HCA 2491/2008
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 2491 OF 2009
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BETWEEN |
| | 楊松 | Plaintiff |
and |
| | 陳華智 | Defendant |
| _____________ |
Before: Deputy High Court Judge Lok in Court
Dates of trial: 19-22 December 2011, 11 & 12 January 2012
Dates of written final submissions: 17 & 20 January 2012
Date of further oral final submissions: 29 March 2012
Date of Judgment: 11 May 2012
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JUDGMENT
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1. This is a dispute arising out of a transfer of shares agreement relating to a joint-venture business in the Mainland.
BACKGROUND
2. The plaintiff is a Mainland citizen. The defendant is a person holding a Hong Kong identity card but he stayed in the Mainland most of the time in recent years.
3. The defendant carried on a sole proprietor business under the name of “Eastasia International (Hong Kong) Industrial Company/東亞國際(香港)公司”(“Eastasia”) from 8 January 1993 to 6 January 1996.
4. In December 1993, the defendant, in the name of Eastasia, entered into a joint-venture business with Guiyang City Native Products and Household Sundry Goods General Corporation/貴陽市土產日雜總公司 (“the Guiyang Partner”) for a property development project in the city of Guiyang in the Mainland (“the JV Business”).
5. In the Re-Re-Re-Amended Statement of Claim, the plaintiff refers to two separate entities: “Eastasia in Hong Kong” and “Eastasia in PRC”. However, as there is no documentary evidence to show that there was a business entity registered under the name “Eastasia in PRC” in the Mainland, the plaintiff accepts that the entity “Eastasia in PRC” was only the defendant’s sole proprietor business as mentioned above.
6. Under the joint-venture agreement made between Eastasia and the Guiyang Partner (“the JV Agreement”):
(i) a Mainland company in the name of貴州東亞大廈物業有限公司/Guizhou Eastasia Building Property Limited Company (“the JV Company”) would be formed for the purpose of the property development under the JV Business;
(ii) Eastasia owned 60% of the shares and interest in the JV Company whilst the Guiyang Partner owned the remaining 40%;
(iii) the JV Company was to build a commercial complex and a tower block in the city of Guiyang, and the whole development was known as 貴州東亞大廈 /Guizhou Eastasia Building (“the Building”);
(iv) the Guiyang Partner was to provide the land for the Building;
(v) the total amount of the investment of the JV Business was RMB¥30,000,000, and Eastasia was responsible to inject the initial capital of RMB¥15,000,000 and to raise a further fund of RMB¥15,000,000 for the completion of the project of the JV Business;
(vi) in the event of Eastasia wishing to transfer its shares in the JV Company to a third party, the consent of the Guiyang Partner was required for such transfer and the latter had the pre-emptive right to purchase the shares; and
(vii) the defendant would be the chairman of the JV Company and its legal representative under the Mainland law.
7. From the outset, the JV Business was not a successful one. Although the Building was located at a prime site in the centre of Guiyang, there were unexpected problems including resumption of part of the land by the City Government and delay in the building work, which resulted in complaints and law suits by some of the buyers of the units in the Building.
8. In 1997, the defendant and the Guiyang Partner did not have the means to continue the building work. The construction work of the Building was suspended and only the commercial block consisting of 6 floors was completed.
9. The defendant had soon lost interest in the JV Business. On 31 December 1998, the defendant resigned as the chairman of the JV Company due to health reason and moved to live in Shenzhen. Since then, the JV Company was managed solely by the Guiyang Partner. Throughout the years, there were protests demanding for the completion of the Building which was causing some concern to the City Government of Guiyang. The creditors also took legal actions against the JV Company and Eastasia for the loans advanced for the JV Business.
10. One of the possible solutions to the deadlock was to introduce new investors to the JV Business. Through the introduction of the Deputy General Manager of the Guiyang Partner, the defendant came to know the plaintiff who expressed an interest in the JV Business.
11. On or about 6 October 2005, the defendant made an agreement with the plaintiff whereby the defendant agreed to transfer the interest of Eastasia in the JV Company to the plaintiff and for the plaintiff to be the chairman of the JV Company (“the Transfer Agreement”). As it would take some time for the plaintiff to be registered as the chairman and the legal representative of the JV Company, the defendant had authorised the plaintiff to handle all the matters relating to the JV Company on his behalf pending the completion of these formalities.
12. According to the evidence at the trial, bank loans in the total amount of RMB¥14,700,000 had already been advanced for the JV Business. By 2006, the JV Company owed one of the main creditors, Guiyang Commercial Bank, the sum of RMB¥20,000,000 inclusive of principal and interest.
13. In acquiring the defendant’s interest in the JV Company, the plaintiff agreed to take over the personal liability of the defendant in respect of the loans to the JV Company. It is the plaintiff’s case that, after the making of the Transfer Agreement, the plaintiff would work with the Guiyang Partner to negotiate with the various creditors to restructure and to write-off some of the loans.
14. Unfortunately, the rescue work did not proceed smoothly and there was dispute between the plaintiff and the Guiyang Partner. It was the plaintiff’s complaint that the Guiyang Partner had failed to account for the rental income that it had received on behalf of the JV Company throughout the years, and the plaintiff demanded to inspect the books of the JV Company. As there were many legal actions against the JV Company, the books of the Company had been seized by the court in the Mainland. In order to gain access to those books, the plaintiff, in the name of the defendant, commenced a legal action against the Guiyang Partner to inspect the books. On the other hand, the Guiyang Partner complained that the plaintiff had brought some gangsters to storm into the Building in March 2006 causing considerable unrest and disturbance.
15. As the defendant was still the legal representative of the JV Company, the Guiyang Partner and the City Government of Guiyang demanded the defendant to return to Guiyang to take care of the matter. The defendant reluctantly did so in late June 2006.
16. The defendant was immediately arrested by the police when he returned to Guiyang. For the first time after many years, the defendant was accused of obtaining loans improperly and using the same property to obtain multiple mortgage loans from different parties. He was released after a few days. Thereafter, the defendant was detained in a motel against his will for about 6 months.
17. By an agreement dated 7 January 2007, the defendant agreed to sell and transfer his interest in the JV Company to the Guiyang Partner. After the making of such agreement, the defendant was released and went back to Shenzhen.
18. By reason of such transfer of shares, the plaintiff was barred by the Guiyang Partner to take part in the management of the JV Company. The plaintiff regarded the transfer of shares to the Guiyang Partner as a breach of the Transfer Agreement, and he therefore issued the present proceedings in Hong Kong to claim for specific performance of the Transfer Agreement and damages in addition to or in lieu of specific performance.
PROGRESS OF THE PRESENT PROCEEDINGS
19. The Writ was issued on 1 December 2008. On 22 January 2009, the defendant took out an application to stay the proceedings on the ground of forum non conveniens but the same was dismissed by Master S Kwang on 11 May 2009.
20. The defendant filed the Defence on 12 October 2009. It is not disputed that the defendant had not transferred his interest in the JV Company to the plaintiff. However, according to the Re-Amended Defence, the defendant claims that the plaintiff was in breach of the implied terms of the Transfer Agreement. As the defendant accepted such repudiation on the part of the plaintiff and the Transfer Agreement had been terminated by such breach, the defendant was entitled to transfer his shares in the JV Company to the Guiyang Partner.
21. In the pre-trial review hearing before me on 25 October 2011, the parties agreed that if judgment is entered against the defendant and specific performance is not ordered, the assessment of damages would be tried separately at a later stage of the proceedings.
22. At the commencement of the trial, the plaintiff has abandoned the claim for specific performance of the Transfer Agreement, and the relief claimed by the plaintiff is therefore limited to damages. This is quite understandable as an order for specific performance would clearly affect the Guiyang Partner who has not been made a party to the proceedings.
23. One of the issues that has haunted the court throughout the proceedings is the pre-emptive right of the Guiyang Partner to purchase the shares of the JV Company. Obviously, such issue would be very relevant in determining, in the case that liability is established, whether specific performance should be ordered and the quantum of damages to be awarded to the plaintiff for the breach of the Transfer Agreement.
24. With a view to establish that the Guiyang Partner had no such pre-emptive right, the plaintiff, at the pre-trial stage, applied for leave to adduce expert report by a Mainland legal expert who stated that, under the Mainland law: (i) despite that Eastasia had ceased business in 1996, it was still a separate business entity in existence according to the civil law in the Mainland; (ii) the Transfer Agreement only involved the transfer of shares of Eastasia, which was a separate legal entity, and not the shares of the JV Company, and so the Guiyang Partner did not enjoy the pre-emptive right to purchase the shares of Eastasia; (iii) the transfer of shares by the defendant to the Guiyang Partner was unlawful under the Mainland law; and (iv) the dispute arising from the Transfer Agreement should be governed by the law of the Mainland. The application to adduce such expert report was dismissed by Master Levy, a decision which was upheld on appeal by Deputy Judge Seagroatt on 30 May 2011.
25. Pausing here, although the expert report is not evidence before the court, it seems that there is some inconsistency between the plaintiff’s case on the pleading and that contained in the expert report. According to the latter, Eastasia seemed to be a separate legal entity under the Mainland law, and since the Transfer Agreement only involved the transfer of shares of Eastasia itself, the Guiyang Partner did not enjoy the pre-emptive purchase right. However in the pleading, the plaintiff seems to accept that the Transfer Agreement involved the transfer of the defendant’s shares in the JV Company, and not the shares in Eastasia. It therefore follows that, according to the opinion of the Mainland legal expert, the Guiyang Partner still enjoyed the pre-emptive right. This may have a grave impact on the quantum of the plaintiff’s claim. Even if the defendant was not in repudiation of the Transfer Agreement, the plaintiff might not be able to obtain the defendant’s shares in the JV Company because such transfer was subject to the pre-emptive right of the Guiyang Partner. In such case, it is arguable that the plaintiff, even if he succeeds on liability, can only obtain nominal damages against the defendant.
26. Since leave was refused for the production of the expert report, I do not need to deal with this particular issue in the first stage of the trial.
27. At the early stage of the trial, I have ascertained from Mr Tsui, counsel for the defendant, whether the defendant is seeking to run a defence that the Transfer Agreement was of no legal effect because it was subject to a condition precedent that the consent of the Guiyang Partner had to be obtained prior to the transfer of the shares. However after looking at the correspondence between the parties, it has all along been the defendant’s position that the Transfer Agreement was subsisting at the relevant time and the plaintiff was in breach of such Agreement. In such circumstances, Mr Tsui agrees that the defence of “condition precedent” is not open to the defendant.
28. As the present case involves the laws of two jurisdictions and the issues relating to liability and quantum may become entwined, I doubt whether it is desirable to have spilt trials on liability and quantum despite the order I made earlier on 25 October 2011. However, at the commencement of the trial, both counsel try to convince me that the issue in the trial on liability is a simple one: whether the plaintiff was in breach of the Transfer Agreement as alleged by the defendant. If the answer is affirmative, the court can simply dismiss the claim. If the answer is negative, the parties would then proceed to the second stage of the trial dealing with assessment of damages. By reason of such consensus between the parties, I would only determine this particular issue in the first stage of the trial.
29. It is the defendant’s case that the plaintiff was in breach of the implied terms of the Transfer Agreement. As the plaintiff disputes such implied terms, there are two sub-issues in the first stage of the trial:
(i) whether the court should incorporate the implied terms as pleaded by the defendant in the Transfer Agreement;
(ii) if the answer is in the affirmative, whether, as a matter of fact, the plaintiff was in breach of such implied terms.
WHETHER THE COURT SHOULD INCORPORATE THE ALLEGED IMPLIED TERMS IN THE TRANSFER AGREEMENT?
30. The defendant’s case is that the plaintiff was in breach of the implied terms of the Transfer Agreement as particularised in paragraphs 13 and 14 of the Re-Amended Defence:
“13. The Defendants avers that to give effect to the common intention of the parties and/or to give business efficacy to the Transfer Agreement, it was an implied condition of the Transfer Agreement that the Plaintiff would take over the Defendant’s obligations for capital injection and make financial contributions to the Joint Venture to the satisfaction of the Guiyang Partner, and obtain the Transfer Approval for the proposed transfer of Eastasia in Hong Kong’s interests in the Joint Venture to the Plaintiff (“the Transfer Condition”). The Plaintiff represented to the Defendant that he had the financial means and was ready to take over the Defendant’s liabilities in return for the investment potential in the Joint Venture.
14. … … … The Defendant avers that, as matters turned out, the Plaintiff was not able to make the necessary financial contributions to the Joint Venture and even entered into a poor relationship with the Guiyang Partner. Despite positive interventions by the Defendant no improvement was seen and the Transfer Condition was not met. The Defendant therefore considered that the Plaintiff had breached the Transfer Agreement and informed the Plaintiff in August 2006, verbally through the Defendant’s daughter acting under the Defendant’s authority, that the Transfer Agreement was terminated. The said termination of the Transfer Agreement was accepted orally by the Plaintiff and confirmed by a written declaration of the Defendant’s daughter [dated] 7 August 2006.”
31. The implied terms alleged by the defendant are therefore as follows: (a) the plaintiff would take over the defendant’s obligation for capital injection and make financial contribution to the JV Business to the satisfaction of the Guiyang Partner; and (b) the plaintiff would obtain the approval for the proposed transfer under the Transfer Agreement.
32. It is trite law that, in order for the court to imply terms into a contract, the following conditions have to be met: (a) it must be reasonable and equitable; (b) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (c) it must be so obvious that “it goes without saying”; (d) it must be capable of clear expression; and (e) it must not contradict any express term of the contract (see: AG of Belize v Belize Telecom Ltd [2009] 1 WLR 1988).
33. According to the defendant, the first implied term required the plaintiff to inject capital into the JV Business to the satisfaction of the Guiyang Partner. When the parties negotiated for the Transfer Agreement, it is fair to say that they anticipated that plaintiff would inject capital into the JV Business so that the construction work of the tower block could continue. However, the problem with the implied term contended for by the defendant is that there was no limit to the plaintiff’s obligation. As the alleged implied term required the plaintiff to inject capital to the satisfaction of the Guiyang Partner, the plaintiff simply had to contribute whatever amount as requested by the Guiyang Partner. From the evidence, it is unclear as to how much money was needed to complete the project. It would then put the plaintiff completely at the mercy of the Guiyang Partner, and to me, no businessman would have agreed to such a term in the Transfer Agreement. As the term is neither reasonable nor necessary, there is no room for the court to imply such a term into the Transfer Agreement.
34. As to the second implied term contended for by the defendant, it is one thing to say that, by reason of Article 15 of the Articles of Association of the JV Company, the parties had to obtain the consent of the Guiyang Partner for the transfer of shares, but it is quite another thing to say that the plaintiff had the obligation to obtain the transfer approval from the Guiyang Partner, failing which the plaintiff would be in breach of the Transfer Agreement and liable to pay damages to the defendant. In fact, under the said Article 15, the Guiyang Partner had the complete discretion whether to give the consent for the transfer of shares by the defendant. If the plaintiff had the legal obligation to obtain the transfer approval, it would again put the plaintiff completely at the mercy of the Guiyang Partner. Even if the plaintiff was trying to develop a good working relationship with the Guiyang Partner, the latter was still free to veto the transfer. The implied term, therefore, makes very little business sense. As the term is neither reasonable nor necessary, there is also no room for the court to imply such a term to give business efficacy to the Transfer Agreement.
35. Mr Tsui submits that the Transfer Agreement, as it stood, was full of ambiguities. There were no particulars on the nature and the extent of the defendant’s rights and obligations in the JV Business that the plaintiff was to take over. Without incorporating the alleged implied terms, the Transfer Agreement would suffer from the defect of uncertainty of terms. There was also no mention of how the transfer approval was to be obtained, and so the alleged implied terms are clearly necessary for the Transfer Agreement to be effective.
36. This is a most unusual argument. Whilst I agree there is some uncertainty in the terms of the Transfer Agreement, it is not the defendant’s case that the Transfer Agreement is void for uncertainty. It is also trite law that the court cannot write the terms of the contract for the parties. Despite that there may be some gaps in the Transfer Agreement, the court cannot fill in such gaps with terms that are reasonable in the eyes of the court. Unless the conditions for the incorporation of the implied terms as mentioned above are met, the defendant’s argument on the implied terms cannot possibly succeed.
WHETHER THE PLAINTIFF WAS IN BREACH OF THE ALLEGED IMPLIED TERMS OF THE TRANSFER AGREEMENT?
37. As the court cannot imply the terms as contended for by the defendant, his defence on liability must fail. However, even if the court were to incorporate such implied terms in the Transfer Agreement, it is my finding that the plaintiff was not in breach of such terms.
38. According to the pleading, the defendant claims that the plaintiff was in breach of the implied terms because: (a) the plaintiff was not able to make the necessary financial contribution to the JV Business; and (b) the plaintiff entered into poor relationship with the Guiyang Partner and hence the Transfer Condition as defined in paragraph 13 of the Re-Amended Defence was not met (see: paragraph 14 of the Re-Amended Defence).
39. In determining whether there was any breach of the Transfer Agreement, I need to resolve some of the factual disputes between the parties.
(i) The creditability of the witnesses
40. On the factual issues, the plaintiff himself testifies at the trial. On the other hand, the following witnesses give evidence in support of the defendant’s case:
(i) the defendant himself;
(ii) 陳依迎 (Madam Chan Yee Ying) who is the defendant’s daughter (“Madam Chan”);
(iii) 姜文 (Madam Jiang Wen) who is the General Manager of the Guiyang Partner (“Madam Jiang”); and
(iv) 王加慶 (Mr Wang Jia Qing) who is a Mainland lawyer (“Mr Wang”).
41. After listening to the evidence of the plaintiff, I find him to be an honest and credible witness. He tells the court as to how he made the Transfer Agreement with the defendant. According to their oral agreement, he had to pay RMB¥490,000 to the defendant as the consideration for the transfer of the interest in the JV Company. The payment was made by instalment, and up to now he has paid at least RMB¥320,000 to the defendant. The plaintiff also agreed to take over the liability of the defendant in respect of the loans advanced to the JV Business. During the negotiation of the Transfer Agreement, the defendant told the plaintiff that he had already made capital contribution of more than RMB¥15,000,000 as required by the Articles of Association of the JV Company. To support the same, the defendant produced a 驗資報告 (capital fund investigation report) dated 10 July 1996 issued by 貴陽尚信審計事務所 (Guiyang Shangxin Audit Office) confirming the making of the capital contribution (“the Capital Fund Report”).
42. After the making of the Transfer Agreement, there were a lot of works to be done about the problems facing the JV Business, including the application for the lost land-title documents. The plaintiff also tells the court about the effort that he had made in reducing the debt liability of the JV Company, including the negotiation with the main creditor of the JV Business, Guiyang Commercial Bank, for the restructure of the loans. He also put up a personal deposit in the sum of RMB¥2,000,000 as a guarantee for such negotiation.
43. As the plaintiff found that the Guiyang Partner had failed to account for the rental income that it had received on behalf of the JV Company throughout the years, the plaintiff requested to inspect the books of the JV Company. As the books had been seized by the court in the Mainland, his contact in the Guiyang Partner told him that the only way to obtain the books was through legal process. Hence, the plaintiff, with the proper written authorization of the defendant as contained in the document exhibited as “P-1” (“the Written Authorisation”), took out a legal action in the name of the defendant against the Guiyang Partner seeking to inspect the books of the JV Company. The plaintiff also denies that he had ever forged the chop of the JV Company or the signature of the defendant in any documents.
44. The plaintiff had all along been willing and had the financial ability to inject capital into the JV Business, but nobody had made a specific request to him to inject a particular sum of money into the JV Business. According to the plaintiff, Madam Chan did inform him that, by reason of the breach of the Transfer Agreement on the part of the plaintiff, the defendant sought to terminate the Transfer Agreement. However, the plaintiff clearly indicated to Madam Chan that he did not accept the defendant’s allegation or the termination of the Transfer Agreement.
45. Despite the vigorous cross-examination, the plaintiff is able to give straightforward answer to every question put to him. He also gives a clear explanation as to why he made a mistake in the first witness statement by referring to the sum of RMB¥220,000 as the consideration for the transfer of the shares under the Transfer Agreement. He also clarifies the confusion relating to the exact amount of money paid by him to the defendant for the transfer of the shares. He makes no attempt to evade any questions put to him, and I therefore accept his evidence as the truth.
46. The difference in the evidence of the plaintiff and that of the defendant is actually quite small. In a way, the defendant can be regarded as a victim himself. He lost all the investment he made in respect of the JV Business. He only wanted to get out of the mess by transferring his shares to the plaintiff, yet he was detained for about 6 months when he returned to Guiyang to resolve the dispute between the plaintiff and the Guiyang Partner. Apparently under some kind of pressure, he had to cancel the Transfer Agreement and transferred his interest in the JV Company to the Guiyang Partner.
47. Despite the said observations, I do have some reservation about the creditability of the defendant’s evidence, in particular as to whether the sum of RMB¥320,000 he received from the plaintiff was the consideration for the transfer of the shares of the JV Company. According to the defendant, such sum of money was actually the investment made by the plaintiff for one of the defendant’s restaurants in Hong Kong, and he also produces some photographs showing that the plaintiff had sent flowers for the opening ceremony of the restaurant. However, if that was the case, there should have been some correspondence or contract between the parties about the said investment and the financial return of the relevant business. Yet, the defendant cannot produce any of these documents. According to the defendant, there was simply no written contract or further oral discussion between the parties about such “investment”, as if the plaintiff did not care about his money and the return from his investment. To me, this is quite incredible. Further, the purpose of such payment is an important issue in the case. If what the defendant says is the truth, it is very difficult to explain why he has not included such crucial allegation in his pleading or earlier witness statements. Hence, I prefer to accept the plaintiff’s evidence about the purpose for the payment of the sum of RMB¥320,000.
48. The evidence of the defendant about the Written Authorisation is also far from clear. In his oral testimony, he confirms that the signature on that document belonged to him. At one stage, he seems to suggest that when he signed on that document, that document was blank and so he had no knowledge of the contents of the document which were put in later by someone else. But subsequently, he accepts that there were words in the document when he signed the same. If he actually signed the Written Authorisation, it is very difficult to understand why the defendant claims that the plaintiff had issued legal proceedings against the Guiyang Partner without proper authorisation, even if there was confusion that the Written Authorisation was dated after the issue of the proceedings in the Mainland court.
49. The defendant also testifies in court that, in a meeting with the plaintiff in or about April 2006, he did mention to the plaintiff that the latter had not made the capital contribution for the JV Business. By that time, the plaintiff assured him that he would make the contribution in a month’s time. This is a completely new allegation. As one of the defendant’s main allegations is about the non-payment of capital contribution, it is very difficult to explain why the defendant has not included such important factual allegation in his pleading or earlier witness statement.
50. As I have grave reservation about the creditability of the defendant’s evidence, in the case that there is any difference in the evidence between the plaintiff and the defendant, I prefer to accept that of the plaintiff.
51. Madam Chan, the defendant’s daughter, also testifies at the trial. In or about July 2006, Madam Chan, upon the instruction of his father, informed the plaintiff that the defendant terminated the Transfer Agreement by reason of the plaintiff’s breach of the Agreement. By that time, the plaintiff indicated to her that he was sympathetic with the defendant’s situation as he was detained in Guiyang. The plaintiff also said that he would give up the JV Business.
52. After listening to Madam Chan’s evidence, it is certainly not clear, by making the said reply to Madam Chan, whether the plaintiff was only expressing words of comfort or the plaintiff had actually waived his right under the Transfer Agreement. As the plaintiff had put in considerable effort to rescue the JV Company and there was so much commercial interest at stake, it was unlikely that the plaintiff would have easily waived his right under the Transfer Agreement. Again, I prefer to accept the plaintiff’s evidence in this regard.
53. Madam Jiang, the General Manger of the Guiyang Partner, also testifies at the trial. According to her, the defendant and 李文高 (“Mr Lee Man Ko”), the General Manager of the JV Company, introduced the plaintiff to the Guiyang Partner as a possible investor of the JV Business. However, it was eventually found out that the plaintiff did not have the sincerity to solve the cash flow problem of the JV Company. He also could not gain the trust of the management and the staff of the JV Company. In March 2006, the plaintiff and some gangsters stormed into the Building and caused some social unrest. In the following month, the plaintiff wrongfully used the name of the defendant to sue the Guiyang Partner. Madam Jiang also states that the transfer of the shares by the defendant to the plaintiff under the Transfer Agreement was unlawful under the law of the Mainland because it was in breach of Article 15 of the Articles of Association of the JV Company.
54. After the making of the Transfer Agreement, there was a committee set up involving some high ranking officials of the City Government to deal with the debts of the JV Company. For the debt of more than RMB¥20,000,000 owed to the Guiyang Commercial Bank, the committee was able to convince the bank to write-off substantial part of the loan and as a result the JV Company only need to pay about RMB¥2,000,000 to discharge the liability for the debt. Up to now, the Guiyang Partner had repaid 70% of the loans. According to Madam Jiang, the plaintiff was not involved in these debt restructuring negotiations.
55. I myself have great reservation about the creditability of Madam Jiang’s evidence. Obviously, the Guiyang Partner has the most to gain from the transfer of the shares from the defendant. The problems with the mounting debt liability and the uncompleted project had been there for a long period of time. In such case, why had the Guiyang Partner, being one of the partners of the JV Business, not made some effort to solve the problems at an earlier time? Obviously, the Guiyang Partner did not have the means and the determination to solve the problems. However, the picture changed after the booming of the property market in the Mainland. It is beyond dispute that the property prices in Guiyang have rocketed in recent years, and the estimated market value of the completed project is now about RMB¥150,000,000. After obtaining the defendant’s shares in the JV Company, the Guiyang Partner, therefore, has the most to gain. It would also be in the interest of the Guiyang Partner to defeat the plaintiff’s interest in the JV Business by supporting the defendant’s case that the Transfer Agreement had been terminated by the repudiation of the plaintiff.
56. Madam Jiang complains that, contrary to the terms of the JV Agreement, the defendant only injected RMB¥9,000,000 into the JV Business instead of the stipulated amount of RMB¥15,000,000. However, the evidence shows that the defendant had personally obtained considerable amount of bank loans to finance the JV Business. Such loans should be treated as the defendant’s contributions to the JV Business. Further, the Capital Fund Report confirmed that the defendant had made the initial capital contribution in the amount of RMB¥15,000,000 for the JV Business. If the defendant had only contributed RMB¥9,000,000, it would virtually mean that the JV Company had submitted a false Capital Fund Report to the government authority in order to obtain the licence of the JV Company. I do not expect that the JV Company would have committed such blatant unlawful act.
57. According to Madam Jiang, the plaintiff was not involved in the debt restructuring negotiation. However, such negotiation only commenced after the making of the Transfer Agreement and the involvement of the plaintiff in the running of the JV Business. In such circumstances, it is very difficult for me to accept that the plaintiff had played no part in the exercise.
58. Madam Jiang is also evasive when she is asked about the rental income of the Building throughout the years. It is clear that the external wall of the Building had been leased out for advertising purposes for many years. However, Madam Jiang, being a senior management of the Guiyang Partner, just denies any knowledge of the rental income as, according to her, she was not responsible for the financial matters of the JV Company. Again, this is quite incredible.
59. Further, Madam Jiang’s evidence is also lacking material particulars. One of the important allegations of the defendant is that the plaintiff did not make the capital contribution for the JV Business. However, there is nothing to support Madam Jiang’s evidence as to why she says that the plaintiff did not have the financial ability to make such contribution. Further, there is also no documentary or even oral evidence to prove that the Guiyang Partner had made any specific request to the plaintiff for the contribution of the capital. In such circumstances, there is simply no substantive evidence to back up the defendant’s allegation that the plaintiff did not contribute the capital for the JV Business or that he did not have the financial ability to do so. Based on these observations, I reject Madam Jiang’s evidence in its entirety.
60. Neither can the evidence of the Mainland lawyer, Mr Wang, assist the defendant’s case. Mr Wang relies on some documents issued by the Mainland police to testify that: (a) the plaintiff had forged the chop of the JV Company and the signature of the defendant; and (b) the plaintiff had tried to get control of the Building by force on 27 March 2006 causing some damage to properties and social unrest. However, these are very serious allegations of criminal conducts. If there was substance to such allegations, one would wonder why there had been no prosecution in respect of the same. Without knowing how the Mainland police had arrived at the conclusion that the plaintiff had committed such serious criminal acts, I attach no weight to the alleged findings of the Mainland police.
61. Mr Wang also produces some documents of the Mainland court showing that the plaintiff had, without proper authorisation, issued legal proceedings in the name of the defendant in the Mainland court against the Guiyang Partner. However, the plaintiff is able to supply the court with the Written Authorisation signed by the defendant himself authorising the plaintiff to commence legal proceedings on his behalf. Again, without knowing how the Mainland court had arrived at the finding about the lack of proper authorisation, in particular the defendant was still detained in Guiyang when such finding was made, I attach no weight to the alleged finding of the Mainland court.
62. Further, Mr Wang appears evasive during cross-examination. Being the lawyer acting for the Guiyang Partner, Mr Wang claims that he does not know whether the books of the JV Company had been seized by the court or how long the defendant was detained in Guiyang. To me, it is quite inconceivable that Mr Wang has no such knowledge, bearing in mind that he was the person retained by the Guiyang Partner to advise them on various legal matters relating to their company. Obviously, Mr Wang would try his best to protect the interest of his client and to defeat the plaintiff’s interest under the Transfer Agreement. His interest in the case certainly undermines the creditability of his evidence.
63. By reason of the aforesaid, I accept the evidence of the plaintiff on the balance of probabilities and reject that of the defendant’s witnesses.
(ii) Alleged breach of the implied terms
64. After making such findings of fact, I turn to the question that, if the court were to incorporate the implied terms in the Transfer Agreement, whether the plaintiff was in breach of such terms.
65. The defendant’s first allegation of breach is that the plaintiff did not make the capital contribution for the JV Business. As the defendant stayed in Shenzhen at the material time, he knew very little about what happened in Guiyang and the dealing between the plaintiff and the Guiyang Partner about the injection of capital. The evidence in support of such allegation of breach mainly comes from Madam Jiang. However, as I reject Madam Jiang’s evidence in its entirety, the defendant’s first allegation must fail.
66. I would also like to make one more observation. According to the evidence, there had been no discussion between the plaintiff and the defendant as to how the former should make the capital contribution for the JV Business. Being an influential person who could ask the Deputy Head of the Province of Guizhou for assistance when the defendant was detained in Guiyang, the plaintiff negotiated with the various creditors of the JV Company and managed to reduce, to a considerable extent, the debt liability of the Company. Was the reduction of the debt liability of the JV Company a form of capital contribution? In my judgment, it is certainly arguable that it was one form of capital contribution. In any event, as there was no detailed discussion as to how and when the plaintiff should make the capital contribution, it is not possible for the defendant to contend that the plaintiff was in breach of the implied term in this regard.
67. The second allegation of breach is that the plaintiff had entered into poor relationship with the Guiyang Partner and hence the Transfer Condition as defined in paragraph 13 of the Re-Amended Defence was not met. Such implied term, according to the defendant’s case, imposed an obligation on the part of the plaintiff not to develop poor relationship with the Guiyang Partner. As I accept the plaintiff’s evidence as the truth, the Guiyang Partner had not allowed the plaintiff to inspect the books of the JV Company and it had failed to account for the rental income that it had received throughout the years. Does it mean that the plaintiff could not confront the Guiyang Partner even under such circumstances? This simply does not make any commercial sense, which also supports why the court should not imply such a term in the Transfer Agreement.
68. Further, in support of the allegation that the plaintiff had entered into poor relationship with the Guiyang Partner, the defendant is mainly relying on the following incidents:
(i) the plaintiff had failed to inject capital into the JV Business;
(ii) the plaintiff had forged the chop of the JV Company and the signature of the defendant;
(iii) the plaintiff had, without the proper authorisation of the defendant, commenced legal action against the Guiyang Partner in the name of the defendant; and
(iv) the plaintiff, on 27 March 2006, stormed into the Building with a group of gangsters causing considerable unrest and disturbance.
69. As mentioned above, I rule against the defendant on the factual issues relating to the first three incidents, and so there is no merit in these allegations. In respect of the fourth incident on 27 March 2006, court knows very little about the incident. Further, there is no positive evidence to show that the plaintiff was responsible for organising the unrest, or the plaintiff had been prosecuted by the police for causing the property damage and the social unrest during the incident. Taking into account the commercial interest involved, there is also no logical reason as to why the plaintiff had to deliberately antagonise the Guiyang Partner. Again I see no merit in such allegation.
70. Perhaps one can also approach the matter from another prospective. If the defendant’s argument on the implied terms is a valid one, it would virtually mean that the plaintiff had unlimited liability in making capital contribution for the JV Business, as he had to make such contribution to the satisfaction of the Guiyang Partner. Despite such unrealistic obligation, the plaintiff could not do anything to confront the Guiyang Partner, even if the latter denied the plaintiff to inspect the books of the JV Company and it had failed to account for the rental income that it had received on behalf of the JV Company throughout the years. This simply cannot be right, which also illustrates the absurdity of the defendant’s argument.
71. In conclusion, I refuse to incorporate the alleged implied terms in the Transfer Agreement. Even if I am wrong on such issue, I find that the plaintiff was not in breach of such implied terms. Hence, for the purpose of the first stage of the trial, I find that the plaintiff was not in breach of the Transfer Agreement and it was the defendant who was in repudiation of the Agreement.
Final observations
72. With the benefit of hindsight, I wonder whether this case should have been tried in Hong Kong. The only connection this case has with Hong Kong is that the defendant holds a permanent Hong Kong identity card. Yet he stayed in Shenzhen nearly all the time in recent years.
73. As the Transfer Agreement relates to a development project in the Mainland, the court has to face many challenges in trying the case in Hong Kong. Firstly, like many commercial contracts in the Mainland, there are a lot of gaps in the Transfer Agreement itself, and yet it is not the parties’ contention that the Transfer Agreement should be as treated as void for uncertainty. In such circumstances, the court has to proceed on the basis that there was a valid agreement between the parties despite all the uncertainties about the terms and the exact obligations of the parties under the Transfer Agreement.
74. The second challenge relates to the pre-emptive purchase right of the Guiyang Partner. Such issue may affect both the questions of liability and quantum, and yet throughout the trial, the parties are unclear as to how they are going to rely on such particular issue in advancing their respective cases. The difference between the laws in the two jurisdictions further complicates the problem. After repeated clarification with the parties, it is now settled that, though the pre-emptive purchase right may be relevant in considering the issue of implied terms, the defendant is not directly relying on the pre-emptive right in challenging the liability issue in the first stage of the trial. Obviously, the pre-emptive right would be relevant in considering the issue of quantum in the second stage of the trial.
75. Based on the aforesaid, I rule in favour of the plaintiff in the first stage of the trial. I make an order nisi that: (i) there be a declaration that the plaintiff was not in breach of the Transfer Agreement and it was the defendant who was in repudiation of the said Agreement; and (ii) costs be reserved. The order nisi shall be made absolute 14 days after the date of the handing down of this Judgment. I also direct the parties to write jointly to the court within 91 days to seek directions in respect of the future conduct of the case.
| (David Lok)
Deputy High Court Judge
|
Mr Andy Hung, instructed by Leung & Wan, for the plaintiff
Mr Wilfred Tsui, instructed by S K Wong & Lee, for the defendant