TELINGS INTERNATIONAL HONG KONG LTD v. JOHN HO AND OTHERS

HCA 2114/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2114 OF 2005

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BETWEEN

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J U D G M E N T

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Introduction

1.  The plaintiff (“Telings”) commenced this action in October 2005 claiming a sum of $136.24 million (and interest) against all 3 defendants. The 3^rd defendant (“Ho King”) is sued as a principal debtor (being the purchaser of the shares of one Uniplan Assets Ltd. (“Uniplan”); Telings was the vendor thereof). The 1^st and 2^nd defendants (respectively “Ho” and “YS Chan”) are sued in essence as the guarantors of the said purchase. Judgment against Ho King was entered by default on 29 December 2005.

2.  The written agreement for the said sale and purchase was executed on 15 December 2003. In the course of the trial, it has come to be known as the “Ho King Agreement” and shall be so called below. It is undisputed the contract price for the shares was $141 million according to the Ho King Agreement.

Background

3.  Quite a number of the factual details were disputed at trial. But if the ultimate issue in this action is deciphered, the overall relevant factual framework leading to (and surrounding) the Ho King Agreement is in fact largely undisputed.

(a)  The Property Investment in Lanzhou

4.  YS Chan and his business associates in Hong Kong went to Lanzhou to invest in around 1993. Through a joint-venture corporation (involving also the Mainland “partners”), they commenced land development (commercial and residential properties) there. The YS Chan camp took part through a Hong Kong company called “Ming Kong Property Investment Ltd.” (“Ming Kong”) which held about 60% of the issued capital of the joint-venture, a Mainland company called “Lanzhou International Trade & Building Co. Ltd.” (“the Lanzhou company”; also called “LITBC” by the parties).

5.  By 2000, the Mainland “partners” transferred some of their interest in the joint venture to Ming Kong. Ming Kong then became the owner of 99% of the shares in the Lanzhou company. The plaintiff came on the scene at around this time.

6.  Financial and management problems appeared in the Lanzhou company in about 2000. Further, as a result of the change in the PRC government’s economic policy, the Mainland camp had to withdraw its share from the Lanzhou company. Cash was needed to deal with these issues. The YS Chan camp wanted to find a new “partner” who could provide the funding.

7.  The parties dispute as to whether the new “partner” was Mr George Tan himself (who was widely known for his connection to the Carrian group of companies and its demise) or his daughters (George Tan being their “adviser” only). The dispute is however not crucial to the determination of this action. For convenience, the word “Tan” is used below to stand for George Tan and/or his daughters (unless the context requires the individual’s identity to be specified).

8.  Tan agreed to inject capital in return for part of the Lanzhou company’s shares. Ignoring the details of the transaction, Tan ended up with 75% of the Lanzhou company’s shares while the YS Chan camp retained about 24% thereof. Tan’s portion of the Lanzhou company’s shares was held by Uniplan. Telings was Uniplan’s parent company (in other words, Uniplan’s shares were held by Telings).

(b)  Initial Attempts to Get Listed

9.  According to the defence, Tan’s vision was to turn the Lanzhou company into a large business consortium. For such purpose, Tan wanted to have the Lanzhou company become a publicly listed company in Hong Kong. He proposed a “reverse take-over” or “reverse listing” scheme. Very briefly, the idea was to find a listed company which is considered to be financially unsound, then use the shares of the Lanzhou company to swap with the shares of that listed company, thereby taking over its ownership (and management).

10.  The first attempt to do so was targeted at a Hong Kong listed company, CIL Holdings Ltd., in June 2001 but this was unsuccessful.

11.  In July 2001, Tan asked for help from his friend in London, one Mr Desmond Bloom (“Bloom”). Bloom was to help in the reverse take-over of a London-listed company, Eurocity Property Plc (“Eurocity”). This attempt also failed when Eurocity refused to acquire the Lanzhou company’s shares.

12.  The listing plan was then changed. In March 2002, Tan caused an Eastern Wind Investments Co. Ltd. (“Eastern Wind”) to be incorporated. The goal was for it to be listed in London. This again failed (the parties differ as to the precise cause of the failure).

13.  During the second half of 2002, yet another plan was devised. A company called Hemisphere Properties Plc. (“Hemisphere”) would get listed in London. Tan (through Telings, the holding company of Uniplan) would sell all of Uniplan’s shares (in other words, Tan’s portion of the Lanzhou company’s shares) to a company called International Operation Ltd. (“IOL”) (a company controlled by Ho and YS Chan). In return, IOL would procure about 213 million of Hemisphere’s listed shares to be transferred to Telings.

14.  Hemisphere was listed in London in August 2003. However, by about September to November 2003, it became increasingly apparent the new plan got into trouble again.

15.  As a result, in November 2003, Tan, Ho and YS Chan (through Ho) entered into discussion about the listing plan. The outcome of the discussion is in effect the main dispute in this action.

The Main Dispute

16.  The main dispute in this action can be summarized as this.

17.  Telings’ case is that the Ho King Agreement (which, as aforesaid, was executed on 15 December 2003) was a genuine sale and purchase. The reason for the transaction is said to be that Tan was upset by the earlier attempts to get the Lanzhou company listed, and did not mind selling Tan’s portion of the Lanzhou company’s shares. On the other hand, Ho and YS Chan wanted to make a profit out of the exercise. They wanted to try it on their own and planned to pay off Telings with the fund which (they hoped) could be obtained through the listing exercise. It is unclear if Bloom was also one of the “purchasers”. It would appear from some of the contemporaneous documents that he was (see para. 33 to 45 below). But it is unnecessary to resolve this point in this action.

18.  On the other hand, the case of the defence is that Tan still wanted to realize his vision of getting the Lanzhou company publicly listed. Because of the obstacle posed by the requirement to disclose his connection with the listed company, Tan asked Ho and YS Chan to be his “fronts” to conceal this from the London listing authorities.

19.  Thus, the contracting parties never intended the Ho King Agreement to be performed. Telings, Ho, YS Chan and Ho King signed the Ho King Agreement on that understanding.

The Ho King Agreement

20.  The main terms of the Ho King Agreement are undisputed:-

(a)  the total sum payable for all of Uniplan’s shares was $141 million;

(b)  $10 million was to be paid upon its execution;

(c)  the completion date was to be 27 February 2004;

(d)  the remaining $131 million was to be paid within 24 months from completion date;

(e)  interest was payable on $131 million from completion date to the date of payment at 4% per annum in arrears on half-yearly basis;

(f)  if Ho King should default in the payment of interest, the whole $131 million would become immediately due and payable.

21.  Ho and YS Chan jointly and severally and unconditionally and irrevocably guaranteed the due and punctual performance and observance of and compliance with the Ho King Agreement.

22.  It is common ground the entire share-holding of Uniplan was transferred by Telings to Ho King on 27 February 2004: para. 10, amended statement of claim and para. 7, defence.

Witnesses’ Credibility and Reliability

23.  The defence called YS Chan, Ho and Bloom to testify. A Mr Tommy Wong, Ms Yeung and Mr Zhan also testified for the defence. The plaintiff did not call any witness.

24.  The testimony of most witnesses covered quite a number of facts some of which are in dispute. I have not restricted myself to the matters expressly spelt out below when assessing credibility and reliability. The matters specifically set out below are so as to give an indication of how this aspect has been addressed.

(1)  Relevant E-mails / Correspondence

25.  Of the various contemporaneous documents in the trial bundles, Telings lays particular emphasis on a number of e-mails passing among Ho, Bloom and (to a lesser extent) YS Chan from 16 September 2002 to 1 December 2004.

26.  Because these e-mails are important to the assessment of the defence witnesses’ testimony, the more salient passages in these e-mails are quoted below (in chronological order).

27.  Further, where appropriate, other correspondence is also summarized below.

28.  Several matters referred to in the e-mails need a brief explanation.

29.  To recap, various attempts have been made to “reverse take-over” a publicly listed company (first in Hong Kong and later in London) so that the Lanzhou company could be “injected” into the company. The attempts made prior to mid-December 2003 failed. The parties dispute the true reason(s) for the pre-15 December 2003 failure.

30.  It is Telings’ case the attempts failed because of the problematic accounts of the Lanzhou company. The defence denies that and contends the failure was caused by Tan’s refusal to comply with the requirement imposed by the London stock exchange to disclose George Tan’s connection to the publicly listed company.

31.  Further, it is Telings’ case that the Ho King Agreement was an arm’s length transaction in fact (because Tan was only interested in selling off his interest in the Lanzhou company) whereas it is the defence case that it was an arm’s length transaction in appearance only.

32.  The references in the e–mails/correspondence to:-

(1)  the Hemisphere shares could not “end up in the Tan ownership” (see the e-mail of 20 October 2003 (para. 34 below));

(2)  an “arm’s length” transaction (see the hand-recorded note of 16 December 2003 (para. 37 below)),

have to be understood in the light of the matters summarized above.

Pre-15 December 2003 (Ho King Agreement)

33.  On 16 September 2002, Bloom wrote to YS Chan (via Ho):-

“… I am extremely interested in acquiring the shareholding of the ‘Tan’ family which I understand is approximately 35% of the total issued equity.  I would be prepared to submit an offer at a price of £9.75M … I would seek payment in the form of a loan note from the vendors repayable after three years … The loan note could be secured against the shares so that in the event of non-payment, ownership of the shares would revert to the original owners. …

I would also be prepared to acquire the shareholding owned by the Thai interests on a similar basis if this was required … ”.

34.  On 20 October 2003, Bloom wrote to Ho:-

“… The stock exchange … are not happy for any Tan shareholding in Hemisphere …

It’ll be necessary for the Tan shareholdings to be disposed of as quickly as possible to enable us to press ahead with the deal …

I understood that the Tan shareholdings were intended to be disposed of anyway …

I would be prepared to acquire the Tan shareholdings if deferred payment of say 24 months could be obtained.  It would probably not be acceptable for the shares to be used as security because in the event of default they would end up in the Tan ownership but I would be happy to provide a personal guarantee … ”.

35.  On 8 December 2003, Ho wrote to Bloom:-

“I have a lengthy meeting with [George Tan] and Mr. Wu this morning, it was finally agreed as follows : -

1.  the Purchase price of Telings is [HK$141 million].

2.  the deposit of HKD10M be paid on signing of the Agreement for Sale and Purchase …

3.  …

I also have lengthy meeting with the Lender this afternoon, it was finally agreed as follows:-

1.  Loan amount of HKD10M …

2.  Interest on the loan …

…

I suppose we have reached a better deal than before with the Lender (originally HKD7.5M for 10% of Ho King but now is HKD10M for 10% of Ho King) … ”.

36.  On 10 December 2003, Ho wrote to Bloom:-

“The Lender’s solicitors have sent me the following documents for approval …

In case you receive the engagement letter … please arrange GBP93,000 to be remitted to my firm’s account … so that I can complete the deal with [George Tan] before he changes his mind … ”.

Post-15 December 2003 (Ho King Agreement)

37.  On 16 December 2003, YS Chan hand-recorded his discussion on that day with Bloom. One matter recorded was:-

“I told [Bloom] John Ho has the way out for arms’ length”.

38.  On 18 February 2004, Ho’s firm (Ho, being a practising solicitor, has been a partner of that firm) wrote to Messrs. Fred Kan & Co., Telings’ solicitors (“Fred Kan”), to seek to postpone the completion of the Ho King Agreement. On 19 February 2004, Fred Kan wrote to refuse the request but agreed to extend the payment date for another 3 months upon the payment of interest. The offer was accepted by Ho’s firm on the same day.

39.  On 3 June 2004, Bloom wrote to YS Chan (copied to Ho):-

“…

I assume that George Tan is now aware that the LITBC/Hemisphere deal has been done and presumably he must be much happier with the situation now.  He will take comfort from the knowledge that he is likely to get his money one way or another which did not appear to be a real prospect just a few weeks ago.  Perhaps it might be possible to gently open negotiations to roll up the debt and even perhaps to discuss the possibility that some of the Ho King shares might be transferred to his nominee companies as a way to repaying certain debts”.

Post-15 June 2004 (Hemisphere London Listing)

40.  According to the defence, Telings started to ask for payment pursuant to the Ho King Agreement since 15 June 2004. The shares of Hemisphere began to be traded at the London stock exchange since then; however, the share price has fallen below the initial offer price since that time (p. 13, defence written chronology; defence verbal final submissions).

41.  On 24 June 2004, Ho wrote to Bloom:-

“The first interest payment on HK$10M in fact was due …

Unfortunately I have received no response from you regarding such payment.  Please note that not only the Loan expenses etc. had been paid by me, … air passages hotels and Vigers fees was settled by me personally on behalf of Hemisphere. …

Please let me know when you are able to send me [the] interest payment amounting to GBP15,000 asap”.

42.  On 6 July 2004, YS Chan and Ho wrote to Bloom:-

“This may not be a pleasant mail but we must call a spade a spade. … despite our previous emails to you regarding the overdue interest of 15,000 pounds to [George Tan] last month and the forthcoming due in mid-August for another appr. 190,000 pounds …

… You must also understand that we have advanced a substantial payment on behalf of Hemisphere out from our pocket and we are exhausted.

We urge you to give serious consideration to the urgency of this matter … ”.

43.  On 19 August 2004, Ho wrote to Bloom:-

“… YS and I have been worrying about and devoting our time on the interest payment due to Telings during the past months much much more than Hemisphere and LITBC.  It was made very clear to you at the very beginning that there is no room for bargaining on the 1st interest payment and we were assured by you that you would take care of it. … Please note that not only our reputation is jeopardized … but also my professional career will be ended in the event of default.  The message that it is mandatory to pay the interest has been conveyed to me otherwise legal proceedings will be instituted against me and YS.

With great pain and difficulty, I manage to find a private financier to fund the first half yearly interest payment of HK$2,820,000. … ”.

44.  On 19 August 2004, Bloom wrote to Ho (copied to YS Chan):-

“… Each time there has been a problem you have managed to negotiate a way around it … I have never believed that [George Tan] would resort to legal action and I have thought that his loan to HoKing will eventually be paid from sale of the HoKing shares in Hemisphere. … ”.

45.  On 1 December 2004, Ho wrote to Bloom (copied to YS Chan) demanding Bloom to indemnify him and YS Chan by paying the interest payable under the Ho King Agreement.

46.  On 11 March 2005, Ho’s firm paid interest of $26,200 for the 3-month time extension relating to the Ho King Agreement. On the same day, there was correspondence between Ho’s firm and Fred Kan regarding further time extension.

(2)  YS Chan and Ho

47.  The testimony of YS Chan and Ho need not be set out in detail. Suffice it to say their testimony purports to support the defence case that the Ho King Agreement was a “sham” transaction orchestrated by George Tan. The goal was as set out in para. 18 above. They claim in essence that they were merely “fronts” acting as directed by George Tan.

48.  Such a case, however, cannot be credible in the face of the e-mail/correspondence summarized above.

49.  In its verbal final submissions, the defence contends the e-mails and correspondence written before 15 June 2004 (the day when the Hemisphere shares started to be traded at the London stock exchange) were part of the “sham” put up by (or for) George Tan. In other words, although the e-mails and correspondence appear to be contemporaneous private communication, they were intended to be shown to whoever may query the propriety of the Ho King Agreement.

50.  The contention is inconsistent with:-

(a)  YS Chan and Ho shouldering up the payment of various sums pursuant to the Ho King Agreement.  The sums paid included $10 million (being the deposit paid on 15 December 2003), $2.6 million (being the interest paid on 26 August 2004) and $26,200 (being the interest paid on 11 March 2005);

(b)  the post-15 June 2004 e-mails/correspondence.

51.  The defence has not been able to satisfactorily explain why the post-15 June 2004 e-mails/correspondence were so expressed.

52.  In its final submissions, the defence does not say that these communications were for “window-dressing”. Judging from their contents, they cannot have that effect. More important, by then it should be apparent to Ho and YS Chan Tan was seeking payment from them. It therefore does not make sense for them to “play along” and continue to act as his “fronts”.

53.  The defence offers the excuse that Ho and YS Chan (especially Ho, who is a practising solicitor) have to choose between the lesser of two evils: either refute Telings’ demand for payment and “expose” the improper nature of the transaction, or rely on the indemnity executed by Bloom to cover their financial exposure. They chose the latter course.

54.  I reject the excuse as untruthful. The e-mails/correspondence were private communications. There is no need to hide the truth from Tan who, according to the defence, well knew what the Ho King Agreement was about. In fact, to warn Telings/Tan that the true nature of the transaction would be exposed if he should persist in his demand may be a more effective means of deterring him from commencing legal action. Finally, according to Ho’s testimony, he did not consider Bloom to be a man of means (see also para. 65, defence written final submissions).

55.  The testimony of Ho and YS Chan is rejected.

(3)  Bloom

56.  Bloom was an untruthful and evasive witnesses. His testimony is likewise also rejected.

57.  He could not come up with satisfactory answers when asked about the contemporaneous e-mails/correspondence. In fact, towards the later stage of his cross-examination, he boldly claimed that no matter how many such e-mails/correspondence were shown to him (including those which have already been shown to him during cross-examination), he did not expect his memory would be assisted as to why he wrote them, or what facts they would reflect.

(4)  Tommy Wong

58.  Tommy Wong’s role in the transaction was limited. His knowledge of factual matters relevant to the determination of this action is also limited.

59.  According to his witness statement, since about 2001 he acted essentially as a go-between for Tan and YS Chan (who was then residing in Australia).

60.  Little weight is placed on his testimony.

(5)  Ms Yeung

61.  Ms Yeung was Ho’s personal assistant/secretary. Her role in the transaction was also limited. Her knowledge of the relevant facts is even less than that of Tommy Wong.

62.  Her witness statement focused entirely on a lunch meeting between Tan and Ho in June or July 2004. Even on that occasion, there was a period when Tan and Ho talked downstairs in private while she waited upstairs.

63.  She claimed Tan uttered words during lunch which indicated Tan’s interest in the Hemisphere shares. For two reasons I do not believe her claim:-

(1)  Tan and Ho considered it necessary to discuss in private.  There is no suggestion the discussion concerned matters other than the Lanzhou company affair.  It does not make sense for Tan then to utter those words in Ms Yeung’s presence after the discussion in private;

(2)  her witness statement was prepared more than 6 years after the event.  She did not claim she had kept contemporaneous notes of those events.

64.  Ms Yeung was also cross-examined on matters beyond those covered in her witness statements. She testified against Telings’ case regarding those matters. But it is obvious she came to know of them from either Ho or YS Chan. No weight is placed on this part of her testimony.

65.  Generally, I do not regard her a reliable witness. She demonstrated a tendency to side with Ho and YS Chan irrespective of the true state of affairs.

(6)  Zhan

66.  Mr Zhan was one of the Chinese “partners” of the Lanzhou company. He did not claim to know anything of relevance to the determination of this action.

Other Matters

67.  The defence relies on ICS v. West Bromwich Building Society [1998] 1 WLR 896 for the proposition that events which happened after the transaction are irrelevant for ascertaining the contracting parties’ intention.

68.  The test propounded in the ICS decision was about construing the true meaning of contract terms. In relation to whether there was a contract, the test is different. As Chitty on Contracts (1999) 27^th Ed. said:-

“Subsequent actions are … inadmissible to interpret a written agreement, although they are admissible to show whether there was a contract and what the terms of the contract were … or as the basis for an estoppel”: para. 12-124, n. 38 citing James Miller & Partners Ltd. v. Whitworth Street Estates (Manchester) Ltd. [1970] AC 572, 615 (emphasis supplied).

69.  The defence argues the Ho King Agreement cannot be a genuine sale and purchase transaction because the defendants were made to sign a number of documents as a result: a share mortgage was signed by Ho King; in addition, Ho and YS Chan were required to sign:-

(a)  blank instruments of transfer;

(b)  blank powers of attorney;

(c)  letters of resignation;

(d)  an undertaking to approve the share transfer pursuant to the share mortgage.

70.  The defence queries why the vendor in such a transaction should retain the right of disposal of the shares if the transaction was genuine. However, the Ho King Agreement was in gist a sale involving a deferred payment of price. The documents set out above make business sense because the vendor’s position could be protected pending full payment. As the defence appears to admit, none of the defendants has the means to pay: para. 47, defence written final submissions.

71.  The defence places importance on a letter dated 4 December 2003 signed by Tan’s daughter (especially the highlighted part) (para. 7(e) and 42, defence written final submissions):-

“… we have received green light from both the Leading Counsel of London and our Malaysian partner to the proposed S&P Agreement drafted by [Ho’s firm] with your minor amendments … our direct and friendly discussion with [Ho] at noon time on 2^nd December 2003.

During the said discussion, [Ho] was very kind to understand that the transaction must not only be seen to be arms-length but also must to be done as arms-length … ” (highlight supplied).

72.  But the highlighted part can be understood to mean that the transaction should not only be seen to be genuine, it should in fact be genuine. Some of the statements therein are consistent with that understanding:-

“… our Malaysian partner was greatly concerned of the security provided by the Purchaser which the proposed securities to guarantee this HKD131 million are Ho King’s promissory note and personal guarantees from [Ho and YS Chan]. … ”.

The quoted statement shows that the letter’s author desired better security for the sale and purchase.

73.  Finally, the defence relies on the practice that where a litigant chooses not to call evidence, the court is entitled to be bold and can draw from the facts all reasonable inferences as to what facts may have been withheld: see Insurance Commissioner v. Joyce (1988) 77 CLR 39, 49; SS Pharmaceutical Co. Ltd. and Another v. Qantas Airways Ltd. [1991] 1 Ll Rep 288, 293; British Railways Board v. Herrington [1972] AC 877, 930.

74.  I have borne the above in mind. However, the fact remains the testimony of the defence witnesses has either been rejected or given no (or little) evidential weight. Moreover, in the absence of sufficient evidential basis to contradict it, the Ho King Agreement (and the related contractual documents) should be given the evidential weight which it deserves as a solemn document.

Findings of Fact

75.  By reason of the matters aforesaid, I find that:-

(1)  the Ho King Agreement was a genuine sale and purchase (of the Uniplan shares by Telings to Ho King);

(2)  Telings has transferred those shares to Ho King;

(3)  the defendants have breached the Ho King Agreement and the related personal guarantee respectively by failing to pay in full as agreed.

Conclusion

76.  I find that Telings has established its claim against Ho and YS Chan. Judgment is therefore entered against them as prayed for in the amended statement of claim. The counterclaim is dismissed.

Costs Order

77.  The parties agree the usual rule that costs should follow the event is applicable. There will accordingly be a costs order that the costs of this action be paid by Ho and YS Chan to Telings.

78.  However, the defence indicates it may object to the court certifying the trial to be fit for the attendance by two counsel (though the defence was itself so represented). The following directions are given in the event the defence should maintain that objection:-

(a)  the defence be at liberty to lodge with court and serve submissions on the subject within 7 days from the date of this judgment;

(b)  Telings be at liberty to lodge with court and serve submission in response within 7 days thereafter.