HSBC INSTITUTIONAL TRUST SERVICES (ASIA) LTD v. TIN LIK AND ANOTHER

HCMP 242/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 242 OF 2011

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BETWEEN

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J U D G M E N T

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1.  The plaintiff is the trustee of a real estate investment trust called RREEF China Commercial Trust (“the Trust”). This is an application by the plaintiff for directions that it may proceed with the distribution of the entirety of the net assets of the Trust without retention to meet any possible claim that the 1st defendant may make against the Trust.

2.  The following are taken from an affirmation of a Ms Chai Geok Lim, a senior vice-president of the plaintiff filed on 31 March 2011.  The Trust was constituted by a trust deed dated 28 May 2007 between the trustee and the 2nd defendant, the manager of the Trust.  The investment property that was held by the Trust was Beijing Gateway Plaza, an office building in Beijing.  The Trust is a Hong Kong collective investment scheme authorised by the Securities and Futures Commission (“the SFC”) under section 104 of the Securities and Futures Ordinance, Cap.571.  The Trust derived its income from the rental payments generated by its investment property.  The income is the fund for distributions to the holders of the shares/units in the Trust.

3.  The initial public offering of units of the Trust took place in June 2007.  The Trust’s investment property, the Beijing Gateway Plaza, comprised of two 25-storey tower blocks connected by a three-storey atrium and three underground floors at 18 Xiaguangli Road, East Third Ring Road, Chaoyang District, Beijing, PRC (“the Property”).  It was owned by Hong Kong Gateway Plaza Company Limited (“HK Gateway”).  HK Gateway was a wholly owned subsidiary of Beijing Gateway Plaza (BVI) Limited (“Beijing Gateway”). 

4.  The entire issued share capital of Beijing Gateway was owned by the 1st defendant, Tin Lik.  By a Sale and Purchase Agreement dated 4 June 2007 and made between the plaintiff on behalf of the Trust, the 2nd defendant and the 1st defendant, the Trust acquired the entire issued share capital of Beijing Gateway from the 1st defendant.  The Sale and Purchase Agreement was amended by a supplemental deed dated 8 June 2007 for setting off the amounts due to the 1st defendant under the Sale and Purchase Agreement against amounts payable by the 1st defendant for his subscription of shares of the Trust.  The 1st defendant had subscribed for and acquired 48,440,000 shares of the Trust at the offer price of the initial public offering.  The 1st defendant’s holding was later reduced to 45,376,000 shares by the exercise of an over-allotment option granted to the Deutsche Bank AG, Hong Kong Branch.

5.  The principal source of income of the Trust was from the rental payable by the tenants of the Property.  The value and terms of the tenancies were provided and warranted to be true and accurate by the 1st Defendant in the Sale and Purchase Agreement.  However, the 2nd Defendant, as the manager of the Trust, later found that there were discrepancies between the amount of rental payments received and the amount expected to be received as disclosed by the 1st defendant in the Sale and Purchase Agreement.  The 2nd defendant duly issued an announcement on the discrepancies and the calculated financial value of the discrepancies on 10 September 2007.

6.  The financial value of the discrepancy or shortfall of rental for the terms of the affected leases was HK$278,526,708. The discrepancies were later reviewed by an independent sub-committee which comprised of, among others, an international accounting firm.  The findings of the sub-committee confirmed that the discrepancies were of substantially the same order as the 2nd defendant had ascertained and announced on 10 September 2007.

7.  In fact the 1st defendant had on 7 September 2007 paid the said sum of HK$278,526,708 into the plaintiff’s account to make up the shortfall and undertook to make further payments if the said sum as paid was insufficient.

8.  A new valuation of the Property was made by DTZ Debenham Tie Leung Limited dated 30 September 2007 at HK$3,699,000,000.  The new valuation and the rental discrepancies meant that the net asset value of HK Gateway had been artificially inflated when Beijing Gateway was acquired by the Trust.  After taking into account of the HK$278,526,708 paid by the 1st defendant, the net asset value attributable to all the unit holders was HK$69,663,000 lower than if there had been no rental discrepancy.

9.  The plaintiff and the 2nd defendant then notified the solicitors of the 1st defendant by letter dated 25 October 2007 that the 1st defendant had breached the Sale and Purchase Agreement in that the Trust received less rental than had been represented by the tenancy agreements provided by the 1st defendant, the value of the Property and hence the net asset value of the Trust was lowered by HK$69,663,000, the 2nd defendant received a smaller management fee as the fee was calculated by reference to the rental value and the rental income and costs were incurred by the plaintiff and the 2nd defendant to investigate the 1st defendant’s breach.

10.  The 1st defendant had also warranted certain equipment like lifts and air-conditioning equipment was in good repair and reasonable working order, had been regularly and properly maintained and not dangerous or obsolete.  However the 1st defendant also breached such warranty as some of the equipment had to be repaired and/or replaced.

11.  The Sale and Purchase Agreement also referred to an advertising agreement dated 18 July 2006 between one Beijing Bestride Estate Development Company Limited (“Beijing Bestride”) and one Beijing Shenmingda Advertising Company Limited (“Shenmingda”).  The agreement allowed Shenmingda to erect and use the advertising spaces of the Property for three years from 18 July 2006 to 17 July 2009 and annual rentals of RMB35,000,000 for the first year, RMB38,000,000 for the 2nd year and RMB40,000,000 for the 3rd year.  The rights of Beijing Bestride under the advertising agreement were transferred to HK Gateway. 

12.  The 1st defendant guaranteed the payment of rentals by Shenmingda and agreed to indemnify HK Gateway for any loss or damage upon default of Shenmingda.  The plaintiff and the 2nd defendant in the letter of 25 October 2007 also demanded the 1st defendant to pay the outstanding rental at RMB82,171,392 as Shenmingda had defaulted in payment under the advertising agreement.

13.  The final results announcements of the Trust for 2007, 2008 and 2009 as published on 2 April 2008, 19 March 2009 and 25 February 2010 respectively and the interim result announcement published on 20 August 2010 showed that there were further sums due from the 1st defendant under the Sale and Purchase Agreement for repair and replacement of defective equipment, rental receivables, management fees, reinstatement costs, additional expenses of legal professional and investor relations costs, listing expenses, stamp duty and miscellaneous taxes and expenses.

14.  On the other hand, the plaintiff was holding US$20,000,000 from the purchase price payable to the 1st defendant as security against breach of warranties by the 1st defendant.  If there was no breach by the 1st defendant, the fund would have been released to him on 31 May 2008 or at the completion of audit of the accounts of Beijing Gateway and HK Gateway for 2007 whichever the earlier.  There was a further sum of HK$64,995,000 due to the 1st defendant as a post-completion adjustment payment.

15.  There was also HK$5,000,000 due the 1st defendant as dividend on the shares of Beijing Gateway held by him prior to completion.  There was a further sum of HK$16,541,342.50 payable to the 1st defendant for the shares of the Trust he held.  The plaintiff and the 2nd defendant in their letter of 25 October 2007 claimed from the 1st defendant a total sum of HK$182,346,006 for loss in net asset value of the Trust, loss in the expenses, management fees loss and the loss in advertising fee.  The 1st defendant was notified that if he did not pay up this sum, it would be set off against sums due to him.  This sum did not include the further sums mentioned in the final and interim result announcements mentioned above.  The 2nd defendant also sent the 1st defendant’s solicitors further notifications of set-offs in 2008 and 2009.  But the 1st defendant made no further payment after the sum of HK$278,526,708 paid on 7 September 2007.  The 2nd defendant has prepared the table showing the sums that had been set off in 2007 to 2010 and the reasons thereof (Exhibit CGL-19).  These sums are HK$216,890,160 in 2007, HK$35,270,591 in 2008 and HK$11,533,376 in 2009 and HK$12,902,544 in 2010.  The total sum is HK$276,596,671.

16.  The 1st defendant’s solicitors by letters dated 12 June 2009 and 20 May 2010 disputed the set-offs and the letter of 20 May 2010 demanded the 2nd defendant and the Trust to repay him HK$287,497,000.  The demand was disputed by the 2nd defendant by letters of 15 June 2009, 26 May 2010 and 5 July 2010.  Since then, there was no further correspondence and the 1st defendant had not started any proceedings to challenge the set-off.

17.  The Property was subsequently sold to one Mapletree India China Fund Limited on 3 February 2010 by way of a sale of the shares of Beijing Gateway to the purchaser.  After the sale, the Trust had no other asset for operation as a real estate investment trust and the investors were informed that the Trust should be terminated in accordance with the REIT code and the units of the Trust be delisted from the HK Stock Exchange.

18.  The disposal of the property and the termination and delisting of the Trust was approved by a special resolution of the unit holders in an EGM held on 31 March 2010.  There was then an interim distribution of HK$4.1 per unit to the unit holders.  The Trust was terminated on 12 May 2010.

19.  On 29 October 2010, the plaintiff published an advertisement in the HKSAR Gazette, the SCMP, the China Daily, the Hong Kong Economic Times and Wen Wai Pao that any person who claims to be interested in the assets of the Trust should send full particulars of the claim to the trustee before 12 noon on 30 December 2010.  So far, the trustee received no claim.

20.  On 10 November 2010, the 2nd defendant also issued an announcement to the unit holders about the making of this application.  The plaintiff believes that it is in the interest of the unit holders to have a distribution of the entirety of the net assets of the Trust and seeks a direction from this court that it can do so.  The information of the 2nd defendant shows that there were 723 unit holders as at 23 April 2010 and they would be entitled to a final distribution of HK$0.41 per share as at 31 December 2010 if no retention should be made to meet any potential claim by the 1st defendant.

21.  The 1st defendant has so far failed to seek any relief in respect of the set-offs applied against him.  However, the trustee could not ignore the letter of 20 May 2010 by the 1st defendant’ solicitors which sought to reserve the 1st defendant’s rights to challenge the set-offs. The plaintiff has been advised by its solicitors that it would require at least HK$500,000 legal costs plus administrative costs to defend a claim that may be brought by the 1st defendant.  However, the initiative to bring proceedings lies with the 1st defendant.

22.  The 2nd defendant has also filed an affidavit by its Managing Director and Chief Investment Officer, Paul Keogh on 6 May 2011 to support the plaintiff for a direction that the plaintiff should proceed with a distribution of the entirety of its net assets without retention.  Mr Keogh concurred with the facts set out in the plaintiff’s affirmation.  He said that the 1st defendant had been fully informed of the existence, extent of and reason for all set-offs as early as October 2007 and he had not formally challenged the applied set-offs.  He had sent in two unreasoned objection letters dated 12 June 2009 and 20 May 2010 which had been responded to by the 2nd defendant’s solicitors.  The 1st defendant had also been advised of the anticipated time-line for liquidating the Trust and he knew he had to act with some despatch if he wished to do so.  The 2nd defendant also considered that there was no reason to make any retention based on any hypothetical claim of the 1st defendant who has not brought any challenge despite having been informed of the set-offs.

23.  I now deal with service of the originating summons which was issued on 18 February 2011.  The following information is from an affirmation of Ms Denise Fung, a solicitor of the plaintiff’s solicitors and filed on 17 May 2011.  The plaintiff’s solicitors had by letter of 11 February 2011 requested the 1st defendant’s solicitors to confirm if they had instructions to accept service of proceedings.  The 1st defendant’s solicitors replied on 14 February 2011 saying that they were taking instructions.  On 18 November 2011, the 1st defendant’s solicitors wrote and said that they had no instruction to accept service.  Also on 18 November 2011, the plaintiff’s solicitors served a copy of the originating summons on the 1st defendant at Room 2807, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong being the last known address of the 1st defendant.  The receptionist there confirmed that the 1st defendant was not in Hong Kong then and a copy of the originating summons was left with the receptionist.  A copy of the originating summons was also sent to the 1st defendant at this office by registered post on 19 February 2011.

24.  The plaintiff issued a summons on 16 March 2011 for extension of time to file and serve the affirmation in support.  A copy of the summons was sent by hand to the 1st defendant’s office above mentioned on 16 March 2011.  On 24 March 2011, one Ms Tam, purportedly the secretary of the 1st defendant confirmed with Ms Denise Fung that she had received the two copies of the originating summons and the summons for extension of time had been passed to the 1st defendant’s solicitors who had discussed the matter with the 1st defendant.  The plaintiff’s solicitors served the originating summons by recorded delivery on 12 April 2011 at the same office, but the envelope was returned and marked “Addressee unknown”.

25.  On 13 April 2011 at about 10:40 a.m., Ms Denise Fung of the plaintiff’s solicitors at the west entrance of Arsonal House, 1 Arsonal Street, Wanchai handed the 1st defendant an envelope containing the originating summons and told him that it contained an originating summons.  The 1st defendant was then in the company of his solicitor.  He did not accept the envelope. Ms Fung told him several times that it contained an originating summons but it did not accept it.  Ms Fung then placed the envelope at his feet, but he and his solicitors just walked away.  Ms Fung then picked up the envelope and placed it at his feet again, but he again walked away with his solicitors. Since the security guard at the building did not allow Ms Fung leaving the envelope on the ground, she then picked up the envelope and left.

26.  Based on the above information, I am satisfied that the 1st defendant had been served with the originating summons.  I also mention that the 1st defendant’s solicitors have on 15 June 2011 filed a notice to act for the 1st defendant.

27.  A letter from the 1st defendant’s solicitors has also been received on 24 June 2011 saying that the 1st defendant would be commencing a claim against the plaintiff and the 2nd defendant.  He would like to make submissions through leading counsel on this matter.  However, this is not the proper way to seek to be heard.

28.  I now deal with the merits of this application. I agree with the plaintiff and the 2nd defendant that the 1st defendant had been fully informed of the existence, extent and reasons for all the set-offs as early as 25 October 2007.  He was given many notifications of further set-offs from time to time.  If he should have wished to challenged the set-offs, there is no reason for him not to have instituted any proceedings by now.  The basis for the set-offs also appears to be solidly based on the Sale and Purchase Agreement by which the Trust acquired the shares of Beijing Gateway.

29.  In the premises, I direct that the plaintiff do proceed to a distribution of the entirety of the net assets of the Trust without retention to meet any possible claim which might otherwise be brought against it by the 1st defendant.

30.  I also make an order nisi that the plaintiff’s costs of this application be paid out of the Trust on a trustee basis.