handing Down Reasons for Judgment: 8 July 1999
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JUDGMENT
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Introduction
1. By Writ of Summons issued on the 22nd of August 1998 the Plaintiff claims inter alia, damages and an indemnity against the Defendants.
2. The Statement of Claim recites that the 2nd, 3rd and 4th Defendants were beneficial owners of not less than 78% of the entire share capital of the 1st Defendant.
3. The Statement of Claim also recites as follows:-
that as at the 13th June 1997 the Plaintiff held and beneficially owned 120 fully paid up shares in Wing Wah (China) Tennis Court and Track Builders Company Limited ("Wing Wah") and that the 1st Defendant held and beneficially owned 1,080 of such shares. The authorized share capital of Wing Wah is $100,000.00 divided into 10,000 ordinary shares of $10.00 each and only the 1,200 shares held by the Plaintiff and the 1st Defendant had issued
that Wing Wah and a Chinese party were at all material times joint venture partners and share holders in Shanghai Xu Hui International Tennis Club Company Limited ("ITC")
that by an agreement dated 13th June 1997 ("the Share Sale Agreement") the Plaintiff and the Defendants agreed, inter alia, that the 1st Defendant would sell and the Plaintiff would purchase the 1,080 shares in. Wing Wah held by the 1st Defendant for $100.00 and the Plaintiff would transfer its 120 shares in Wing Wah to the 2nd Defendant
that in the Share Sale Agreement the Defendants made certain representations and entered into certain warranties and undertakings with the Plaintiff concerning the financial position of Wing Wah and ITC
that subsequent to the Share Sale Agreement, and in accordance with one of its provisions, the Defendants confirmed by letter dated 18th June 1997 that they were not aware of any matter or thing which was in breach of or inconsistent with any of the representations, warranties and undertakings
that in reliance upon such representations warranties and undertakings the Plaintiff advanced sums totalling US$3,043,500.00 for injection into ITC
and that contrary to the Defendants' representations warranties and undertakings the Defendants had, without the knowledge of the Plaintiff, procured Wing Wah to borrow in 1995 a total of HK$7,094,200.00 from Sunlink Limited with interest at prime rate plus 6% and failed to disclose this to the Plaintiff pursuant to the Share Sale Agreement or at all.
4. By Writ of Summons in High Court Action No. 3325 of 1998 Sunlink claimed against Wing Wah the repayment of the loans with interest totalling HK$9,972,989.80 as at 6th May 1998 with further interest accruing thereafter. It is, if I have understood the position correctly, principally this claim in respect of which the Plaintiff has sought the indemnity.
5. In their Defence filed on 23rd October 1998 (pursuant to an order of Mr. Registrar Betts dated 20th October 1998) the Defendants inter alia admit the fact of the 'Sunlink loans' but aver that such were disclosed to the Plaintiff prior to the Share Sale Agreement. Further the Defendants aver that if, which is denied, they were in breach of any warranties representations or undertakings, the Plaintiff has suffered no loss or damage whatsoever and that if, which is again denied, they made misrepresentations to the Plaintiff they did so innocently.
6. By summons dated 23rd November 1998 the Plaintiff applied for Order 14 judgment against the Defendants.
7. On the 4th March 1999 Master Lok gave judgment for the Plaintiffs in the following terms:-
"
1.
Judgment for the Plaintiff against the Defendants for damages to be assessed;
2.
an indemnity pursuant to Clause 7.06 of the Share Sale Agreement dated 13th June 1996 be granted against the Defendants in favour of the Plaintiff;
3.
the Defendants do pay the Plaintiff the costs of this action including the costs of this application with Certificate for Counsel."
8. The date of the Share Sale Agreement in the order is wrong. It should be 13th June 1997. In any event that is the order which is now appealed against.
9. On the same day - 4th March 1999 - Master Lok gave judgment for Sunlink against Wing Wah for the principal amount of the loans with interest in High Court Action No. 3325 of 1998.
The 2nd Defendant
10. The 2nd Defendant has appeared before me in person. He is the subject of a receiving order in bankruptcy which was made on 6th August 1997. The Solicitors acting for the Plaintiffs were not made aware of that fact by the Solicitors then acting for all of the Defendants, and only discovered it upon making a Bankruptcy Search in March of this year, long after the commencement of these proceedings and, if I have understood the position correctly, after the order now appealed against.
11. The position then, as it relates to the 2nd Defendant, is that by virtue of Section 12 of the Bankruptcy Ordinance (Cap. 6), proceedings could not be commenced against him without the leave of the Court and on such terms as the Court might impose. No such leave has been sought and that being so the proceedings against the 2nd Defendant are a nullity - and at the invitation of Mr. Lam who appears for the Plaintiff (and unsurprisingly without demur from the 2nd Defendant) I set aside the order presently being appealed against in so far as it concerns the 2nd Defendant. In relation to that matter I make no order as to costs.
The Issues
12. I have been assisted greatly in this case by the provision of most helpful skeleton submissions by Mr. Lam, Counsel for the Plaintiff, and by Mr. Chan, Counsel for the 1st, 3rd and 4th Defendants.
The case for the Plaintiff
13. The argument advanced by Mr. Lam for the Plaintiff has been concise. He relies principally, as doubtless he did before the Master, upon the proposition that the Defendants are clearly liable to the Plaintiff for breach of warranties and undertakings both in the Share Sale Agreement and in subsequent correspondence. He argues that disputes raised by the Defendants cannot alter the fact that those warranties and undertakings were breached. He says that they were absolute warranties and undertakings as to a state of affairs concerning the financial position of Wing Wah, which state of affairs did not in fact exist and thus the Order 14 application and the judgment that followed it were entirely appropriate.
14. Mr. Lam took me through each and everyone of the alleged warranties and undertakings upon which, he said, the Plaintiff relied.
15. However, and I shall return to this matter later, it is still unclear to me what it is suggested that the Plaintiff did to its detriment relying upon those undertakings and warranties. What is abundantly clear to me now is the fact that the Plaintiff only invested funds into ITC many months after the fact of the Sunlink loans were known to it, and thus it cannot, in my view, claim that such investment was made in ignorance of those loans albeit that the Statement of Claim would appear to suggest otherwise.
16. Mr. Lam appeared to me to be saying that as the warranties and undertakings were by their very nature absolute; and as the Plaintiff relied upon them somehow to its detriment then the Plaintiff has a right of action based upon their breach. That is undoubtedly right if there was firstly a breach, and secondly an identifiable and quantifiable loss brought about as a direct consequence of that breach.
17. Mr. Lam argues that in a case of breach of warranty as to the attributes of a Company whose shares were purchased, then the purchaser is prima facie entitled to the difference between what the shares as warranted would have been worth and what they were actually worth [Lion Nathan Ltd. v. C. C. Bottlers Ltd. [1996] I WLR 1438
18. With reference to Benjamin's Sale of Goods (5th Edition) Mr. Lam quotes to me from para. 10-019 as follows:-
"As a matter of interpretation it seems reasonable that an express warranty should not normally be regarded as covering obvious defects which the buyer must have noticed."
19. And from para 10-017 the following:-
"It seems therefore that whether a statement is to be regarded as a warranty must be ascertained objectively by asking whether the other party assumed (and a reasonable person in his position would have assumed) that the representor was to be regarded as undertaking legal liability for his assertions. Factors relevant to the ascertainment of this are the importance of the statement, the relative knowledge and means of knowledge of the parties, and the possibility of verification. There must also be a tendency to look to the consequences of treating a statement as a warranty. These are prima facie that the liability which the representor undertakes is strict and that he answers in damages on the basis that he must put the other party in the same position as that in which he would have been if the statement had been true - viz., for the expectation loss."
The case for the 1st, 3rd and 4th Defendants
A. Liability
20. Having taken me through the background matrix of the Share Sale Agreement Mr. Chan argues as follows:-
1.
that the express representations, warranties and undertakings contained in that agreement can only be construed in the light of that matrix, and should not be viewed in isolation or in a vacuum. Mr. Chan then says that if that is right the agreement cannot be construed at all until the matrix has been determined and it can only be properly determined at trial, not at a hearing to assess damages
2.
that there is clear affidavit evidence that the fact of the Sunlink loans was known or at the very least should have been known to the Plaintiff prior to the Share Sale Agreement and, if at trial that is shown to be so, then the Plaintiff's claim must fail irrespective of the terms of the Share Sale Agreement
3.
that if, at trial, it is determined that the fact of the Sunlink loans was not known to the Plaintiff or was not ascertainable from documents provided by the Defendants prior to the Share Sale Agreement there remains yet another triable issue upon which the Plaintiff's Statement of Claim depends, and that is why did the Plaintiff see fit to inject US$3,043,500.00 into ITC on 21st March 1998 when it undoubtedly by then was fully aware of the Sunlink loans. It was aware of those loans by 26 July 1997 when it received a demand letter for repayment from Sunlink and by 21st July 1997 when its accountants raised requisitions with the former accountants to Wing Wah concerning the provenance of a sum of money referred to in Wing Wah's accounts which equated to the loan amount and
4.
that on the question of liability there are then two triable issues, neither of which can properly be determined summarily upon the footing that they do not amount to a defence to the claim unless the warranties and undertakings which appear in the Share Sale Agreement are viewed in a vacuum or in isolation and viewed in that manner are to be strictly applied
B. The Assessment of Damages
21. As to the judgment for damages to be assessed, Mr. Chan argues that given the disputes in this case it is simply impossible, without a full trial of the issues, to determine what the heads or nature of the damages are, let alone what is the quantum of damages.
22. That being so Mr. Chan argues, relying on Auto Shade (Overseas) L.L.C. & Another v. Chai Lun and Others
23. In pursuit of that argument Mr. Chan also says that the Statement of Claim alleges tortious misrepresentation and breach of contract, and the measure of damages being different he asks, rhetorically, how can damages be assessed without knowing the appropriate measure; which measure can only be determined after trial.
24. In summary Mr. Chan argues that there are triable issues as to what heads and types of damages are recoverable, and whether they are substantial or merely nominal damages for breach of contract.
Conclusion
25. I am in no doubt, in the absence of any reasons for the judgment, that the full and lengthy arguments put before me by Mr. Chan were not put - at least in such persuasive detail - before the Master. Had they been, and had reference been made, as it was before me, to detailed affidavit evidence, I daresay that he would have dismissed the Order 14 summons upon the footing that Order 14 proceedings are, as Keith J. (as he then was) stated in Auto Shade, "intended to be summary in nature and not an appropriate occasion for the detailed examination of evidence".
26. There are, in my view, in this case substantial and difficult issues to be resolved which can only properly be resolved at trial. By entering judgment upon the Order 14 application in the terms that he did, it seems to me (and I say this entirely in the light of the arguments put before me which arguments I believe were not before the Master) that the Master imposed upon himself, or upon another Master, a task which would be impossible to fulfil without a full trial of all of the issues in this case, limited not only to the assessment of damages but extending to the whole question of liability.
27. I agree with Mr. Chan's submission that the Share Sale Agreement cannot be considered in a vacuum and, if I am right about that, it must follow as night follows day, that all of the circumstances which gave rise to the document may well need to be examined at trial.
28. Quite apart from that matter, the Plaintiff needs must determine precisely what it is that it is claiming, given as I have said, that it is now quite apparent that when it injected the capital sum through Belidore into ITC it knew full well, and had known for many months, of the existence of the Sunlink loans, and that Wing Wah was being pressed for payment.
29. If, as a consequence, the Plaintiff has no claim in respect of that injected capital, and given that the Statement of Claim does not refer to a claim in respect of any loss or damage arising out of the fact of the Sunlink loans, the only claim remaining would appear to be a nominal one relating to consideration of $100.00 (in respect of which I might add there is an affirmation now before me made by the 3rd Defendant dated 9th June 1999 denying that that sum was, in fact, ever paid) and 120 shares in Wing Wah.
30. I respectfully adopt all that was said by Keith J. (as he then was) in the Auto Shade case, to which I have already made reference, under the sub-heading "The nature of the hearing" at pages 6 and 7 of that judgment. It seems to me that all of what is said there is particularly apposite to the case before me.
31. It was for all of these reasons that on 10th June 1999 I allowed this appeal; I set aside the judgment entered by the Master and I ordered that the Plaintiff's summons for summary judgment under Order 14 be dismissed.
32. For the sake of completeness I should add that having heard submissions from counsel on 10th June I ordered that the costs of the hearing before the Master be costs in the cause and that the costs of the appeal on the 10th June be to the 1st, 3rd and 4th Defendants.
(C.G. Jackson)
Judge of the Court of First Instance
Representation:
Mr. Godfrey Lam, instructed by Messrs. Baker & Mckenzie, for the Plaintiff.
Mr. Chan Chi Hung, instructed by Messrs. W. K. To & Co., for the 1st, 3rd and 4th Defendants.
The 2nd Defendant, Mr. Ho Hit Po, in person.