HOLLYWOOD PALACE CO LTD v. TRANS-GLOBAL HONG KONG INVESTMENT LTD AND ANOTHER

HCMP 151/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 151 OF 2010

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BETWEEN

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D E C I S I O N

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1.  This is the Plaintiff’s application by summons taken out on 13 October 2010 for an order for interim payment against the 1^st Defendant pursuant to Order 29 r 11(1)(c) and 12(b) of the Rules of the High Court.

Background facts

2.  The Plaintiff is the owner of the whole of Kowloon Inland Lot No 10730 together with the building erected thereon known as Chinachem Golden Plaza (“the Building”) at No 77 Mody Road and No 16 Science Museum Road, Tsim Sha Tsui East, Kowloon.

3.  By a tenancy agreement dated 5^th May 2008 (“the Tenancy Agreement”), the Plaintiff agreed to let and Advance China Holdings Limited (“Advance China”) agreed to take certain premises of the Building, namely, a Portion of Ground Floor and Cinema Nos 3, 4 and 5 on UG2 Floor of the Building (“the Premises”) for non-domestic use for a term of 3 years commencing on 18 January 2008 and expiring on 17 January 2011 at the basic rent of HK$500,000 per month (inclusive of government rates, operation cost, management fee and air-conditioning charges) plus an extra percentage rent derived from the business at the Premises to be calculated by reference to a formula set out in Part 4 of the Schedule to the Tenancy Agreement, the details of which do not matter for the purpose of the present application.

4.  It is not in dispute that the Plaintiff, a company incorporated in the British Virgin Islands, is wholly owned by Monday Investment Limited, which in turn is beneficially owned by the estate of the late Nina Kung, also known as Nina T H Wang.

5.  Advance China is a company incorporated in Hong Kong on 25 May 2006.  As stated in Advance China’s Annual Return made up to 25 May 2007, it had an issued share capital of HK$2.00, divided into 2  shares of HK$1.00 each.  The 2 shares were held in the names of two persons called Kong Fu Yan and Tang Yu Keung. They were also the only directors of Advance China.  There is evidence before the court that Kong Fu Yan and Tang Yu Keung were employees of Chinachem Entertainment Limited, and that Tang Yu Keung had worked for Chinachem Entertainment Limited for over 17 years.  For the purpose of the present application, I am prepared to infer that the Plaintiff and Advance China are related companies.

6.  Be that as it may, it is the Plaintiff’s case that Advance China’s tenancy in respect of the Premises came to an end on 24 November 2009.  Ordinarily, upon the termination of the Tenancy Agreement, the Plaintiff would be entitled to regain possession of the Premises.

7.  The 1^st Defendant has however remained in occupation of the Premises after the termination of Advance China’s tenancy.  Hence, the Plaintiff commenced these proceedings, originally by way of Originating Summons under Order 113 of the Rules of the High Court, to recover possession of the Premises.  I am told that these proceedings have since been continued as if the cause or matter had been begun by writ, pursuant to Order 28 r8(1) of the Rules of the High Court.

8.  In the Statement of Claim, the Plaintiff seeks an order for possession of the Premises as well as damages for trespass against the 1^st Defendant.

The Defendant’s case

9.  The 1^st Defendant claims to be entitled to remain in occupation of the Premises by virtue of an undated Co-operation Agreement (“the Co-operation Agreement”) entered into between Advance China on the one part and the 1^st Defendant on the other part.

10.  According to the Defence filed by the 1^st Defendant:-

(1)   Wong Lai Chuen (“Wong”) was one of the personal assistants of the late Nina Kung, and was and is a director of Chinachem Entertainment Limited in charge of its entertainment business.

(2)   Lai Long Sun (“Lai”), who is the major shareholder and sole director of a company known as Leader Rich Holdings Limited (“Leader Rich”), had been engaged in the entertainment business for over 30 years.

(3)   The Premises were and are assets beneficially owned by or belonging to companies within the Chinachem Group or under the control of the Chinachem Group.

(4)   On a date in 2006, Wong on behalf of the Plaintiff, Chinachem Entertainment Limited and/or the Chinachem Group invited Lai to invest in an entertainment business to be carried on at the Premises and made the following representations:-

(a)   The landlord of the Premises on behalf of the Chinachem Group had already signed the Co-operation Agreement with the 1^st Defendant to enable the 1^st Defendant to carry on an entertainment business at the Premises but the 1^st Defendant was then financially incapable of implementing the Co-operation Agreement;

(b)   Should Lai wish to invest in such business, Wong could arrange Lai or his nominated company to take the place and stead of the 1^st Defendant by acquiring the shareholding of the 1^st Defendant.

(5)   In reliance upon the said representations made by Wong on behalf of the Plaintiff, Chinachem Entertainment Limited and/or the Chinachem Group, Lai decided to make the investment and nominated Leader Rich to proceed to acquire the shareholding of the 1^st Defendant.

(6)   On 16 July 2007, Leader Rich became the sole shareholder and director of the 1^st Defendant.

(7)   On 1 August 2007, the 1^st Defendant commenced to carry on business at the Premises pursuant to the Co-operation Agreement.

(8)   The Co-operation Agreement was entered into on a date in 2006 between the 1^st Defendant and Advance China for and on behalf of the Plaintiff, Chinachem Entertainment Limited and/or the Chinachem Group.

(9)   Accordingly, the 1^st Defendant is entitled to remain in occupation and in possession of the Premises pursuant to the Co-operation Agreement.

11.  The 1^st Defendant further pleads that the Tenancy Agreement dated 5 May 2008 is a sham agreement, and was created with knowledge of and subsequent to the making of the Co-operation Agreement.

12.  The Co-operation Agreement provides, inter alia, as follows:-

(1)   Under Clause 2, Advance China agrees that the 1^st Defendant shall invest a sum of HK$15 million to operate an entertainment business of disco / cinema / restaurant / bar / net bar, etc at the Premises.

(2)   Under Clause 3, the 1^st Defendant shall be responsible for all operations and the profit and loss of the business. It is also stated that all operations must comply with the laws and subsidiary regulations of Hong Kong.

(3)   Under Clause 4, Advance China agrees to make applications for licences and provide a liquor licence holder in accordance with the laws and subsidiary regulations of Hong Kong, and be responsible for providing promotion services.

(4)   Under Clause 10, the term of co-operation shall be 3 years from the date of commencement of business, which may be extended at the option of the 1^st Defendant for a further term of 3 years provided that it shall not have acted in breach of any term of the Co-operation Agreement during the initial term of 3 years.

(5)   Under Clause 11, the 1^st Defendant shall pay to Advance China on the first day of every month during the term of the agreement the sum of HK$500,000 as the payment of guaranteed minimum of profit-sharing for that month.  There is also provision made in that clause and Clause 12 for payment by the 1^st Defendant to Advance China of what is described as “extra payments of profit-sharing”, the details of which do not matter for the purpose of the present application.

13.  Mr Chain for the Plaintiff accepts that the 1^st Defendant has no obligation to make payment under Clause 11 of the Co-operation Agreement unless there is a business being run or operated at the Premises.

14.  In two affirmations of Lai filed in these proceedings on 17 March 2010 and 24 November 2010 respectively, Lai further says that:-

(1)   Leader Rich has invested the amount of over HK$21 million in the 1^st Defendant to run an entertainment business, namely, Club PP Disco Karaoke Night Club (“Club PP”), at the Premises;

(2)   For the period from 2 September 2006 to 1 September 2009, the 1^st Defendant has paid a total sum of over HK$9 million to Advance China pursuant to the Co-operation Agreement;

(3)   The 1^st Defendant has not been able to operate the business of Club PP at the Premises since 14 January 2010 due to the failure of Tang Yu Keung to apply for an extension of the liquor licence for the Premises which expired on 14 January 2010.

15.  In short, the 1^st Defendant’s case is that:-

(1)   It is entitled to remain in occupation of the Premises pursuant to the Co-operation Agreement.

(2)   The Co-operation Agreement is binding on the Plaintiff because it was entered into by Advance China as agent on behalf of the Plaintiff.

(3)   Advance China has been in breach of the Co-operation Agreement for failing to apply for an extension of the liquor licence, with the consequence that the 1^st Defendant could no longer operate the business of Club PP at the Premises.

(4)   Accordingly, there is no obligation for the 1^st Defendant to make payment under Clause 11 of the Co-operation Agreement to Advance China for so long as it is unable to operate the business at the Premises caused by Advance China’s breach of contract.

(5)   It follows that the 1^st Defendant is not liable to pay mesne profits to the Plaintiff.

(6)   Further or alternatively, it has a valid claim in damages against the Plaintiff for breach of contract, which claim can be utilized to set off the Plaintiff’s claim herein.

Application under Order 29 r11(1)(c)

16.  Order 29 r11(1)(c) provides as follows:-

“If, on the hearing of an application under rule 10 in an action for damages, the Court is satisfied –

(c) that, if the action proceeded to trial, the plaintiff would obtain judgment for substantial damages against the respondent or, where there are two or more defendants, against any of them, the Court may, if it thinks fit and subject to paragraph (2), order the respondent to make an interim payment of such amount as it thinks just, not exceeding a reasonable proportion of the damages which in the opinion of the Court are likely to be recovered by the plaintiff after taking into account any relevant contributory negligence and any set-off, cross-claim or counterclaim on which the respondent may be entitled to rely.”

17.  Mr Chain accepts that the onus on the applicant for an order of interim payment under Order 29 r11(1)(c) is a high one, and refers me to the judgment of Mr Justice Au in Guo Jing Jing v Artmaster Investment Ltd (unreported), HCA 1008/2009, 11 December 2009, where the learned Judge, at paragraph 88 of his judgment, stated as follows:-

“The test for granting interim payment is a high one and is well settled:

(1) The court must be satisfied that the plaintiff “would” obtain judgment for substantial damages against the defendant, not “would likely to”, and the standard of proof is a high one, on the balance of probabilities: Shenzhen Envirotex Electronics Co Ltd v Cellplus (HK) Ltd [2005] 4 HKLRD 217 at para 19.

(2) The court must be satisfied that the defendant has no arguable defence, such as one that would warrant the grant of unconditional leave in an O.14 application:  Commonwealth Holdings Plc v Quadrex Holdings Inc [1989] 3 All ER 492 at 519b.”

18.  As for the situation where a defence is so shadowy that only conditional leave to defend would be given in an Order 14 application, Mr Chain refers me to the following judgment of Sir Nicolas Browne-Wilkinson VC (as he then was) in British and Commonwealth Holdings plc v Quadrex Holdings Inc [1989] QB 842 at 866D-F:-

“In my judgment, in cases where on the evidence then before it, the court entertains sufficient doubts as to the genuineness of the defence to give only conditional leave to defend, it is possible for a court to be satisfied that the plaintiff will succeed at trial. Although in such a case it does not automatically follow that it is appropriate to make an order for interim payment, if in all the circumstances such payment appears sensible and desirable, in my judgment it can be ordered”.

19.  I am not hearing any application for summary judgment, although I have been told that the Plaintiff intends to make such application.  In principle, I consider that the same approach should be applied in deciding whether to make an order for interim payment, even though there is no Order 14 application before me.  Obviously, if and when such application is made, the parties may file further evidence in support of or in opposition to the application, and a different conclusion may be reached on the validity of the defence.  My decision here is given on the basis of the materials now before me.

20.  In my view, the defence raised by the 1^st Defendant is shadowy, for the following reasons.

21.  First, it is clear that the defence is based on the premise that Advance Chan entered into the Co-operation Agreement as agent for the Plaintiff, which in turn is based on a bare assertion of Lai that certain oral representations were made by Wong.  Although, as I have mentioned above, I am prepared to infer, for the purpose of the present application, that Advance China and the Plaintiff are related companies, there is no independent or contemporaneous evidence to prove that the alleged oral representations were made.

22.  Second, there is no evidence that Advance China was acting as the Plaintiff’s agent in entering into the Co-operation Agreement with the 1^st Defendant.   While Wong might have been a personal assistant of the late Nina Kung, there is no proof that he had any authority to speak on behalf of either Advance China or the Plaintiff.

23.  Third, the contention that Advance China acted as the Plaintiff’s agent in entering into the Co-operation Agreement does not sit comfortably with various express terms of the Co-operation Agreement, which recognize the Plaintiff as a separate party, for example:-

(1)   Clause 1 specifically identifies the Plaintiff as the owner and landlord of the Premises and states that Advance China has a tenancy agreement with the Plaintiff;

(2)   Clause 16 provides that the 1^st Defendant shall indemnify Advance China and/or the landlord (i.e. the Plaintiff) against any loss resulting from the 1^st Defendant’s conviction of any offence during the cooperation period; and

(3)   Clause 17 provides for the right of Advance China to terminate the Co-operation Agreement if the landlord intends to re-develop the Building.

24.  Fourth, the existence of a tenancy agreement between the Plaintiff and Advance China, referred to in Clause 1 of the Co-operation Agreement, is itself an indication of the separate roles intended to be played by the Plaintiff and Advance China vis-à-vis the 1^st Defendant.  I should add that I do not consider that there is any or any sufficient basis to support the 1^st Defendant’s contention that the Tenancy Agreement is a sham.

25.  Finally, the 1^st Defendant does not suggest that it is entitled to remain in occupation of the Premises as a tenant or that it has any legal or equitable interest in the Premises.  At the highest, it is a licensee of the Premises under the Co-operation Agreement. There is no defence raised that such licence is irrevocable, or that the 1^st Defendant is entitled to rely on some form of estoppel against the Plaintiff which would entitle it to remain in occupation of the Premises.

26.  Overall, I consider, on the existing materials, the 1^st Defendant’s defence to the Plaintiff’s claim for possession to be shadowy such that, had this been an application for summary judgment, it would have been open to me to grant only conditional leave to defence.

27.  I then consider the matter more generally.  The reality of the matter is that the 1^st Defendant has remained in occupation of very substantial commercial premises against the wish of the Plaintiff as the owner thereof for over 1 year without paying anything to the Plaintiff.  The balance sheet of the 1^st Defendant as at 31 March 2008 shows that the 1^st Defendant had net liabilities of over HK$1.6 million, and a share capital of HK$10,000 only, and the income statement of the 1^st Defendant for the period from 18 March 2006 to 31 March 2008 shows that the 1^st Defendant incurred a loss of over HK$1.6 million over that period.  I do not have more updated accounts of the 1^st Defendant before me, but the above accounts are produced by the 1^st Defendant.  There must be a risk that, should the Plaintiff succeed at trial, it may not be able to recover mesne profits from the 1^st Defendant.

28.  In all the circumstances, I consider that it is sensible and desirable that interim payment be ordered.

Application under Order 29 r11(1)(c)

29.  Having reached this conclusion, it is not necessary for me to consider the Plaintiff’s alternative application based on Order 29 r12(b).  I shall therefore only deal with it briefly.  As can be seen from Mr Chain’s Skeleton Submissions, this alternative application is based on the argument that pursuant to the Co-operation Agreement the 1^st Defendant still has to pay a monthly fee of at least HK$500,000 to Advance China for the occupation and use of the Premises.  However, as mentioned above, Mr Chain also accepts that the 1^st Defendant has no obligation to make such payment under Clause 11 of the Co-operation Agreement if there is no business being run or operated at the Premises.  Apparently, the 1^st Defendant has ceased business at the Premises because of the absence of a liquor licence and/or a light refreshment restaurant licence.  It is at least arguable that Advance China is in breach of the Co-operation Agreement for failing to procure such licences.  Hence, I consider that the 1^st Defendant has an arguable case to say that it is under no obligation to make any payment under Clause 11 of the Co-operation Agreement in the circumstances.

Conclusion

30.  For the above reasons, I make an order that:-

(1)   The 1^st Defendant shall, within 14 days from the date hereof, make an interim payment to the Plaintiff in the sum of HK$6,500,000 representing mesne profits for its occupation and use of the Premises, calculated at the rate of HK$500,000 per month for the period of 13 months from 1 December 2009 to 31 December 2010;

(2)   The 1^st Defendant shall make further monthly interim payments to the Plaintiff at the rate of HK$500,000 per month, such payments to be made on the 1^st day of each calendar month commencing on 1 January 2011, provided that the first such payment may be made on or before 14 January 2011, until possession of the Premises has been delivered up or until further order of the court.

(3)   The costs of this application be to the Plaintiff, summarily assessed at HK$75,000.