CHANGGANG DUNXIN ENTERPRISE CO LTD (IN LIQUIDATION) v. 北京精准溝通傳媒科技股份有限公司

HCA 133/2021

[2022] HKCFI 2646

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 133 OF 2021

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BETWEEN

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ASSESSMENT OF DAMAGES

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1.  The Plaintiff claims against the Defendant for damages as a result of the Defendant’s breach of the Restructuring Agreement dated 24 December 2018 (“the Restructuring Agreement”).

2.  Pursuant to the Order dated 7 April 2021, Interlocutory Judgment on liability and costs was entered for the Plaintiff against the Defendant, leaving damages to be assessed.

3.  This is the hearing for assessment of damages. The Defendant has not appeared or otherwise taken any step in these proceedings. The Plaintiff has duly notified the Defendant of the present hearing and served on it all relevant documents and orders.

Background to the Restructuring Agreement

4.  The Plaintiff is an investment holding company incorporated in the Cayman Islands. On 6 December 2012, it was registered as an overseas company in Hong Kong under Part XI of the former Companies Ordinance (Cap 32).

5.  Before its liquidation, the Plaintiff and its subsidiaries (“the Group”) were engaged in the business of producing and selling paperboards, corrugated medium boards and boxes, and playing cards in the People’s Republic of China (“the PRC”).

6.  The Plaintiff’s shares had since 26 June 2014 been listed on the Main Board of the Hong Kong Stock Exchange (“the Stock Exchange”), but the listing had been suspended from trading since 20 January 2016, and eventually cancelled on 16 October 2019.

7.  On 31 May 2017, a creditor of the Plaintiff issued a winding up petition against the Plaintiff in Hong Kong, and made an application for the appointment of joint and several provisional liquidators to the Plaintiff.

8.  On 5 June 2017, the Hong Kong Court appointed three persons, including Lau Wu Kwai King Lauren (“Lauren Lau”) as the joint and several provisional liquidators to the Plaintiff. The appointment was subsequently discharged on 11 June 2018 after they were appointed provisional liquidators in the Grand Court of the Cayman Islands (“the Cayman Court”).

9.  On 19 February 2018, an application was presented in the Cayman Court for the provisional liquidators to be appointed to the Plaintiff for the purpose of promoting the restructuring of the Plaintiff including a scheme of arrangement or other compromise to its creditors.

10.  On 12 March 2018, the Cayman Court granted the said application. On 23 April 2018, the Hong Kong Court recognised the said appointment.

11.  The Defendant is a company incorporated in the PRC.

12.  In around December 2018, the Defendant expressed an interest in the restructuring and was willing to commit and make available funds to facilitate the restructuring and the resumption of public trading in the shares of the Plaintiff. It was contemplated that the restructuring and the resumption would be effected by way of a reverse takeover of the Plaintiff by the Defendant, and would involve parallel schemes of arrangement in the Cayman Islands and in Hong Kong.

13.  On 24 December 2018, the provisional liquidators, the Plaintiff and the Defendant entered into the Restructuring Agreement, pursuant to which the parties have agreed to proceed with the restructuring, the resumption and the reverse takeover on the terms and conditions stipulated therein.

14.  Subsequent to the Defendant’s breach of the Restructuring Agreement as set out in paragraphs 15 to 23 below, a further application was presented on 1 June 2020 in the Cayman Court for orders that the Plaintiff be wound up and the provisional liquidators be appointed as the official liquidators. On 10 July 2020, the said application was granted by the Cayman Court. On 21 September 2020, the Hong Kong Court recognised the said appointment.

The Defendant’s Breach of the Restructuring Agreement

15.  Pursuant to the terms of the Restructuring Agreement, inter alia:-

(1) After the signing of the Restructuring Agreement, the provisional liquidators shall endeavour to agree with the Defendant the form of the resumption proposal to be submitted by the Plaintiff to the Stock Exchange for the purpose of the resumption. The Plaintiff, the provisional liquidators and the Defendant’s financial advisers shall draft the resumption proposal and then submit it to the Stock Exchange for approval.

(2) After receipt of the in-principle approval of the resumption proposal by the Stock Exchange and, if applicable, the Securities and Futures Commission (“the SFC”), the provisional liquidators shall endeavour to agree with the Defendant the terms of the agreements and other documents required to effect the restructuring, the resumption and/or the reverse takeover.

(3) The Plaintiff granted the exclusive right to the Defendant to, among other things, enter into or be involved in any discussion, negotiation or agreement with the Plaintiff and the provisional liquidators relating to the restructuring, the resumption and the reverse takeover, for the period from 24 December 2018 until the Termination Date as defined in the Restructuring Agreement.

(4) The Defendant undertakes to effect the restructuring and resumption by way of a reverse takeover in accordance with the principal terms as stipulated in the Restructuring Agreement.

(5) In consideration of the Plaintiff and the Provisional Liquidators granting the exclusive right to the Defendant, the Defendant shall pay earnest money in the total sum of HK$27,000,000 by four instalments in the manner as stipulated in the Restructuring Agreement. The earnest money shall be applied by the provisional liquidators towards discharge of the fees and expenses to be incurred in connection with the restructuring and the resumption; and any earnest money paid from time to time shall not be refundable notwithstanding termination of the Restructuring Agreement.

16.  On 24 December 2018, the Defendant paid the 1^st instalment of HK$300,000 to the provisional liquidators.

17.  On 2 January 2019, the Defendant paid the 2^nd instalment of HK$9,700,000 into an account held in the name of Messrs Huen & Partners Solicitors, the escrow agent jointly appointed by the Plaintiff and the Defendant pursuant to an escrow agreement entered on 31 December 2018.

18.  On 4 January 2019, the Plaintiff submitted the resumption proposal to the Stock Exchange. Since then, the provisional liquidators and their financial advisor have attended various communications with the Stock Exchange on the resumption proposal. The provisional liquidators have also contacted the SFC for comments or queries on their investigation report.

19.  However, on 7 March 2019 the Defendant without any prior notice, suddenly informed the Stock Exchange and the Plaintiff by letter that it would no longer participate in or facilitate the restructuring or resumption due to commercial reasons, and that it instead intended to arrange its business to be listed on the Hong Kong Stock Exchange by applying for an initial public offering (“the 7 March Letter”).

20.  On 8 March 2019, the Stock Exchange informed the Plaintiff that subject to clarification of the 7 March Letter and unless the Plaintiff could demonstrate that there existed a viable resumption proposal, the Stock Exchange would recommend the Listing Committee to cancel the Plaintiff’s listing.

21.  Subsequent to the 7 March Letter, the Plaintiff has repeatedly written to the Defendant to invite it to resume its support for the restructuring and resumption, but without success.

22.  On 8 August 2019, the Plaintiff was informed by the Stock Exchange that it had decided to reject any further submission of a new or revised resumption proposal.

23.  On 11 October 2019, the Stock Exchange announced the cancellation of the delisting publicly and the cancellation became effective on 16 October 2019.

24.  As a result of the Defendant’s breach, the 3^rd and 4^th instalments of earnest money payable respectively upon approval of the resumption proposal and after the date of resumption have never become due.

25.  Upon the Plaintiff’s enquiry about the 2^nd instalment of earnest money already paid to the escrow agent by the Defendant, the escrow agent by letter dated 17 May 2021 confirmed that the said sum of HK$9,700,000 was still held in the escrow account.

Damages Claimed

26.  The Plaintiff claims damages in the sum of HK$7,228,270 on a reliance loss basis, ie by reference to the professional fees incurred in reliance upon the promised performance of the Defendant under the Restructuring Agreement, as well as costs incurred in mitigating its loss suffered as a result of the Defendant’s breach.

27.  Lauren Lau was called to testify for the Plaintiff. Pursuant to the Order dated 9 September 2021, her witness statement stands as evidence in chief at the hearing for assessment of damages.

28.  Lauren Lau confirmed that the sum of HK$7,228,270 consisted of the following professional fees incurred in connection with the Restructuring Agreement, the resumption proposal and efforts to mitigate the loss caused by the breach of the Defendant:-

(a) HK$3,438,982 being professional fees of the provisional liquidators;

(b) HK$2,000,000 being professional fees of the Plaintiff’s financial advisor;

(c) HK$937,676 being professional fees of the legal advisor in Hong Kong; and

(d) HK$851,612 being professional fees of the legal advisor in Cayman Islands.

29.  The professional works done are clearly itemized and described with details and particulars, and with documentary support including the relevant bills. I find Lauren Lau’s evidence reliable.

Legal Principles : Damages on Reliance Basis

30.  The relevant legal principles have been summarised by DHCJ Marlene Ng (as she then was) in Ng Chi Kwan, Danny Summer v Yeung Yiu Kwan [2014] 5 HKLRD 744 at §§119-124. They are in gist as follows.

31.  Where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.

32.  The law of damages permits the claimant on breach of contract to seek damages on reliance basis, and to elect to claim damages by reference to expenses he incurred in reliance on the contract being performed.

33.  A claimant’s unfettered choice to claim reliance expenses is subject to one caveat, namely, the courts will not allow a claimant to escape from what is clearly a bad bargain by recovering damages protecting his reliance interest.

34.  The burden of proving that a claimant has made a bad bargain, ie, that he would not have recouped his expenses if the contract had been performed, is on the defendant. In this regard, it has been said that “the promisee may recover his outlay in preparation for the performance, subject to the privilege of the promisor to reduce it by as much as he can show that the promisee would have lost, if the contract had been performed.”.

35.  Therefore, in the absence of contrary proof that the claimant has entered into a bad bargain, the Court will assume in the claimant’s favour that he would have recouped all the costs incurred, and so will be willing to award damages to reimburse the claimant: Chitty on Contracts (34^th Ed) at §29-027 (p 2083).

36.  The types of reliance expenditure which may be awarded by the Court include:

(a) Expenditure directly related to the claimant’s own preparations for his performance, as where he has incurred the cost of labour and materials which will be wasted as a result of the breach.

(b) Expenditure not incurred in or towards the performance of the claimant’s own obligations but from which he expected to benefit as part of the activity in which he was engaged, and which he would have recouped had the contract been performed. Subject to mitigation, the claimant is entitled to damages to reimburse him for this expenditure, provided it was within the reasonable contemplation of the parties that it was not unlikely that the claimant would incur it in reliance on the contract, and that it would be wasted if the defendant committed the breach in question. See Chitty on Contracts (34^th Ed) at §§29-025, 29-030 (pp.2081, 2084-2085).

37.  Further, subject to the rules of causation and remoteness and to the test of acting reasonably, the claimant may recover as damages reasonable costs (which are commonly termed “incidental losses”) he incurred in mitigating the loss caused by the breach or in otherwise dealing with the consequences of the breach. See Chitty on Contracts (34^th Ed) at §29-038 (pp.2090-2091).

Assessment of Damages

38.  Applying the principles set out in paragraphs 30 to 37 above, the damages claimed by the Plaintiff fall within the claimable reliance expenditures.

39.  In the absence of contrary proof, these fees would have been recouped but for the Defendant’s breach. These fees have been completely wasted as a result of the Defendant’s failure to perform its side of the bargain under the Restructuring Agreement.

40.  Further, insofar as the fees were incurred towards the efforts to mitigate the loss caused by the Defendant’s breach, they amount to incidental losses. They were incurred reasonably, and were within the reasonable contemplation of the Defendant at the time of contracting as not unlikely losses flowing from its breach, being losses which resulted directly and naturally, in the ordinary course of events of its breach.

41.  For the above reasons, damages are assessed in the sum of HK$ 7,228,270, with interest thereon at 1% above the best lending rate quoted by HSBC from time to time from the date of the writ to date, and thereafter at judgment rate until date of payment.

Costs

42.  I make an order nisi that the Defendant do pay the Plaintiff’s costs of the assessment of damages, with certificate for counsel, to be taxed if not agreed.

43.  The order nisi shall become absolute unless an application to vary is made within 14 days from today.