LIEU TSENG VAN v. JIUZHOU DEVELOPMENT CO LTD

HCA 1645/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1645 OF 2009

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REASONS FOR JUDGMENT

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1. I gave my judgment on the seventh of this month. I now give my reasons.

2. The claims and counterclaims in this action arose out of the failure of a negotiation for the sale and purchase of 80% of the shares of a company called Super Cruise Limited (“Super Cruise”).  Super Cruise owns and controls a recreation club called Pine Valley Sports and Country Club (“Pine Valley”) in Doumen District of Zhuhai City, Guangdong Province.  The plaintiff (“Lieu”) is and was the owner of 98% of the shares of Super Cruise.  The defendant (“JZD”), a company listed in the Hong Kong Stock Exchange, was the potential purchaser.  The only asset of Super Cruise is Pine Valley.

3. For the purpose of the negotiation, JZD signed a confidentiality undertaking dated 8 August 2008 to Lieu and Super Cruise agreeing to keep confidential the documents and information provided for its consideration in the negotiation.  JZD also paid Lieu RMB26 million in Hong Kong dollars equivalent as earnest money for the negotiation.  The repayment of the earnest money is secured by a share charge executed by Lieu and his wife Madam Chen Siu Ling, the 2nd defendant by counterclaim (“Chen”) over 400 or 80% of the shares of Super Cruise and by a loan assignment executed by Van Shipping Company Limited (“Van Shipping”), a company owned and controlled by Lieu, in favour of JZD.

4. JZD claims that the earnest money has become repayable but is still outstanding.  It has thus exercised its rights under the share charge and the loan assignment.  It has also appointed receivers pursuant to the share charge over the charged shares.  Lieu on the other hand claims that JZD has breached the confidentiality undertaking.  He also denies that the earnest money is repayable or that the rights under the share charge and loan assignment exercisable.

5. Lieu claims against JZD in his re-amended statement of claim for damages for breach of the confidentiality undertaking, damages for wrongful enforcement of the share charge, forfeiture of the earnest money (which he described as a deposit) or set-off of the same against the damages payable by JZD, and a declaration that the share charge be discharged or set aside.

6. JZD in its re-re-amended defence and counterclaim prays for repayment by Lieu of the earnest money, a declaration that it is entitled to enforce the share charge, a further declaration that its appointment of receivers is valid and effective, an order requiring Lieu and Chen to deliver up the books, documents and company seal and chops of Super Cruise, damages for breach of the share charge, and an indemnity for all costs, expenses and charges incurred in enforcing the share charge and the loan assignment.

Background

7. Super Cruise has issued and allotted 500 shares. 490 shares are held by Lieu and 10 by Chen. 

8. Super Cruise is the sole beneficial owner of Pine Valley.  Pine Valley operates a recreation club in Doumen District, Zhuhai City.  It has a country club, a golf course, a gun club and shooting range, a hunting area and other facilities for recreation and leisure.  It is the only golf club in Zhuhai that also has a gun club and hunting area.

9. A Zhuhai Huafa Industrial Company Limited (珠海華發實業股份有限公司) (“Huafa”) was interested in acquiring all the interest in Pine Valley.  Lieu said they had some negotiations in 2006 which were later called off by Lieu.  Huafa approached Lieu again in July 2008.  Lieu said Huafa offered him RMB250 million for all the shares in Super Cruise.  Before that, Lieu had also negotiated with a property developer in Hong Kong for the sale and purchase of 70% shares of Super Cruise.  The developer had paid Lieu an earnest money of HK$15million which was secured by Lieu’s pledge of 350 shares of Super Cruise.  The negotiation with the developer did not bear fruit.  Lieu later used part of the earnest money paid to him by JZD to repay the earnest money with interest to the developer.

10. Whilst Huafa was negotiating with Lieu, JZD approached Lieu on 7 August 2008 with a view to purchase 80% of the Super Cruise shares from Lieu.  JZD signed the confidentiality undertaking on 8 August.  By the undertaking, JZD undertook and agreed that the information and documents concerning Super Cruise, its subsidiary Pine Valley and its business and clients to be provided to JZD for review and consideration of the purchase were the confidential information that JZD would safeguard and not disclose to 3rd parties.  JZD further undertook to indemnity Lieu and Super Cruise for all loss and damage that would flow from the breach of the undertaking.  The exceptions from the undertaking were disclosures required by law or the listing rules of stock exchanges and information already available in the public domain. 

11. After the execution of the undertaking, Lieu provided some 136 English documents and records and some 341 Chinese documents and records to JZD on 9 August for the due diligence enquiry on Super Cruise and Pine Valley.

The Framework Agreement and the share charge

12. The parties then negotiated a share transfer framework agreement (權益轉讓框架協議).  This agreement was signed on 27 August 2008 and modified by a supplemental agreement signed on 10 September 2008.  The framework agreement as modified by the supplemental agreement is hereinafter called “the Framework Agreement”. 

13. Pursuant to the Framework Agreement, JZD also paid Lieu HK$30 million which was equivalent to RMB26 million.  Of this sum, HK$14,122,500 was paid to Lieu personally.  The balance of HK$15,877,500 was paid on Lieu’s behalf to an investment company as his repayment of the earnest money of HK$15 million with interest to the Hong Kong property developer and for discharge of his pledge of 350 Super Cruise’s shares.  On the same day, Lieu and Chen also executed the share charge over 400 Super Cruise’s shares (“the charged shares”) and Lieu on behalf of Van Shipping also executed the loan assignment in favour of JZD to secure the repayment of the earnest money.

14. The relevant terms of the Framework Agreement are:

「权益转让框架协议…

九洲发展有限公司 (以下简称“甲方”) ， …

吕政范先生 (以下简称“乙方”) ，…

一、权益转让

甲方拟向乙方购买 Super Cruise 400股股份，即佔 Super Cruise全部已发行股份的80% (称“目标权益”)，乙方拟向甲方转让目标权益 (“权益转让”)。

二、价格及支付

2.1 受限于甲方的尽职调查结果及权益转让协议的谈判结果，Super Cruise的80%股权拟作价不超逾人民币2.0亿元 (“转让价格”) ；作价的基础为：

2.1.1 乙方保证在双方签署权益转让协议时，“万盛”、“Super Cruise”不存在任何未了结诉讼。

2.1.2 乙方保证结清“万盛”、“Super Cruise”所有对外责务（包括但不限于股东贷款）。否则，转让价格按本框架协议第五条的方式扣减。

2.1.3 Super Cruise唯一的资产为其对万盛的权益（股份）（以下简称“万盛权益”）。

2.2 为免存疑，实际转让价格将以权益转让协议所载价格为准。在权益转让成交时，如果Super Cruise或万盛，负有任何经审计的债务，转让价格应按本框架协议第五条作相应的削减，审计日及审计账目方式由双方再行商议决定，有关条款将载于权益转让协议内。

…

2.4 转让价格分两期支付，首期人民币二千六百万元等值港币 (“交易保证金”)，… 转让价格的第二期于目标权益交割当日支付。

…

三、交易保证金

3.1 作为保证乙方根据3.2.1、3.2.2或3.2.5条退还交易保证金 (若发生) 予甲方之担保，在本框架协议签署当日，(i) 乙方须与甲方同时签订一份股份抵押协议 (其格式载于补充协议附件一)(“股份抵押协议”)，将乙方及陈小玲持有的共80% Super Cruise股权 (“抵押股权”) 抵押予甲方；及 (ii) 乙方须交付一份由 Van Shipping Company, Limited 妥为签署的债权抵押契据 (其格式载于补充协议附件二)(债权抵押契据)。

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3.2 交易保证金的处理

3.2.1 如甲方于进行尽职调查期间发现 Super Cruise 或万盛存在重大问题，包括但不限于法律，会计财务、或业务及发展方面 (包括但不限于 (仅作为范例) 土地房屋业权不清晰、自有土地不可持续开发或持续开发须补缴相关费用 (但改变现有土地使用权证书规定的用途 (旅游综合用地) 除外)、任何现时或计划经营的业务未取得所有有权审批的政府机关批准及发出有效证照、公司存在重大或然负债、股权或股东贷款的拥有权存在问题或争议等)，甲方有权按本框架协议第7.2款之规定向乙方出具交易退出函。乙方须在收到交易退出函后不迟于2008年12月31日按甲方支付的原币种退还金部交易保证金 (若为港币，则依原甲方支付日汇率计算) 及按1年期贷款利率计算的利息。

3.2.2 如发生下述任何一种情形：

(i) 如果于进行尽职调查期间并无发现 Super Cruise 或万盛存在重大问题，但甲方仍按本框架协议第7.2款之规定向乙方出具交易退出函；或

(ii) 因不可归责于甲方的原因，权益转让未能取得香港联交所的批准 (如有需要)；

(iii) 因不可归责于甲方的原因，权益转让未能取得甲方股东大会的批准 (如有需要)；

则乙方须于上述情況發生後不迟于2008年12月31日按甲方支付的原币种向甲方退还全部的交易保证金 (若为港币，则依原甲方支付日汇率计算) 及按香港上海汇丰银行最优惠计算的利息。其余部份归乙方所有作为对乙方的补偿。

…

3.2.4 如因甲方未遵守正式的权益转让协议 (“权益转让协议”) 的规定而导致转让未能完成，则全部交易保证金归乙方所有，乙方并继续保留所有的追索权。

3.2.5 如因乙方未遵守本框架协议或权益转让协议的规定而导致转让未能完成，则全部交易保证金须立即归还甲方，甲方并继续保留追索权。

3.3 抵押股份的处理

如出现3.2.1、 3.2.2或3.2.5条规定的情况，即乙方未能在2008年12月31日或之前退还属于甲方的交易保证金，则甲方有权按照股份抵押协议的规定对抵押股权自行处置及/或执行债权抵押契据。在此情况下，乙方须促使其及其联系人停止要求 Super Cruise偿还任何往来帐，在甲方要求时，乙方的联系人并须马上向甲方交付承诺函，承诺遵守上述规定，直至乙方收到甲方的书面批准为止。

四、权益转让的交割先决条件

权益转让协议将载有包括不限于以下的先决条件 (除下面第4.3项外，一方对另一方应满足的条件可给予全部或部分豁免遵守)；

4.1 甲方完成尽职调查，并在限定的时期对其结果，书面表示满意及接纳；

4.2 双方已签署 Super Cruise的股东协议；及

4.3 权益转让协议已获甲方股东大会和香港联交所的批准 (如适用)。

五、待清理债务

5.1 乙方在股份转让交割日前，应促使 Super Cruise及万盛清还所有对外欠款 (包括但不限于股东贷款)。但在交割时 Super Cruise及万盛如仍有任何对外欠款，其总额由双方共同认可的会计师事务所进行审计确定 (“待清理债务”)。

5.2 双方将根据待清理债务的经审计确定金额，相应降低转让价格，具体条款将载于权益转让协议内。 …

七、尽职调查

7.1 甲方应尽快完成对目标公司进行法律、会计财务和业务等方面的尽职调查，乙方为必要调查提供便利。甲方的尽职调查应于股份抵押协议项下的抵押股权手续完成后30个工作日内完成。

7.2 甲方在完成尽职调查后的当日，应向乙方出具对目标公司尽职调查结果满意确认函，或出具交易退出函，如甲方既不出具确认函又不出具退出函,甲方视为对尽职调查结果表示满意。

…

九、排他性 在本框架协议有效期内，乙方及其关联方不可与其它任何人就目标權益、万盛资产和股份的处置 (包括但不限于转让) 进行任何形式 (直接或间接) 的磋商、谈判或达成任何意向或安排。… 十一、有效期 本框架协议自股份抵押协议项下的抵押股权手续完成后即生效，有效期至2008年12月31日或权益转让签署之日 (以最早发生者为准)，除本框架协议中另有约定或法律另有规定外，任何一方不得擅自解除本框架协议。

…

十三、其它

13.1 本框架协议签署后，双方应尽快进行权益转让协议及股东协议的磋商，争取于2008年12月31日前完成权益转让协议的签署；

…

13.2 本框架协议的任何修订、修改或补充，须由双方签署书面文件；…」

15. I also append below the free translation of the relevant terms:

“Framework Agreement

…

Jiuzhou Development Company Limited (hereinbelow known as “Party A”), …

Mr Lieu Tsang Van (hereinbelow known as “Party B”), …

1. Subject matter of sale

Party A intend to purchase from Party B 400 shares in Super Cruise, which is the 80% of the issued shares (the “Subject shares”), Party B intends to sell the Subject shares to Party B (the “Sale and purchase”).

2. Price and payment

2.1 Subject to the result of due diligence conducted by Party A and the negotiation outcome of the sale and purchase agreement, the price for the 80% shares in Super Cruise shall not exceed RMB 2 billion dollars (“Sale and Purchase price”); the basis of fixing the price is:

2.1.1 Party B warrants that when the parties sign the sale and purchase agreement, “Pine Valley” (and) “Super Cruise” shall have no unfinished litigation.

2.1.2 Party B warrants that it will fully discharge all debts of “Pine Valley” (and) “Super Cruise” due to outsiders (including but not limited to shareholder loan). Otherwise, the sale and purchase price shall be deducted in accordance with the method in clause 5 of this framework agreement.

2.1.3 The only asset of Super Cruise is its rights of ownership over Pine Valley (shares) (hereinbelow called “Pine Valley rights of ownership).

2.2 For avoidance of doubt, the actual sale and purchase price shall be the price expressly provided in the sale and purchase agreement. On completion, should Super Cruise or Pine Valley is liable to any audited debts, the sale and purchase price shall be deducted in accordance with Clause 5 of this framework agreement, the day of audit and the format of accounts shall be negotiated and decided by parties and the relevant terms shall be incorporated in the Sale and Purchase Agreement.

…

2.4 The Sale and Purchase price shall be paid by two instalments, the first instalment shall be RMB 26 million or a equivalent sum in HK dollars (“Earnest money”), … the second instalment of the sale and purchase price shall be paid on the date of completion.

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3. Earnest money

3.1 As a security that Party B would return to Party A the Earnest money in accordance of clause 3.2.1, 3.2.2 or 3.2.5 (if so happened), on the date of execution of this framework agreement, (i) Party B shall enter into a share charge with Party A at the same time (in the prescribed format in attachment I of the supplemental agreement) (“Share Charge”), to charge the 80% shares in Super Cruise owned by Party B and Chan Siu Ling (陳少玲) to Party A; and (ii) Party B shall deliver a Loan assignment duly executed by Van Shipping Company, Limited (in the prescribed format in attachment 2 of the Loan Assignment)(Loan Assignment).

…

3.2 Handling of the Earnest money

3.2.1 Should Party A during due diligence discovers substantive problems in Super Cruise or Pine Valley, including but not limited to the aspects of legal, account and finance, or operational and development (including but not limited to (only serve as an example) unclear title for land and property, forbidding sustainable development on the free use land or relevant fee should be paid for such development (save and except the prescribed land use under the current land use certificate (mixed tourist land use)), any current or planned business projects failed to obtain approval or issued by relevant license by the responsible licensing government authorities, the company is liable to existing substantive contingent liabilities, ownership of shares or shareholder loan is under dispute etc), Party A shall have the right pursuant to clause 7.2 of this framework agreement to issue a notice of withdrawal. Party B shall, no later than 31.12.2008, return the full Earnest money paid in its original currency to Party A (if in HKD, exchange rate shall be the rate Party A advanced the Earnest money) with an interest at the rate calculated on the basis of a 1 year loan.

3.2.2 In the event that any of the following situations arises:

(i) If in the course of due diligence, no substantive problem was discovered in Super Cruise or Pine Valley but Party A still issue to Party B a notice of withdrawal under clause 7.2 of this framework agreement; or

(ii) for reasons not attributable to Party A, the sale and purchase was not approved by the Hong Kong Exchanges and Clearing Limited (if needed);

(iii) for reasons not attributable to Part A, the sale and purchase was not approved by the shareholder meeting (if needed);

Then Party B shall, no later than 31.12.2008, return the full Earnest money in its original currency to Party A (if in HKD, exchange rate shall be the rate Party A advanced the Earnest money) with an interest at the rate of the HSBC’s Best Lending Rate. …

3.2.4 If for the reason that Party A is not abiding the formal sale and purchase agreement (“Sale and Purchase Agreement”) and lead the failure of the transaction, then Party B shall be entitled to the whole sum of Earnest money and shall retain all actionable rights.

3.2.5 If for the reason that Party B is not abiding this framework agreement or the sale and purchase agreement and lead to the failure of the transaction, then the whole sum of Earnest money shall be returned to Party A immediately and Party A shall retain all actionable rights.

3.3 Handing of the charged shares

Shall the situations as prescribed under clauses 3.2.1, 3.2.2 or 3.2.5 arise, that Party B failed to return the Party A’s Earnest money on or before 31.12.2008, the Party A shall be entitled, pursuant to the provisions of the share charge, deal with the charged shares on its own motion and/or enforce the Loan Assignment. In the circumstances, Party B shall procure itself and its agent to stop demanding Super Cruise to repay any current debts, upon demand of Party A, agent of Party B shall immediate deliver an undertaking to Party A, undertake to be bound by the above provided regulation until Party B received from Party A a written approval.

4. Condition precedents for sale and purchase

The sale and purchase agreement shall provide but not limited to the following condition precedents (except Clause 4.3 below, one party shall waive the compliance of the whole or part of the conditions to be fulfilled by another party);

4.1 Party A completes the due diligence and within the prescribed period states in writing that it is satisfied with and accepts the result;

4.2 Both parties have signed the shareholders agreement of Super Cruise; and

4.3 The sale and purchase agreement has been approved by Party A’s shareholders at general meeting and Hong Kong Exchanges and Clearing Limited (if applicable).

5. Loans to be cleared

5.1 Before the completion date of sale and purchase, Party B shall procure Super Cruise and Pine Valley to clear all outstanding debt (including but not limited to shareholder loans). Should Super Cruise and Pine Valley be liable to any outstanding debt upon completion of sale and purchase, the total amount of such debt shall be audited and confirmed by an accountancy firm jointly approved by the parties (“Loans to be cleared”).

5.2 Both parties will reduce the price for the sale and purchase in accordance with the amount of the audited Loans to be cleared, detail provisions shall be prescribed in the sale and purchase agreement.

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7. Due diligence

7.1 Party A shall complete the due diligence in the aspects such as legal, accounting and finance and businesses to the targeted company as soon as possible. Party B shall facilitate the necessary inquiry. Party A shall complete the due diligence in 30 working days after the completion all procedures of the Share Charge as prescribed under the relevant section.

7.2 Party A shall issue to Party B a notice of satisfaction or notice of withdrawal regarding the due diligence to the targeted company at the date of the completion of the due diligence. Shall neither notice of satisfaction nor notice of withdrawal be issued by Party A, Party A shall be deemed satisfy with the result of the due diligence.

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9. Exclusivity

During the period of validity of this Framework Agreement, Party B and its related parties shall not consult, negotiate or reach any agreement or arrangement in any forms (directly or indirectly) with other parties regarding the targeted interests, assets of Pine Valley and the disposal of shares (including but not limited to transfer).

 

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11. Period of validity

This Framework Agreement shall take effect from the date of completion of the Share Charge to 31.12.2008 or the date of execution of the sale and purchase agreement (whichever is earlier). Unless otherwise agreed in this Framework Agreement or otherwise provided by law, no party shall be allowed to discharge this Framework Agreement.

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13. Miscellaneous

13.1 Parties shall as soon as possible commence negotiation of the sale and purchase agreement and shareholders agreement after the execution of this Framework Agreement with a target date for signing the sale and purchase agreement on or before 31.12.2008;

13.2   Any amendment, modification or supplement to this Framework Agreement shall be made in writing and signed by both parties; …”

16. I also append the relevant terms of the share charge below for reference:

“THIS DEED is dated the 10th day of September 2008

Interpretation

1.1 In this Deed (including the recitals hereto), except where the context otherwise requires:

…

“Charged Shares” means collectively, (i) all those 390 Shares in the capital of the Company beneficially owned by and registered in the name of Mr Lieu; and (ii) 10 Shares in the capital of the Company beneficially owned by and registered in the name of Ms Chen;

…

“Date of Satisfaction” means the date on which (i) Mr Lieu shall have duly performed and discharged all his repayment obligations under clause 3.2.1, 3.2.2 or 3.2.5 of the Letter of Intent; or …;

“Deposit” means the sum of RMB26,000,000 in HK Dollars equivalent paid by JZD to Mr Lieu pursuant to the Letter of Intent;

…

“Event of Default” means the events or circumstances mentioned in Clause 3.3 of the Letter of Intent;

…

“Letter of Intent” means the letter of intent dated 27 August 2008 made between Mr Lieu and JZD, as amended and supplemented by a supplemental agreement … on (10th) September 2008;

…

“Receiver” means the receiver or receivers appointed under Clause 9.1 and, …;

“Secured Debt” means the indebtedness, liabilities or obligations which the Chargors covenant to pay and discharge under Clause 2.1 or, where the context so admits, any part thereof;

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2. Covenant for Provisions

2.1 In consideration of JZD agreeing to enter into the Letter of Intent, the Chargors hereby jointly and severally covenant with JZD that they will pay and discharge to JZD on demand the Deposit and interest accrued on the Deposit in the occurrence of events or circumstances mentioned in Clause 3.2.1, 3.2.2 or 3.2.5 of the Letter of Intent.

3. Charing Provisions

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3.2 The Chargors shall deliver to JZD contemporaneously with the execution of this Deed the following:

(1) the share certificate(s) representing the Charged Shares and the undated instrument of transfer and bought/sold notes (substantially in the form of Schedule 2) in respect of the Charged Shares duly executed by the Chargors in blank;

(2) letters of resignation of all directors of the Company, duly signed but undated in the form of Schedule 3;

(3) undated resolution of all directors of the Company, in the form of Schedule 4, signed by all directors of the Company (accepting the resignations by Lieu and his wife as directors of the Company and approving the transfer of the charged shares to JZD or its nominee(s));

(4) Letter of authorization in the form of Schedule 5 signed by all directors of the Company (authorizing JZD to put into effect of the resolutions of the board of the Company as signed by Lieu and his wife and their resignations from the board); and

(5) irrevocable proxy in respect of the representation of the Chargors and nominee thereof at general meetings of the Company in form of Schedule 6;

(6) undertaking in the form of Schedule 7, signed by each of the companies or persons who are the associates of the Chargors and being creditors of the Company (undertaking not to demand repayment from the Company upon event of default save with consent of JZD);

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3.4 JZD shall be entitled to continue to hold any document delivered to it pursuant to Clauses 3.2 and 3.3 until the Date of Satisfaction.

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5. General Covenants and Undertakings

5.1 The Chargors hereby jointly and severally covenant with JZD that until the Date of Satisfaction, he/she will:

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(6) procure the registration of transfers of the Charged Securities and the entry of JZD or its nominee in the register of members of the Company as the holder of the Charged Securities and give all necessary assistance to JZD in arranging the registration of the transfer of the Charged Securities to JZD or its nominee in the books of the Company and the entry of JZD or its nominee in the register of members of the Company as the holder of the Charged Securities;

…

5.4 The Chargors hereby jointly and severally undertake with JZD that, forthwith on being required by notice from JZD or the Receiver so to do, the Chargors will at its own costs and expenses, execute and do all assurances, acts, deeds and things as JZD or the Receiver may require, and procure other interested parties so to do, for protecting or perfecting the security over all or any part of the Charged Securities or for facilitating the realization of all or any part of the Charged Securities and exercise of all powers, rights, remedies, authorities and discretions hereby vested in JZD or the Receiver. The Chargors shall, in particular, execute all transfers and assurances of all or any part of the Charged Securities whether to JZD or to its nominees or purchasers and give all notices, orders and directions which JZD or the Receiver may think expedient.

…

8. Enforcement of Security

8.1 Save where an Event of Default and/or any other event set forth below shall have been fully remedied to the satisfaction of JZD within 7 Business Days of a notice in writing given by JZD to the Chargors, JZD shall be entitled to declare all or any part of the security hereby created immediately enforceable;

(1) if any one or more of the Events of Default shall have occurred or is continuing; or

(2) if any of the Chargors has failed to pay any part of the Secured Debt when due or on demand; or

(3) if any of the Chargors is in default under any of the terms hereof, or of any other Security Documents to which any of the Chargors is a party; or

…

8.2 Upon the security hereby constituted becoming enforceable and at any time thereafter (whether or not any part of the Secured Debt remains unpaid or undischarged):

…

(2) the powers of appointing a receiver and the powers conferred on a mortgagee by this Deed or by enactment, statute or otherwise shall, to the extent not already exercisable, immediately arise and become exercisable;

…

9. Receiver

9.1 Upon the power of appointing a receiver becoming exercisable, JZD may appoint under seal or by writing under the hand of a duly authorized officer of JZD any one or more person or persons to be a receiver or receivers (jointly and severally where more than one person) of the Charged Securities or any part thereof and ….

9.2 The Receiver shall be the agent of the Chargors and the Chargors shall be solely responsible for his acts and remuneration as well as for any defaults committed by him …

…

14. Miscellaneous

14.1  Indulgence : Save as may be expressly provided herein to the contrary, time is of the essence of this Deed.  No failure or delay on the part of JZD to exercise any power, right or remedy under this Deed shall operate as a waiver thereof nor shall a waiver by JZD of any particular default by the Chargors affect or prejudice the power, right or remedy of JZD in respect of any other default or any subsequent default of the same or a different kind nor shall any single or partial exercise by JZD of any power, right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other power, right or remedy. …”

The public announcement of the negotiation and the news article

17. Lieu’s first claim is for damages for breach of the confidentiality undertaking by JZD.  The first public announcement of the negotiation of the sale and purchase of 80% of the shares of Super Cruise by JZD was made on 10 September 2008 for compliance with the listing rules.  The announcement therefore came within the exceptions to the undertaking.  The contents of the announcement had also been approved by the son of Lieu, Mr Wayne Lieu, on behalf of Lieu before publication.

18. The announcement said that JZD had on 27 August 2008 entered into a letter of intent (which was a reference to the original framework agreement) with a 3rd party in relation to the possible acquisition of 80% of the issued share capital of a Hong Kong company.  The letter of intent was amended by a supplemental letter dated 10 September 2008 and became effective on that date.  The target company was the owner of a foreign owned enterprise in the mainland.  The foreign owned enterprise was principally engaged in the running of a golf club, gun club, hunting area, hotel and sports training in Zhuhai.  JZD had to pay the 3rd party RMB26 million earnest money pursuant to the letter of intent.  The 3rd party agreed to grant JZD an exclusive right of negotiation up to 31 December 2008 when the letter of intent would expire if no formal agreement was made between the parties.  The repayment of the earnest money was secured by certain pledge given by the 3rd party over some shares of the target company.  JZD would perform further due diligence review on the target company within 30 business days and to negotiate and sign a formal agreement on or before 31 December 2008.  Should a formal agreement be signed, the letter of intent provided that the price for the 80% shares of the target company would not exceed RMB200 million.

19. There were then 5 golf clubs in Zhuhai, but only Pine Valley had a gun club and hunting area as well.  Though the announcement made no mention of Lieu, Super Cruise or Pine Valley, its reference to a golf club in Zhuhai that also had a gun club and hunting area was a clear reference to the club ran by Pine Valley.  Lieu in oral evidence also agreed that Pine Valley was well known in Zhuhai even before 2008.  If someone in Zhuhai should mention about a Zhuhai golf club with gun club and hunting facilities, people there would know that the club was Pine Valley.  Lieu further agreed that his negotiation with Huafa for the sale and purchase of Pine Valley before he was introduced to JDZ was also known to the people of Zhuhai.

20. After the publication of the announcement on 10 September 2008, there was then a news article appearing on 16 September 2008 edition of Zhujiang Wan Bao reporting on the negotiation between JZD and Lieu on the sale and purchase of 80% shares of Super Cruise.  The article was written by a reporter Mr Hsu Fei and referred to Lieu as the owner of the shares of Super Cruise which was the parent company of Pine Valley.  It stated that the price for the possible sale was RMB200 million instead of not exceeding that sum as mentioned in the announcement.  It also alleged that the General Manager of JZD, Mr Huang Xin had provided some information to the reporter.  Huang was alleged to have told the reporter that there were tough negotiations by various competitors with Pine Valley and they started in the previous year.

21. The news article also appeared in the internet portal of Zhuhai News Network on 16 September.  The news network is owned by Zhujiang Wan Bao.

Lieu’s complaint of breach of confidence

22. As a result of the news article in the newspaper and on the internet, Lieu on 17 September wrote a complaint letter to Huang of JZD.  Lieu said in the letter that enquiry by his staff with the newspaper revealed that the contents of the news article were provided by JZD, the article had been approved by JZD before publication and the reporter had perused the Framework Agreement.  Lieu complained that the Framework Agreement should have been kept confidential and not have been shown to the reporter.

23. He further said that the news article had caused worries amongst the staff of Pine Valley and induced many enquiries from suppliers, tour and other agents and the revenue department on the details of the Framework Agreement.  These caused him embarrassment and adverse effect. He asked JZD to clarify the erroneous reporting immediately.

24. After this, the issue of breach of confidence by JZD seemed to have gone to rest.  It was raised again by Lieu’s lawyers in a letter dated 20 February 2009.  The letter complained that JZD had leaked out to the media about the signing of the supplemental agreement (which amended the original framework agreement) and important information of the project.  The important information included the identities of the vendor, the target company and the price.  The letter also alleged that the disclosure led to other potential buyers undertaking interference actions to sabotage the deal between JZD and Lieu and causing serious damage to Lieu.

25. Lieu’s lawyers raised this issue again in a letter dated 17 April 2009 to JZD.  However, they raised it in connection with an allegation of insider dealing rather than Lieu’s loss or damage.

The disclosure in the news article

26. Both Huang and the reporter Hsu gave evidence on this matter.  Huang denied any breach of the confidentiality undertaking.  Both of them denied that Huang had provided any information to Hsu except a copy of the public announcement and the full title of the supplemental agreement.  My assessment of the credibility of Huang and Hsu on this issue is not entirely satisfactory. However, the important questions are the extent of the disclosure in the news article over and above that of the public announcement and whether Lieu has suffered therefrom.

27. Though the announcement did not name Pine Valley as the subject of the sale and purchase negotiation, the description therein of the business under negotiation has clearly identified to the people of Zhuhai that Pine Valley was it.  Hsu, being a reporter responsible for tourism and economic news of Zhuhai, would have known that Pine Valley was being discussed for the sale and purchase.  Hence, the naming of Pine Valley in the news article did not have the effect of a disclosure of something not already made known by the announcement.

28. The news article also mentioned that Pine Valley’s parent company was Super Cruise and the shares of Super Cruise were held by Lieu.  However, once the identity of Pine Valley is known from the announcement, the additional information of its parent and the shareholder of the parent is not of any sensitivity.  Such information was also available from the Zhuhai government upon payment of a fee. 

29. The further matters that have been disclosed in the news article but not in the announcement were the full title of the supplemental agreement and the quantity of the charged shares was at 80%.

30. The news article also carried some brief history of Pine Valley. It also contained some inaccurate information like JZD had been in the talks since the previous year, there were 3 competitors in the talks and price of the deal was at RMB200 million rather than not exceeding that sum. These inaccuracies might have added colours to the article, but they were not disclosures of confidential information. 

31. The article also contains an alleged confirmation by Pine Valley to the reporter of the proposed sale and purchase, but Lieu and Mr Wu Wei of Pine Valley both denied that Pine Valley had provided the confirmation.  This could have been another inaccuracy in the article.  The method and style of reporting in this article left much to be desired.

Lieu’s first claim for breach of confidence and decision thereon

32. Lieu pleaded his loss and damage from the breach of the confidentiality undertaking in paras 22 to 26 of his re-amended statement of claim.  He alleged that two potential purchasers had offered to purchase 70% of the interest in Pine Valley in about January 2009 on the basis of an agreed valuation of RMB266 million.  These purchasers however withdrew on learning of the price mentioned in the Framework Agreement.  Lieu did not say whether the purchasers were apprised of the “RMB200 million” price from the news article or the “not exceeding RMB200 million” price from the announcement.  He went on to allege that after the withdrawal of the 2 bidders, there was no one willing to offer anything better than RMB200 million for 80% of Pine Valley or Super Cruise. 

33. He further alleged that after the failure of his negotiation with JZD, he was unable to negotiate with Huafa for the sale of the entire interest in Pine Valley at RMB250 million.  He was also unable to negotiate with any purchaser for the Pine Valley at RMB300 million which was the price of a valuation of it as at 3 July 2009. 

34. If this claim should arise from the disclosure in the news article that the price for 80% of Super Cruise shares was at RMB200 million, then this claim must fail once it is accepted that the subject of negotiation referred to in the public announcement was Pine Valley.  The obvious reason is that this price information in the article had already been made public with Lieu’s consent in the announcement.  In fact the price of “RMB200 million” mentioned in the article was better than the price of “not exceeding RMB200 million” mentioned in the announcement. 

35. Furthermore, the mere fact of negotiation with 2 potential purchasers without the making of any agreement with them is too remote a ground to justify any damages.  Such claim is wholly speculative (see Halifax Building Society v Urquart-Dykes & Lord [1997] RPC 55 at 87, line 17-22 and Gosfield School Ltd v Birkett Long (a firm) [2006] PNLR 342 at paras 125-131).  I therefore dismiss this claim for loss and damage for breach of the confidentiality undertaking or Framework Agreement. 

Lieu’s second claim for breach of confidence and decision thereon

36. Lieu’s next claim for loss and damage from JZD’s breach of confidence is grounded on a claim by the Sanli Villagers’ Committee. The village committee claimed that the village was entitled to possession of some 200 mu land occupied by Pine Valley.  Lieu alleged that the village committee made this claim after learning of the proposed acquisition.  They used this claim to pressure Lieu for compensation.  Lieu pleaded that the villagers had on 14 March, 4 April and 1 May 2009 attempted to block access to Pine Valley thereby causing disruption to its business and frightened the staff, customers and potential purchasers.  Wu Wei of Pine Valley also gave evidence for Lieu that the villagers had indeed blocked the access to Pine Valley on those days. 

37. However, if the villagers’ actions were sparked off by the disclosure of negotiation of sale of Pine Valley in the news article published on 16 September 2008, one wonders why they would have waited for some 6 months before acting on 14 March 2009.  Further, the negotiation for the sale of Pine Valley to JZD had already been made known for the first time in the public announcement on 10 September.  There was nothing more in the article that would have encouraged the villagers to act if they had not been so encouraged by the announcement.  The fact that Lieu had been negotiating to sell Pine Valley to Huafa was also known in Zhuhai including the Sanli Village before JZD had come into the picture. 

38. In fact, Lieu’s case as unfolded at the trial was that Huafa was behind the villagers’ action.  Huafa was JZD’s competitor and did not want JZD to succeed in acquiring Pine Valley.  One Leung Ka Wing, who was in a close relationship with one Yuen Shiu Bor of Huafa, then instigated the villagers to act against Pine Valley to sabotage the proposed sale.  Lieu further admitted that Huafa would have learnt from the announcement that JZD was negotiating with Lieu for the purchase of Pine Valley.  Hence, any loss or damage flowed from the actions of the villagers would have been ultimately caused by the public announcement rather than the news article.  In the premises, there is no basis for Lieu to blame the news article for the villagers’ actions.  I therefore dismiss this second claim for damages for breach of confidence as well. 

Due diligence and title problems identified in it

39. The next issue between the parties is on the conduct of the due diligence and up to what time it should have been completed. This further leads to whether JZD was entitled to demand the return of the earnest money on 27 May 2009 under the Framework Agreement and on 3 June 2009 under the share charge.  It is therefore necessary to look into the correspondence on the due diligence. 

40. According to clause 7.1 of the Framework Agreement, the due diligence should be completed within 30 working days after 10 September. Mr Kwok, counsel for Lieu calculated that the due diligence should have been completed by 29 October.

41. JZD had raised some questions on the assets and liabilities of Super Cruise and Pine Valley on 13 August 2008 before signing the Framework Agreement.  Lieu had also provided some answers as supported by some documentation on 14 August.

42. JZD continued with the due diligence after the signing of the aforesaid agreements and security documents.  It pleaded in the re-re-amended counterclaim that there were 3 land title issues relating to 3 areas occupied and used by Pine Valley that it regarded as problematic.  The 3 matters are pleaded in paragraph 61 of the counterclaim as follows:

“61. So far as the land title problems are concerned, it was revealed during Due Diligence that:-

(1) The 200 acres (should be “mu”) of free use land (自有土地) was originally owned by Sanli Village committee and later resumed as national land and transferred to 斗門赤鼻島工貿公司 (“Doumen Company”), which was liable to pay compensation to Sanli Village committee for the lost (sic) of the resumed land. The land was subsequently injected by Doumen Company in Pine Valley in exchange for 10% equity interest. Pine Valley was unable to produce any documentation to show that Doumen Company had paid the requisite compensation to Sanli Village committee.

(2) The lease between Pine Valley and Sanli Village committee for the use of the mountain slope (出租山坡地) had already expired. Sanli Village committee had decided not to renew the lease with Pine Valley, thereby making it impossible for Pine Valley to continue to operate its business on the mountain slope.

(3) Pine Valley had not entered into any lease with the water authority (斗門區乾務鎮水利會) over the use of the land covering the reservoir (水庫出租地) located within the facilities operated by Pine Valley.”

43. The first problem relating to the 200 mu land was in fact not mentioned in the due diligence correspondence until after 31 December 2008.  The second problem of the mountain slope land owned by Sanli Village was first identified by JZD in a letter to Lieu dated 13 August 2008.  Regarding the third problem relating to the land over the reservoir, JZD’s lawyer Madam Zhang had on as early as 20 October proposed a draft lease for execution between Pine Valley and the water authority. 

44. JZD’s lawyers on 20 October requested the provision of certain documents for their consideration for the due diligence.  Super Cruise complied with the request by providing a number of documents on 23 October.

Extension of time for due diligence

45. 29 October came and went, but JZD did not issue any certificate of satisfaction with the due diligence or certificate of withdrawal pursuant to clause 7.2 of the Framework Agreement.  Nevertheless, nobody said anything about the deadline for completion of the due diligence.  Lieu also did not say that under clause 7.2, JZD was deemed to have been satisfied with the result of due diligence.  This was so because both sides knew that the due diligence was still continuing.  This was clearly demonstrated by the subsequent correspondence between the parties. 

46. Furthermore, if Lieu should rely on the deeming provision, that could force JZD to issue a notice of withdrawal under clause 7.2 by relying on clause 3.2.2(i) of the Framework Agreement.  In that event, Lieu would have to repay the earnest money with interest at the best lending rate of the Hong Kong Bank no later than 31 December 2008.  In the light of Lieu’s then financial condition as revealed in the due diligence of Super Cruise, he obviously did not have the funds to effect the repayment.

47. On 7 November, JZD’s lawyer Madam Zhang revised and re-circulated the draft lease regarding the reservoir land to all concerned. Then Wayne Lieu on 13 November sent an email on behalf of Lieu to one Mr Y K Poon, the then financial controller and company secretary of JZD. He said in the email “… on due diligence work progress, please confirm with your lawyers … and advise what are the outstanding items/issues requiring our attention in order to meet the requirement of Securities and Futures Commission (SFC).”  This clearly indicated that Lieu was contented with the continuation of the due diligence and was cooperating with it despite the passing of the deadline and the deeming provision in clause 7.2. 

48. JZD replied on 14 November and raised mainly a number of loans due to Super Cruise’s director and outsiders.  Wayne Lieu replied on 17 November by referring to clause 2.2 of the Framework Agreement which provided for the deduction of all outstanding loans from the purchase price.  JZD responded also on 17 November and said that the due diligence had not been completed because Lieu had not provided the various loan documentation and letters confirming the outstanding amounts.  The letter further said that the particulars of the documentation and outstanding debts had to be listed in the due diligence report and the sale and purchase agreement.  Hence, JZD repeated its request for the documentation.  JZD’s Hong Kong solicitors repeated in a letter dated 18 November the request for the loan documentation for the purpose of the due diligence.

49. Though the parties had mentioned about the loans again in subsequent correspondence, the provision of loan documentation did not seem to be an issue of real concern to JZD.  It was not mentioned in the defence and counterclaim at all.  I would therefore make no more mention about it. 

50. Since the due diligence exercise was still continuing with the collaboration of Lieu, the 30-working-day time limit for its completion under clause 7.1 must have been extended.  The extension must have applied to the date for JZD to issue a certificate of satisfaction or withdrawal or for JZD to be deemed to be satisfied with the due diligence under clause 7.2.  Lieu had also elected not to invoke the deeming effect in clause 7.2 on the passing of 31 December 2008.  The extension of the date under clause 7.2 would also mean the extension of the date for JZD to exercise its rights under clauses 3.2.1, 3.2.2 and 3.2.5.  The deadline of 31 December 2008 in clauses 3.2.1 and 3.2.2 for Lieu to repay the earnest money with interest was likewise extended.  The same applied to the payment deadline in clause 3.3 the default of which is an event of default under the share charge.

51. However, the extension of time could not have been indefinite.  I think when the due diligence should reasonably have been completed, it would then be open to Lieu to put JZD on election on what to do under clause 7.2 and to act accordingly within a reasonable time thereafter.  This time would also depend on whether Lieu was willing to allow the due diligence to continue.  If JZD should, when put to election, decide to issue a certificate of withdrawal and demand the earnest money back with interest, Lieu would have to make payment within a reasonable time after the demand so as to avoid an even to default under clause 3.3 and JZD’s exercise or rights under the share charge and the loan assignment.  JZD could also act under clauses 7.2, 3.2.1 or 3.2.2 at any time before it was put to election by Lieu (see Ng Chek Kwok v Kiu Wai Ming (1992) 1 HKLR 5).  (Since I take the view that the earnest money is not forfeitable by Lieu as I will explain below, JZD could also have asked for the money back even if it should fail to do so within a reasonable time after the completion of due diligence, expiry of the Framework Agreement or after it had been put to election by Lieu.)

52. On 19 November, Lieu wrote to Huang and responded to JZD’s suggestion of paying the smaller sum of RMB172 million for 80% shares of Super Cruise.  Lieu said that in the light of the amount offered, which was the result of the drastic downturn of the world economy, he offered to increase the shares to be sold from 80% to 90%.  Lieu further asked JZD to consult its lawyers on the existing situation of the leased mountain slope of Pine Valley and to accept the status quo rather than to request the Sanli Village Committee to sign a new lease.  He said that a new lease would alter the then favourable lease terms.  He ended the letter by requesting JZD to speed up the necessary procedure and close the deal before the end of the year. 

53. JZD’s lawyer, Madam Zhang circulated another draft lease of the reservoir land on 10 December to all concerned.

54. On 18 December, Wayne Lieu wrote to Y K Poon acknowledging receipt of a draft sale and purchase agreement.  He also said that he understood JZD’s lawyers had completed the due diligence to reach the final negotiation stage of negotiation for the sale and purchase agreement and he looked forward to the successful completion of the deal.  But he did not refer to clause 7.2 of the Framework Agreement or ask JZD to issue a certificate of satisfaction or assert that JZD’s satisfaction with the due diligence had been deemed.  He merely expressed his understanding that the due diligence had been completed and he hoped to have the sale and purchase agreement signed by 31 December 2008.  That was the target date provided in clause 13.1 of the Framework Agreement.

Completion of due diligence

55. If JZD’s purpose in conducting the due diligence was to verify all the assets and liabilities including debts of Super Cruise and Pine Valley, find out whether they had any legal or tax problem or risk of litigation and to get to know their management team, I think this exercise should have been completed sometime before 31 December 2008.  The pleaded first land title problem relating to the 200 mu land had not been mentioned in the correspondence until after December 2008.  The second and third pleaded land title problems were known to JZD before the end of October.

56. Regarding the reservoir land in the third pleaded problem, Pine Valley had entered into agreements of usage on 22 August 1996 and 17 March 1997 with a Doumen County Wushan Lianwei Project Management Department (斗門縣五山聯圍工程管理處).  But JZD took the view that this department did not have the right to lease the reservoir land to Pine Valley and it was the local water authority responsible for the reservoir that had such right.  JZD thus assisted Lieu to liaise with the water authority which promised to enter into a lease over the reservoir land with Pine Valley.  JZD’s lawyer Madam Zhang had also on 20 October 2008 circulated the draft lease for the reservoir land to all parties concerned.

57. Regarding the mountain slope land owned by Sanli Village in the second pleaded problem, JZD had prior to 19 November 2008 asked Lieu to procure a fresh lease between Pine Valley and the Sanli Village Committee which would have a term coterminous with the business period of the golf club.  This lease problem was first identified in JZD’s letter to Lieu and dated 13 August 2008.  Lieu’s position was that the golf course land had a 50-year lease and would be coterminous with the business period of the club. It was the land where the gun club stood that was rented from the villagers for a 10-year term (Lieu’s solicitors later said in a letter dated 17 April 2009 that there were 2,700 mu such land and all but 108 mu had lease term coterminous with the business period of Pine Valley whilst the lease for the 108 mu would expire in 2015 but had renewal provisions).  Hence, this problem was known to JZD even before the signing of the Framework Agreement. 

58. It turned out that JZD did not accept Pine Valley’s lease over the 108 mu land as satisfactory and insisted that Lieu should enter into a new lease with Sanli Village Committee for the mountain slope.  JZD also provided a draft lease to Lieu to lengthen the term for this 108 mu on the slope so that it would be coterminous with the neighbouring land.

59. Regarding the 200 mu free use land in the first pleaded problem, JZD all along knew that it was land resumed by Doumen County Government and injected into Pine Valley as capital contribution for a 10% interest in Pine Valley which interest the government later sold to Lieu.  This land had a land use certificate issued by the Doumen County Branch of the National Land and Resources Bureau.  JZD raised a problem about this land in its letter of 13 August.  That was not the same problem as now expressed in the counterclaim.  Lieu then addressed to that problem in his reply of 14 August.

60. However, the villagers of Sanli Village suddenly asserted a new claim by a letter to Pine Valley and dated 23 December 2008. They asserted that this land was occupied by Pine Valley illegally.  It is this issue that JZD now relies on in the counterclaim.  But this issue created by villagers did not appear to have any basis.  Lieu’s solicitors had by a letter dated 30 December 2008 to the villagers clarified the situation.  They made it clear that Pine Valley had a government land use certificate for the land. 

61. This issue was, from the standpoint of the Doumen Branch of National Land and Resources Bureau, also a non-issue.  The bureau issued a letter dated 12 February 2009 to the People’s Government of Doumen confirming that Pine Valley had a land use certificate for this land and the villager’s claim for compensation should be addressed to the local county government. 

62. This issue was in fact not mentioned by JZD in the correspondence on the due diligence until shortly before 11 March when JZD mentioned it to Lieu.  Lieu’s solicitors then explained the situation in a letter dated 11 March to JZD.  JZD’s solicitors replied by a letter dated 12 March and only made a general and unparticularised allegation on Pine Valley’s acquisition of this land.  The problem on this 200 mu land thus arose after JZD had completed the due diligence.  It was also without basis.

63. JZD thus had before 31 December 2008 learnt of the then existing problems of the lands occupied by Pine Valley.  The due diligence should have been completed insofar as land titles were concerned. This was so regardless of whether JZD was happy with such titles.  In this action, JZD is only relying on land title problems allegedly discovered in the due diligence and not any other problem. 

Rectification of title problems

64. JZD was obviously keen to complete the sale and purchase.  That was why it did not issue a certificate of withdrawal under clause 7.2 despite the discovery of the title problems.  But it required a good due diligence report to show to the shareholders to secure their approval for the purchase.  A good due diligence report would require the rectification of the land title problems.  The rectification required Pine Valley to enter into a lease for the reservoir land with the local water authority and another lease of the appropriate term for the 108 mu of land on the mountain slope.

65. JZD in fact provided assistance to Lieu and Pine Valley in securing these 2 leases.  JZD had liaised with the water authority and provided several drafts of the lease for the reservoir land.  Mr Wu Wai of Pine Valley also had meetings with the water authority on this matter.  One of the meetings took place on 19 December wherein Mr Wu discussed the draft lease with the water authority.  He advised JZD’s lawyer Madam Zhang about this meeting by an email of the same date.  JZD also provided a draft lease for the 108 mu land on the slope.  Its lawyer also accompanied Lieu’s staff to attend a meeting with the Sanli Village Committee.  But the villagers were not cooperative.  Rumour has it that they were on the side of Huafa and assisted Huafa to sabotage JZD’s negotiation with Lieu.

Extension of the Framework Agreement

66. 31 December 2008 came and went.  Nobody referred to the expiry of the Framework Agreement under its clause 11.  Lieu also did not return the earnest money under clause 3.2.1 or 3.2.2 because JZD did not issue any certificate of withdrawal under clause 7.2 and then ask him to repay it under clause 3.2.1 or 3.2.2.  There was then also no allegation under clause 3.2.5 that Lieu had breached the Framework Agreement resulting in the transfer not taking place.  Hence, JZD also could not exercise any right under the share charge and the loan assignment. 

67. On the other hand, Lieu also did not put JZD to election on what to do under clause 7.2 despite the due diligence should have been completed.  The obvious reason is that JZD, if asked to make the election under clause 7.2, might have no choice but to elect to withdraw and demand the earnest money back as Lieu knew that JZD was not satisfied with the land titles and no good due diligence report could be produced.  In that event, Lieu would have to face the difficulty of raising the money to repay JZD. 

68. Despite the passing of 31 December 2008, the parties just continued with the negotiation of the terms of sale and purchase within the scope of the Framework Agreement.  They also worked together to try to rectify and make good the land titles.  Both sides wanted to accomplish the sale and purchase of the 80% shares of Super Cruise.

69. In the correspondence, the due diligence then seemed to have assumed an extended meaning and significance of not only to verify the nature and effect of the land titles, but also to rectify the problems with a view to produce a good due diligence report.  The time for completing the due diligence and the life of the Framework Agreement were both extended by the conduct of the parties.

70. On 12 January 2009, Wayne Lieu sent an email to return to Y K Poon the draft sale and purchase agreement with revisions.

71. On 14 January 2009, Wayne Lieu sent another email to Y K Poon advising him that Lieu’s lawyers would also take part in the negotiation of the sale and purchase agreement.  This yet again shows that the parties continued to conduct vis-à-vis one another on the basis of the Framework Agreement.

72. Wu Wei sent a further email to Madam Zhang on 17 January 2009 advising her of another meeting between him and the water authority on 16 January in which both sides agreed on the terms of the lease for the reservoir land.

Lieu fixed time to expire on 9 February 2009

73. However, Lieu became impatient on 23 January 2009.  He wrote to Huang on that day and complained that JZD’s lawyers had taken an intolerable amount of time to conduct the due diligence even though the Framework Agreement required it to be completed within 30 working days.  He said he was not prepared to entertain anymore request form JZD’s lawyers.  He also said that the exclusivity in (clause 9 of) the Framework Agreement had expired and other parties interested in Pine Valley had appeared.  He asked JZD to sign the sale and purchase agreement before 9 February 2009 failing which he would regard JZD as having abandoned the project.  I think this can be regarded as Lieu’s notice to fix 9 February 2009 as the new limit of validity of the Framework Agreement.  That would in effect also be the new deadline for completion of the due diligence under clause 7.1 and JZD’s election under clause 7.2.  

74. Huang replied on 10 February 2009.  He denied of having delayed the due diligence.  He instead said that JZD had pushed back the due diligence to give Lieu time to rectify the title problems on the mountain slope and the reservoir land.  He also said that the agreement on price and rectification of the title problems were the prerequisites for signing the sale and purchase agreement.  He then referred to the differences between the parties on the terms of the sale and purchase agreement and suggested to suspend the negotiation until after the new lease for the reservoir land had been signed.  He imposed a deadline on 28 February 2009 for Lieu’s rectification of the title problems and urged Lieu to negotiate and sign the sale and purchase agreement as soon as possible.

75. JZD did not act pursuant to clause 7.2 on or before 9 February.  It considered that the due diligence had not been completed as it was aiming at producing a good due diligence report.  However, this view was farfetched as Lieu had made it quite clear in his letter of 23 January that he was not going to entertain anymore request.  Hence, JZD could not insist that Lieu should do anything to improve the result of JZD’s due diligence.  It was then for JZD to decide whether to go ahead with the deal.  JZD could issue a certificate under clause 7.2 to withdraw from the transaction and ask for the earnest money back.

Lieu’s offer to resume negotiation

76. Lieu’s solicitors responded to Huang’s letter on 20 February.  They referred to the expiry of the 30 working days for completion of the due diligence and asserted that JZD’s satisfaction with the due diligence had been deemed by the expiry date.  They also said the Framework Agreement had ended on 31 December 2008 and there was no more exclusivity for JZD in the negotiation for the sale of the Super Cruise’s shares.  They concluded by saying that if JZD intended to acquire the Super Cruise’s shares according to the Framework agreement, Lieu was prepared to negotiate with JZD and to sign the sale and purchase agreement within a few weeks.  This letter completely ignored the extension of time for completing the due diligence and the lengthening of the life of the Framework Agreement.  It however contained an offer to resume negotiation per the Framework Agreement.

77. This offer must have embodied a term that if the negotiation be resumed, then JZD should not ask for the return of the earnest money in the meantime and the time for JZD to issue a certificate of withdrawal under clause 7.2 be extended until the conclusion of the negotiation. Otherwise, it would be open to JZD to demand the money back whilst negotiation was going on.  The money then could not be applied as the 1st instalment payment under clause 2.4 of the Framework Agreement should the negotiation be successful. 

78. It appears that despite Lieu’s letter of 23 January, he was still desirous of negotiating with JZD and cooperating with them to improve the land titles for a good due diligence report.  His solicitors by a letter dated 11 March advised JZD of two matters.  They first provided JZD with a copy of the letter dated 12 February from the Doumen Branch of the National Land and Resources Bureau which stated that Pine Valley had a land use certificate for 200 mu lands.  They then advised JZD that the water authority had signed the new lease for the reservoir land and had given it to Pine Valley.  They then repeated the offer to JZD to resume negotiation in accordance with the Framework Agreement but non-exclusively. 

79. As I have pointed out above, the offer to resume negotiation embodied a term extending the time under clause 7.2 for JZD to withdraw from the negotiation and it could not demand Lieu to return the earnest money in the meantime.  The assertion by Lieu’s solicitors of non-exclusivity in negotiation did not affect the terms of the sale and purchase agreement to be negotiated.  It was no more than a threat to JZD to quickly resume the negotiation.

80. On 12 March, the solicitors of JZD replied to the letter of 20 February from Lieu’s solicitors.  They complained that Lieu still had not presented the new lease for the reservoir land to the relevant government department for execution.  They also complained that Lieu had not diligently negotiated with Sanli Village for the lease proposed by JZD for the mountain slope which failure led to the villagers’ refusal to renew the lease of that land for Pine Valley. They said that if these problems were not rectified, JZD could not be satisfied with the due diligence.  They also referred to the previous cooperation of the parties for solving the title problems.  They said that it was contrary to the actual circumstances and the spirit of cooperation for JZD to have issued a notice of dissatisfaction with the due diligence and to withdraw.

81. They also referred to the cooperation on the due diligence and negotiation on the terms of the sale and purchase agreement in January 2009 and asserted that there was no more deadline for the due diligence.  They blamed Lieu for the deadlock on negotiation for the sale and purchase agreement.  They however did not take up the offer to resume negotiation, but appeared to consider that the Framework Agreement was still in force.

Resumption of negotiation

82. On 2 April, JZD wrote to Lieu and suggested that parties should meet as soon as possible to discuss the sale and purchase and implement the same.  That was really taking up Lieu’s offer to resume negotiation.  Lieu replied on 7 April that the parties could negotiate to resolve the difference.  He further suggested that the parties could leave the negotiation of the terms of the sale and purchase agreement to their solicitors and they should negotiate on the agreement of cooperation.  That was a suggestion to start negotiating for the shareholders agreement as referred to in clause 13.1 of the Framework Agreement.

83. JZD replied on the same day and agreed to negotiate the terms of sale and purchase.  The parties eventually met on 16 April.  This meeting was conducted per the Framework Agreement.  Hence, it was on the basis that the Framework Agreement was in force.  The time for JZD to issue a certificate of withdrawal under clause 7.2 was thus extended.  The time for JZD to act under clause 3.2.1 and 3.2.2 was likewise extended.  The earnest money was still kept by Lieu and would be used as the 1st instalment payment under clause 2.4 in the event of a successful negotiation. 

84. On 5 May, JZD’s solicitors wrote again and said that Lieu had not responded to JZD’s proposal conveyed in the meeting of 16 April.  They suggested a final meeting on 7 May for an agreement to be made failing which the negotiation would be treated as a failure.  Lieu’s solicitors replied on 6 May and suggested flexibility in the negotiation from both sides. They further suggested a postponement of the meeting so that JZD could consider a term for provision of security by Lieu for his performance of the sale and purchase agreement.

85. There were then some further correspondence, but the meeting eventually did not take place.

JZD’s demand for return of earnest money and the notice of revocation by Lieu and Chen

86. On 27 May, JZD issued a demand letter to Lieu. JZD said that Lieu had not complied with the Framework Agreement to supply the information on all aspects of the business of Super Cruise to complete the sale and purchase.  JZD said it still had doubts about the substantive problems of Super Cruise in the aspects of finance, legal, operational or development.  They therefore demanded Lieu to return the Hong Kong dollar equivalent of the earnest money of RMB26 million within 5 working days.  This demand was made in terms of clause 3.2.1 which indicated JZD’s dissatisfaction with the result of the due diligence on Super Cruise. It was in effect a notice of withdrawal under clause 7.2 and a demand under clause 3.2.1 for return of the earnest money.

87. Lieu did not comply with the letter of demand. His solicitors responded on 2 June by sending JZD’s solicitors a notice of revocation.  The notice alleged that JZD had breached the Framework Agreement and the confidentiality undertaking.  It alleged that JZD had breached the Framework Agreement in failing to complete the due diligence within 30 working days from 10 September and failing to issue any certificate under clause 7.2 of the Framework Agreement.  It also alleged the breach by JZD of the confidentiality undertaking.  It also asserted that the Framework Agreement had expired on 1 January 2009.  It then alleged that JZD’s breaches had caused enormous loss and damage to Lieu which far exceeded the earnest money.  Hence, the earnest money was set-off by part of the loss and damage.  The share charge was therefore no longer effective.  All the documents and resolutions signed by Lieu and Chen and delivered under clause 3.2 of the share charge were also purportedly revoked.

88. JZD’s solicitors replied on 2 June and denied the allegation of breach by JZD. 

89. Lieu did not return the earnest money.  JZD took that as an event stipulated in clause 3.3 of the Framework Agreement.  I have already mentioned that the time for JZD to act under clause 3.2.1 or 3.2.2 had been extended to beyond December 2008 and resumed in April 2009.  The time for repayment under clause 3.3 therefore must have been extended to a reasonable time after the demand.  Lieu never complained that 5-working day period was too short.  His solicitors merely said that he was not obliged to return the money as it had been set off.

JZD exercised the rights under the share charge

90. An event within the scope of clause 3.3 was an event of default under the share charge.  Y K Poon of JZD wrote on 3 June 2009 pursuant to clause 2.1 and 8.1 of the share charge and demanded Lieu to repay the earnest money with interest within 7 working days, failing which, JZD would enforce the share charge without further notice.  JZD appointed receivers over the charged shares of Super Cruise on 20 July 2009.

Lieu’s arguments for forfeiture of the earnest money

91. Mr Kwok, counsel for Lieu, maintained that the time for the due diligence and the life of the Framework Agreement had not been extended.  He submitted that after the expiry of the Framework Agreement after 31 December 2008, JZD had nothing to rely on to demand the return of the deposit.  Hence, JZD could not have demanded the return of the same in May 2009.  Mr Kwok made this argument on the ground that there was no written variation of the terms of the Framework Agreement under its clause 13.2.  This is a narrow view.  I take the view that if the parties had in fact varied the terms of the agreement by their conduct but did not record the variation in writing, this clause could not have stopped the variation from taking effect.

92. Mr Kwok, having submitted that JZD could not have demanded the return of the earnest money after 31 December 2008, further submitted that Lieu was not obliged to return the money to JZD and could keep it indefinitely.  He said there was practically no difference from the money having been a deposit that had been forfeited by Lieu.

93. Mr Kwok further argued that the earnest money was indeed a deposit and forfeitable when JZD did not issue a notice to withdraw from the negotiation or to complete the sale and purchase of the 80% shares of Super Cruise at RMB200 million or to sign a sale and purchase agreement by 31 December 2008.

94. He reached this conclusion by construing clauses 2.1 and 2.2 as provisions defining two different purchase prices.  He submitted that the price defined in clause 2.1 is called “the transfer price” and is fixed at RMB200 million subject to deduction of debts according to clause 5 and nothing else.  The price defined in clause 2.2 is called “the actual transfer price” and should be the price as stated in the sale and purchase agreement.  He then took the Framework Agreement as a binding sale and purchase agreement of the 80% shares at “the transfer price” of RMB200 million less the deduction of debts according to clause 5 unless the parties should sign the sale and purchase agreement by 31 December 2008.

95. Counsel then submitted that since JZD had failed to issue a notice to withdraw or to complete the sale and purchase of the 80% shares at the “the transfer price” of RMB200 million or to sign a sale and purchase agreement by 31 December 2008, JZD had thereby breached the binding Framework Agreement resulting in the forfeiture by Lieu of the deposit of RMB26 million.

96. I am of the view that this submission is based on an erroneous interpretation and twisted construction of clauses 2.1 and 2.2.  Clause 2.1 provides that the transfer price should not exceed RMB200 million. The actual figure would be subject to or dependent upon the result of the due diligence by JZD and the result of the parties’ negotiation for the sale and purchase agreement.  No doubt, clauses 2.1.1 to 2.1.3 further provided that the basis for fixing the price under clause 2.1 should be the absence of any unfinished litigation, complete discharge of all debts and that the only asset of Super Cruise being Pine Valley.  But this is not to say that the price was fixed at RMB200 million and only subject to deduction of debts as provided in clause 2.1.2 or 5.  It is also gravely wrong to suggest that the result of the due diligence will have no effect on the amount of price but will only affect JZD’s decision to buy or not.  Counsel also ignored the provision in clause 2.1 of the mechanism of negotiation for the transfer price. 

97. The straightforward and correct interpretation of clauses 2.1 and 2.2 is that there would be one transfer price to be determined by the result of the due diligence and negotiation of parties and such price would be on the basis of no debt due to outsiders, no pending litigation and Pine Valley being Super Cruise’s only asset.  I therefore reject counsel’s submission that the Framework Agreement is in itself a binding sale and purchase agreement with the price fixed at RMB200 million.  The Framework Agreement is not a binding agreement for the sale and purchase of the shares.

Is the earnest money a forfeitable deposit?

98. Separate and independent from the above argument, I also consider the question of whether the earnest money is in the nature of a deposit liable to be forfeited within the terms of the Framework Agreement.  The only forfeiture provision in the Framework Agreement against JZD is clause 3.2.4 which is contingent on JZD’s failure to abide by the sale and purchase agreement.  But the parties failed to arrive at such an agreement and this clause cannot apply. 

99. The earnest money was paid by JZD to show its sincerity in entering into the negotiation for the sale and purchase.  If the negotiation did not bear fruit, it is prima facie refundable to JZD (see Chitty on Contracts, 30^th edn, para 29-064).  The fact that the share charge described the money as a deposit does not alter the nature of this money as that is defined by the Framework Agreement and not by the share charge.

100. Miss Chan, SC for JZD also referred me to Chillingworth v Esche [1924] 1 Ch 97.  That is a case where a purchaser agreed to buy certain freehold land subject to contract and paid £240 as a deposit and part payment of the purchase price.  The parties negotiated for a proper contract.  The vendor then signed the contract but the purchaser did not.  The purchaser then asked for the return of the deposit.  The Court of Appeal held in favour of the purchaser.  Pollock MR said at pp 106-107:

“Mr Luxmoore says that the result of such a finding is that the money paid on deposit is recoverable, on the ground that there never was a contract, and I think that prima facie he is right, and that the deposit is recoverable and ought to be repaid to the plaintiffs. This 240l, was paid ‘as deposit and in part payment of the said purchase money’. It is clear that the purchase money might never become payable, so the character of part payment was lost. But then it is said that it had the character of a deposit, and never lost that character, and therefore the vendor is entitled to retain it. … It is said here that this 2401, was a guarantee that the purchasers meant business, and as, through their action, business did not result, the deposit should be forfeited, on the ground that the purchasers should have executed the contract tendered to them. It is, however, no part of the business of this Court to concern itself with the question why the negotiations in this case came to an end and whether any one is to blame in the matter, but the duty of the Court is to note that as no contract was entered into the deposit would prima facie be returnable. What ground is there then for saying that the purchasers who were entitled to break off negotiations have thereby lost the deposit? It is said that they could not seriously enter into these negotiations and then break them off without reason, but that is not for us to consider. That they were entitled not to complete the purchase seems clear, and I do not accept the view that the purchasers were paying the deposit as a guarantee or earnest of good faith that they would complete the purchase, because they could have revoked what had up to that time been agreed upon at any moment. It seems to me that when once the negotiations came to an end the rights of the parties were gone, and the purchasers were entitled to receive their money back.”

The same reasoning applies here.  I therefore hold that the earnest money is not a deposit liable to forfeiture and Lieu could not have forfeited it.

Has JZD pleaded a proper demand?

101. Mr Kwok also takes the point that JZD’s cause of action is “total failure of consideration” (see paras 12-10 to 12-15, Goff & Jones, The Law of Unjust Enrichment, 8th edn).  He then submitted that JZD had not pleaded any cause of action in the counterclaim for the return of the money.  He further submitted that JZD could not have pleaded a cause of action in reliance of the Framework Agreement as that had already expired after 31 December 2008.  I have already given my reasons on why the Framework Agreement had not expired after 31 December 2008.  I take the view that JZD can rely on the agreement in seeking the return of the money. 

102. Regarding the cause of action for JZD’s demand of the money, I referred to it as for “money had and received” (see paras 1-29 and 2-41 of Goff & Jones) in the course of counsel’s submissions.  However in pleading claims of unjust enrichment, the claimant needs only state the nature of the claim and the facts on which he relies (see para 1-30 of Goff & Jones).  JZD has referred to the earnest money in the re-amended defence and counterclaim.  JZD denied that Lieu had any right to forfeit it.  JZD pleaded in alternative that Lieu had waived the right to forfeit it.  JZD further pleaded the demands for repayment by the letters of 27 May and 3 June 2009.  Hence, the nature of the claim and the facts in support of it are pleaded.  I therefore hold that Mr Kwok’s pleading point also fails.

Election by Lieu, estoppel and extension of time

103. JZD has pleaded that the parties have by conduct extended the time limits under clauses 3.2.1 and 3.2.2 to a reasonable time after completion of the due diligence.  JZD pleaded further or alternatively that Lieu had elected to treat the due diligence as continuing and waived his right to insist on JZD issuing a notice of satisfaction or notice of withdrawal by the expiry of 30 working days from 10 September and/or estopped from asserting that JZD was obliged by such deadline.

104. On election and waiver, Ms Chan, SC, for JZD referred to the “Kanchenjunga” [1990] 1 Lloyd’s Rep 391 at 399 where Lord Goff said:

“In the context of a contract, the principle of election applies when a state of affairs comes into existence in which one party becomes entitled to exercise a right, and has to choose whether to exercise the right or not. His election has generally to be an informed choice, made with knowledge of the facts giving rise to the right. His election once made is final; it is not dependent upon reliance on it by the other party.”

Ms Chan thus submitted that Lieu has made the election to treat the due diligence as continuing.  I agree that the facts as summarized above indeed show that Lieu has so elected.

105. Mr Kwok, however, submitted extensively on the criteria of promissory estoppel and that such estoppel can only be used as a shield and not a sword.  I think a careful reading of the re-amended defence and counterclaim shows that JZD pleaded the estoppel more as an assertion that Lieu should not be allowed to renege from his election and agreement by conduct to continue with the due diligence despite expiry of time than as a plea of promissory estoppel.

106. Mr Kwok also referred to Lieu’s letter dated 23 January and his solicitors’ letter dated 20 February.  I have already said that Lieu’s letter of 23 January should have fixed 9 February as the new deadline for the due diligence and limit of validity of the Framework Agreement.  That new deadline and time limit was however overtaken by Lieu’s subsequent resumption of negotiation within the scope of the Framework Agreement that created further extension of time for JZD to make its election under clause 7.2.  Lieu had done nothing to bring that extension to an end.

107. Regarding the letter by Lieu’s solicitors of 20 February, I have already opined that it was written in ignorance of the previous extension of time for the due diligence and the life of the Framework Agreement.  The stance taken in that letter is misconceived though it repeated Lieu’s offer to resume negotiation.

108. Mr Kwok’s main argument is against extension of time.  He argued strenuously that the due diligence had to be completed by 29 October 2008 and the Framework Agreement expired after 31 December 2008.  His reason was that there was no variation in writing of the Framework Agreement made under its clause 13.2.  This argument permeated his written submissions extensively.  However I disagree with it and have ruled against it above.

Demand for return of earnest money under cl. 3.2.2(i)

109. Even if I am wrong on my conclusion that time for the due diligence and/or expiry of the Framework Agreement had been extended and that JZD should have been deemed to be satisfied with the due diligence, I still hold that JZD was entitled to issue a demand for the return of the earnest money under clause 3.2.2(i) of the Framework Agreement at any time after the negotiation or resumed negotiation had failed.  This is so as the earnest money is not forfeitable and must be repaid upon demand. 

110. I also hold that the demand on 27 May 2009 could have been such a demand though the grounds stated are those in clause 3.2.1.  Once the earnest money is not forfeitable and returnable upon demand, then the demand must be met despite the wrong ground has been alleged.  The reason being that no ground need be made and the demand cannot be invalidated by a wrong ground. 

111. However, if the demand should have been made under clause 3.2.2(i), then the amount of interest payable would be at the best lending rate of the Hong Kong Bank as provided in clause 3.2.2.

Judgment

112. My review of the correspondence above clearly shows an extension of time by the conduct of the parties.  I therefore hold that JZD was entitled to make the demand on 27 May under clause 3.2.1 or alternatively 3.2.2(i) of the Framework Agreement and on 3 June under clauses 2.1 and 8.1 of the share charge.  The failure by Lieu to return the money justified JZD’s exercise of its rights under clauses 2.1, 8.1(1) and (2) of the share charge as against Lieu and Chen. 

113. When I gave judgment on the seventh of April, I overlooked the liability of Chen under her covenant in clause 2.1 of the share charge.  I do correct my slip and order that Chen is jointly and severally liable with Lieu to pay JZD the Hong Kong dollar equivalent of RMB26 million with interest at judgment rate from the date of writ to the seventh of this month.  The order for delivery up of documents and damages to be assessed should also be addressed to Chen as well.

114. Furthermore, Lieu and Chen were not entitled to issue the notice of revocation to JZD on 2 June to revoke the signed documents delivered under clause 3.2 of the share charge as the earnest money was still outstanding.  The purported revocation therefore amounted to a breach by Lieu and Chen of clauses 3.4 and 5.4 of the share charge.  That amounted to a default by them of clause 8.1(3) of the share charge which also justified JZD’s exercise of the rights in the share charge against them.  For the same reasons, I hold that JZD is entitled to enforce the Loan Assignment against Van Shipping. 

115. In consequence of these decisions.  I would dismiss Lieu’s claim for discharge or setting aside of the share charge, for damages for enforcement of the share charge or set-off of the earnest money.

116. Regarding the question of interest on the earnest money, clause 3.2.1 provided that the earnest money be repaid with interest at the rate of a one year loan.  This provision is unclear.  I did not give effect to it.  I ordered the judgment rate from the date of writ 23 July 2009) on the seventh of this month.  I would now order that interest be payable on the earnest money from 27 May 2009 to the seventh of this month at the best lending rate of the Hong Kong bank.  This is in line with clause 3.2.2 and lower than the judgment rate.  I use this lower rate in order to be fair to Lieu and Chen as I suspect that there was a slip of hand in the drafting of the supplemental agreement dated 10 September 2008 which restricted the best lending rate of the Hong Kong Bank to clause 3.2.2 only when the intention was to apply it to clause 3.2.1 as well.

117. On the question of costs, the Loan Assignment provided that Van Shipping should pay costs on the indemnity scale and there is no reason to depart from that.

118. I repeat below the judgment I gave on 7 June with corrections indicated above:

(1)  I declare that the earnest money is not liable to forfeiture and has not been forfeited.

(2)  I order Lieu Tseng Van, Chen Siu Ling and Van Shipping Company Limited to pay Jiuzhou Development Company Limited (“JZD”) the Hong Kong dollars equivalent of RMB26 million with interest at the best lending rate of the Hong Kong bank from 27 May 2009 to 7 June 2012.

(3)  I declare that JZD is entitled to enforce the share charge and the Loan Assignment.

(4)  I further declare that the appointment of the receivers on 20 July 2009 by JZD is valid and effective.

(5)  I order that Lieu and Chen do forthwith deliver all the books, financial records, ledgers, bank statements, contracts and statutory records including minutes books, share certificates, director and member registers, company chops and seals belonging to Super Cruise Limited to the receivers.

(6)  I order Lieu and Chen to pay JZD damages for breach of the share charge to be assessed.

(7)  I order that Lieu and Chen Siu Ling do indemnify JZD with all the costs, expenses and charges incurred by JZD and the receivers in enforcing the share charge to be assessed.

(8)  I order Van Shipping to pay JZD damages for breach of the Loan Assignment to be assessed.

(9)  I also order Van Shipping to indemnify the JZD with all the costs, expenses and charges incurred by JZD in enforcing the Loan Assignment to be assessed.

(10)  I dismiss Lieu’s claim for damages for breach of the confidentiality undertaking and/or the Framework Agreement; and/or for enforcement of the share charge.

(11)  I also dismiss any claim for set off by Lieu.

(12)  I also make a costs order nisi that Lieu, Chen and Van Shipping do pay JZD the costs of this action including the counterclaim.  The costs as payable by Van Shipping should be assessed on indemnity basis as provided in the Loan Assignment.  I also certify the matter fit for leading and junior counsel.

Mr Kwok Kam Kwan and Mr Freddy Chu, instructed by Wong Poon Chan Law & Co, for the plaintiff (by original action) and the 1st, 2nd and 4th defendants (by counterclaim)

Ms Linda Chan, SC and Ms Elizabeth Cheung, instructed by Wilkinson & Grist, for the defendant (by original action) and the plaintiff and the 3rd defendant (by counterclaim)

HCA 1645 / 2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1645 OF 2009

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D E C I S I O N

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A. Introduction

1.  In my judgment (“the Judgment”) dated 17 June 2010, I made an order nisi at para 100 that there be no order as to costs of the Striking Out Summons (as defined in the Judgment).    I gave the reason that although Mr Lieu (as defined in the Judgment) was successful in resisting the more substantial part of the Striking Out Summons, he was able to do so only because the Court granted him leave to resile from his earlier admissions in the pleading.  As a result, the Court was of the view that a just order in costs should be no order as to costs.

2.  By way of its Summons dated 28 Jun 2010, JZD (as defined in the Judgment) asks to vary the costs order nisi to the effect that:

(1) It be entitled to half of the costs of the Striking Out Summons, including the costs reserved by orders dated 13 January, 10 February and 29 March 2010.  I will refer these as “the Reserved Costs”; or

(2) Alternatively, the costs of the Striking Out Summons including the Reserved Costs be JZD’s costs in the cause.

3.  Ms Chan for JZD submits that the costs order nisi should be so varied because:

(1) JZD would have been successful substantively in its Striking Out Summons if not because of the Court’s granting of leave to Mr Lieu to resile from his admissions.

(2) However, it was Mr Lieu’s primary position all the way up to and including at the hearing that there was no admission.

(3) It was therefore right, appropriate and necessary for JZD to take out the Striking Out Summons seeking to strike out the complained parts of the Amended Statement of Claim.

(4) Further, insofar as Mr Lieu’s fall-back and alternative position of resiling from his admissions is concerned, it was again necessary for him to come to Court to ask for leave.  This he could only do so after JZD had rightly taken out the Striking Out Summons.

(5) In the circumstances, even though eventually Mr Lieu had successfully invoked the Court’s discretion to give him leave, and thus resisted the substantial part of the Striking Out Summons, it is only just and fair in all the circumstances that JZD should be entitled to half of its costs to reflect on the one hand the above and also to take into account of the Mr Lieu so called “success” in the matter on the other hand.

4.  On further reflection, I think Ms Chan is right and accept her submissions.  In particular, I accept that most of the evidence and arguments raised in the affirmations filed in relation to the Striking Out Summons and the skeletons relate to the contentions as to whether there were admissions in the pleading on the part of Mr Lieu.

5.  In the premises, I will vary the costs order nisi to the extent that JZD is entitled to half of its costs of the Striking Out Summons, including the Reserved Costs.

6.  I further order that costs of this application be to JZD, to be taxed if not agreed.

HCA1645 /2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1645 OF 2009

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BETWEEN

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HCMP1893 /2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1893 OF 2009

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BETWEEN

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D E C I S I O N

_______________

A. Introduction

1.  There are 6 applications under the 2 actions before me.   In order to better understand why these applications are brought, I should first give a brief introduction of the dispute.

2.  The dispute arose from a potential sale of 80% interest in a golf and leisure club in Zhuhai in the Mainland.

3.  Mr Lieu Tseng Van[1] and his wife (Ms Chan Siu Ling)[2] as the entire beneficial owners of Super Cruise Ltd (“Super Cruise”) own beneficially a PRC company called Pine Valley Sports & Country Club (“Pine Valley”), which operates a club (“the Club”) with a golf course, shooting range, hunting ground and various extensive clubhouse facilities in Zhuhai.

4.  Jiuzhou Development Company Ltd (“JZD”)[3] is a partly state-owned Mainland company with its shares listed on the Hong Kong Stock Exchange.

5.  In the negotiation for the intended and potential sale of 80% interest in Super Cruise to JZD, in around August and September 2008:

(1)	JZD gave a confidentiality undertaking (“the Confidentiality Undertaking”) effectively not to disclose to the public the fact and the information concerning the negotiations and the intended sale and purchase of the Club.  There were certain exceptions provided in the undertaking.
(2)	Mr Lieu entered into a Framework Agreement (as defined below) with JZD which set out the parties’ intention for the sale and purchase of 400 shares  (80% of all the issued shares) in Super Cruise for a price of not exceeding RMB200m.  This was stated to be subject to the entering into a formal sale and purchase agreement upon a satisfactory due diligence exercise.
(3)	Pursuant to the Framework Agreement, JZD paid Mr Lieu HK$30 million (which was made as equivalent to RMB26m million) as earnest money. The earnest money was provided in the agreement as repayable under certain conditions.
(4)	As security for the repayment of the earnest money, a charge was created over 400 shares in JZD owned by Mr Lieu and Ms Chen under a Share Charge[4] executed by them.  Pursuant to the Share Charge, JZD was entitled to appoint Receivers over these charged shares (“the Charged Shares”) if and when JZD was entitled to enforce the charge.

6.  The parties did not eventually enter into any formal sale and purchase agreement, as JZD said that it was not satisfied with the result of the due diligence.    It then demanded repayment of the earnest money.  Mr Lieu did not repay the money.

7.  In July, JZD appointed Receivers over the Charged Sharesas they sought to enforce their rights under the Share Charge. 

8.  In response to the appointment of the Receivers:

(1)	On 23 July 2009, Mr Lieu issued a generally endorsed Writ under HCA1645/2009 against JZD seeking the reliefs of, inter alia, (a) damages for JZD’s breach of the Confidentiality Undertaking, (b) forfeiture of the earnest money, and (c) setting aside of the Share Charge.
(2)	On 3 August 2009, Mr Lieu further issued an inter partes Summons seeking an injunction effectively to restrain the Receivers from exercising their rights to enforce the Share Charge and the Loan Assignment (as defined below), and to sell the shares.    On hearing the application, Stone J adjourned it, and gave leave to the parties to file affirmations in support and in opposition.

9.  In the meantime:

(1)

Mr Lieu and Ms Chen as the purported directors and members of Super Cruise sought to pass special resolutions to revoke various documents (including certain undated documents for their resignations as directors of the company) they had previously signed for the purpose of and required under the Share Charge.

(2)

The parties have since filed their pleadings while the Receivers continued to take steps to seek to take control of Super Cruise, Pine Valley and the Club, by replacing the directors and the legal representatives of these companies in Hong Kong and in the Mainland through the filing of various documents with the relevant authorities, including the Companies Registry (“CR”) in Hong Kong insofar as Super Cruise is concerned.

10.  As a result, on 24 September 2009, Mr Lieu issued in the name of Super Cruise the Originating Summons under HCMP 1893/2009 against the Registrar of Companies (“the Registrar”) requiring her (a) to withdraw various company documents filed by the Receivers with the CR, and (b) to instead accept and register the Form R1 (change of address of the registered office) purportedly filed by Super Cruise on 13 August 2009 and the special resolutions passed by Mr Lieu and Ms Cheng (as members of Super Cruise) on 17 August 2009.

11.  These have led to the 6 applications now before me.  They are:

(1)	Under HCA 1645/2009:
	(a) Mr Lieu’s Summons for the injunction (“the Injunction Summons”). (b) Summons dated 16 October 2009 taken out by Wilkinson & Grist acting for Super Cruise (as the 3rd Defendant by Counterclaim) under the instruction of the Receivers to strike out King & Wood’s Notice to Act to purportedly act for Super Cruise, and the Acknowledgement of Service filed thereby (“the Want for Authority Summons”). (c) JZD’s Summons dated 24 November 2009 seeking to strike out various paragraphs of the Amended Statement of Claim, the Amended Reply and Defence to Amended Counterclaim filed by Mr Lieu (“the Striking Out Summons”).
(2)	Under the HCMP 1893/2009:
	(a) Mr Lieu’s Summons dated 12 October 2009 seeking to join as an additional applicant in the proceedings (“the Joinder Summons”). (b) JZD’s Summons dated 23 October 2009 seeking to intervene (“the Intervening Summons”). (c) The reliefs under the Originating Summons itself.

12.  Before dealing with these applications substantively, I will further elaborate on the relevant essential background as follows.  Unless otherwise stated, this is largely uncontroversial.

B.      Background

13.  In about early summer 2008, there were negotiations between Mr Lieu and a potential buyer called Hua Fa for the sale and purchase of the entire interest in Pine Valley.  It is Mr Lieu’s case that the purchase price under negotiation was some RMB250 million.

14.  Later, there were also negotiations between Mr Lieu and a Mr Huang Xin of JZD for the sale and purchase of the interest in Pine Valley.  As a result of these negotiations:

(1)	JZD signed a confidentiality undertaking (“Confidentiality Undertaking”) dated 8 August 2008, agreeing not to release, inter alia, the information and details of the negotiations for the intended sale of effectively the Club between JZD and Mr Lieu.
(2)	Mr Lieu and JZD entered into a framework agreement dated 27 August 2008 (as further amended by a supplemental agreement dated 10 September 2008) for the intended sale of 400 shares (80% of the issued shares) in Super Cruise owned by Mr Leiu at a price of not exceeding RMB200 million.  I shall call this amended agreement conveniently the Framework Agreement. Some of the more relevant terms of the Framework Agreement are that:
	(a) Mr Lieu was to negotiate with JZD exclusively for the proposed sale of the 80% interest in Super Cruise. (b) The intended sale was subject to the satisfactory completion of due diligence on Super Cruise and Pine Valley, and the parties entering into a formal sale and purchase agreement. (c) JZD was to pay Mr Lieu RMB26 million as earnest money which shall be returned under certain conditions.  I will deal with these conditions later as they feature substantially in the applications before me.  (d) If Mr Lieu was unable to repay the earnest money as demanded on or before 31 December 2008, JZD was entitled to deal with the Charged Shares in accordance with the terms of the Share Charge and/or to enforce the Loan Assignment (see below).
(3)	Securities were provided to JZD for the return of the earnest money (and interest accrued thereof upon any failure to repay), which include:
	(a) A share charge deed (“the Share Charge”) executed by Mr Lieu and Ms Chen over the 80% of the issued shares of Super Cruise held by them.  Under the Share Charge, Mr Lieu and Ms Chen further executed 10 undated documents (“the Undated Documents”) relating to the enforcement and execution of the Share Charge.   They included blank instruments of transfer, directorship resignation letters and a written board resolution to approve the share transfer and resignation.  (b) A Deed of Assignment of Loan (“the Loan Assignment”) executed by Van Shipping Company Ltd (“Van Shipping”) in favour of JZD.    Van Shipping is found and majority-owned by Mr Lieu which had made various loans to Super Cruise.

15.  Due diligence on Super Cruise and Pine Valley was then carried out by JZD. 

16.  The parties eventually did not proceed to enter into any formal sale and purchase agreement, as it is JZD’s case that they were not satisfied with the results of the due diligence carried out under the Framework Agreement.  In particular, they were of the view that there were title problems with the land upon which the Club situated as:

(1)	Insofar as the part of the free use land was concerned, there was nothing to show that Pine Valley had paid the requisite compensation to Sanli Village committee (which originally owned the land).
(2)	Insofar as the part of the leased land was concerned, the lease had already expired and Sanli Village committee had decided not to renew the lease with Pine Valley.
(3)	Pine Valley had not entered into any lease with the water authority over the use of the land covering the reservoir located with the facilities operated by Pine Valley.

17.  The parties then engaged in further negotiations following JZD’s above dissatisfaction of the result of the due diligence.

18.  The negotiations were not fruitful.

19.  By a letter dated 27 May 2009, JZD informed Mr Lieu that they would not continue with any further negotiations and demanded him to repay the earnest money within 5 days.

20.  In response to this, by a letter dated 1 June 2009 (signed by Mr Lieu and Ms Chen), Mr Lieu stated that the Framework Agreement already expired on 31 December 2008 and that:

(1)	JZD had failed to complete the due diligence and also to issue any “Due Diligence Notice” to Mr Lieu before the expiration date (i.e., 31 December 2008) as provided thereunder.
(2)	JZD had breached the Confidentiality Undertaking and clause 8 of the Framework Agreement (which was of similar effect of the Confidentiality Agreement).
(3)	Mr Lieu was therefore entitled to apply the earnest money to set off his claim for loss and damage against JZD, thereby extinguishing the earnest money.
(4)	The security created by the Share Charge was therefore no longer effective and was revoked, cancelled and annulled with immediate effect.
The parties have referred to this letter as the Revocation Notice, which I will adopt in this Decision.

21.  At the same time, by written resolutions (“the Revocation Written Resolutions”) of the directors of Super Cruise dated 1 June 2009 signed by Mr Lieu and Ms Chen (as the only directors), Super Cruise and Mr Lieu and Ms Chen (as its directors) purported to revoke, cancel and annul some of the Undated Documents.  The same allegations as set out in the Revocation Notice were repeated in the Revocation Written Resolutions as the bases justifying the purported revocation of the Undated Documents.

22.  Then, by a letter dated 2 June 2009, Mr Lieu’s solicitors provided to JZD’s solicitors the Revocation Notice and the Revocation Written Resolutions and said effectively that Mr Lieu was not required to return the earnest money.  The letter further demanded JZD for the return of the certificate of the Charged Shares.

23.  Notwithstanding these:

(1)	By a letter dated 3 June 2009 sent to Mr Lieu and Ms Chen, JZD again requested them to repay the earnest money within 7 days, and stated that it would enforce the Share Charge if the money was not paid.
(2)	Mr Lieu and Ms Chen did not repay any of the earnest money.

24.  On 20 July 2009, JZD issued a notice to Mr Lieu informing him of its appointment of Receivers pursuant to the Share Charge for Mr Lieu’s failure to repay the earnest money. 

25.  On 22 July 2009, the Receivers inserted the date of 22 July 2009 on each of the Undated Documents, thereby:

(1)	Appointing the Receivers themselves as directors of Super Cruise through the written resolutions previously signed by Mr Lieu and Ms Chen as directors.
(2)	Giving effect to the resignation of Mr Lieu and Ms Chen as directors of Super Cruise.
(3)	Appointing JZD as the proxy for Mr Lieu and Ms Chen in respect of the Charged Shares and to vote on their behalf.
(4)	Transferring the Charged Shares to JZD.

26.  Further relying on the above, by a shareholders resolution of Pine Valley passed by Super Cruise on 27 July 2009:

(1)	The then directors of Pine Valley were removed.
(2)	The Receivers and their nominees were appointed as directors of Pine Valley.
(3)	Mr Lieu was removed as the Chairman and Legal Representative of Pine Valley.
(4)	Mr Borrelli (one of the Joint Receivers) was appointed as the Chairman and Legal Representative of Pine Valley.

27.  Suffice to say, as expected, Mr Lieu and Ms Chen do not accept as valid the Receivers’ appointment and the aforesaid procedures taken out by the Receivers.

28.  These have led to these proceedings and the instant 6 applications.

29.  The parties first appeared before me on 10 February 2010 for these applications (with 19 and 20 May 2010 also reserved).  However, given that both sides wanted to sell the Charged Shares subject to Mr Lieu’s concern about the Receivers not having been able to fetch the best price, at the Court’s suggestion and eventually by consent and subject to certain undertakings, I adjourned the matter to 20 March 2010 to enable the Receivers to provide detailed information to Mr Lieu on the potential purchasers found by them to purchase the shares to see if Mr Lieu could find any one who was prepared to make a better offer.  

30.  The Receivers eventually managed to provide the necessary information a few days before 20 March 2010. They have found a buyer who is prepared to pay HK$172million to purchase the entire shareholding in Super Cruise[5].  Mr Lieu said he needed more time to consider this proposal, and confirmed that he could respond to it by mid April.  I therefore further adjourned the hearing of these Summonses to the originally reserved dates on 19 and 20 May 2010.

31.  Eventually, other than saying that the offer from the Receivers’ purchaser is too low as compared with the valuation reports Mr Lieu previously obtained in 2007 and 2009 (which gave a value of RMB300 million odd)[6], Mr Lieu has not been able to identify or locate any purchaser to purchase the shares.  He however continues to object to the Receivers’ appointment and the intended sale of the Charged Shares by them.

32.  The long and short of these is that these Summonses remain alive before me now.   Bearing the above background in mind, I will proceed to look at each of the applications individually.

C.      The Injunction Summons

C1.    Applicable principles

33.  The applicable principles for interlocutory injunctions are well known.  They are to be found in American Cyanamid v Ethicon Ltd [1975] AC 396 and the relevant text in Hong Kong Civil Procedure 2010, paras 29/1/8-29/1/18, and can be summarized as follows:

(1)	Whether there is a serious question to be tried on the plaintiff’s claim and the reliefs sought.  If the answer is negative, no interlocutory injunction would be granted.
(2)	After satisfying with question (1) above, the Court should proceed to ask the following questions:
	(a) Whether damages would be a sufficient remedy for the plaintiff if the interim injunction is not granted.  If the answer is affirmative, generally no interlocutory injunction would be granted. (b) If the answer is negative, then the Court should ask whether damages are a sufficient remedy for the defendant even if the injunction is wrongly granted. If the answer to this question is in the positive, the interlocutory injunction should usually be granted.
(3)	If the answer to (2)(b) is also negative, then the court should proceed to consider all the circumstance as to whether on the balance of convenience, it is just and convenient to grant the injunction.

34.  I now apply these to Mr Lieu’s application.

C2.    Serious question to be tried?

C2.1  Mr Lieu’s claims

35.  In light of the pleaded case and the submissions made at the hearing, Mr Lieu’ claims that JZD was not entitled to enforce the Share Charge and thus to appoint the Receivers are premised principally on the following bases:

(1)	He has a claim for damages against JZD’s breach of the Confidentiality Undertaking, which damages are more than sufficient to set-off the earnest money liability.   I will call this the set-off claim.
(2)	Mr Lieu was entitled to forfeit the earnest money, as JZD was deemed to have been satisfied with the due diligence after failing to issue any notice to the contrary as required under the Framework Agreement.   There was thus no liability to repay the earnest money at all.   I will call this the forfeiture claim.
(3)	There was a valid revocation of the relevant Undated Documents by the Revocation Written Resolutions.  Thus, there was nothing upon which JZD was entitled to enforce the Share Charge.  I will call this the revocation claim.

36.  I will now deal with each of these bases in greater detail to see if any serious questions to be tried have been raised.

C2.1.1         The set-off claim

37.  The essence of this claim is as follows:

(1)	After entering into the Framework Agreement, there had been a report in a newspaper in Zhuhai in September 2008 which referred to the negotiations between Mr Lieu and JZD of the sale of the Club and the terms of the Framework Agreement, including the reference to the price of RMB200 million.
(2)	It is Mr Lieu’s case that this information was released to the newspaper by JZD, in breach of the Confidentiality Undertaking.
(3)	Then, in January 2009, there were two (unidentified) potential purchasers offered to purchase from Mr Lieu 70% interest in Pine Valley based on an agreed valuation of RMB266 million (i.e, a potential purchase price of some RMB186.8 million).  But they withdrew their offer on learning of the price mentioned in the Framework Agreement (i.e., not exceeding RMB200 million for 80% interest in the Club).  Since then, Mr Lieu has not been able to find any purchasers who are willing to offer any terms better than JZD’s RMB200 million for 80% shareholding in Pine Valley.
(4)	Mr Lieu therefore says he has by JZD’s breach of the Confidentiality Undertaking suffered a loss, which would almost certainly be an amount well exceeding the earnest money (and any accrued interest thereof).
(5)	He is thus entitled to set-off such damages against the earnest money.

38.  In relation to the set-off claim, the gist of JZD’s defence is that:

(1)	Although accepting that there was the newspaper report, JZD says the media only obtained such information from JZD’s public announcement  (published as required by the listing rules in Hong Kong), which set out its negotiations for the potential purchase of an unidentified and unnamed club in Zhuhai with various club facilities.
(2)	This does not amount to any breach of the Confidentiality Undertaking because:
	(a) such public announcement fell within the exceptions provided under the Confidentiality Undertaking; and (b) in any event, JZD did not identify the Club in the announcement, but instead it was the media itself who was able to identify the Club as it was the only club in Zhuhai with those facilities and features mentioned in the announcement.
(3)	Even if JZD were in breach of the Confidentiality Agreement, there was no causation between the breach and the alleged loss.

39.  With the evidence filed before me reading together with the express exceptions provided in the Confidentiality Undertaking, I am prepared to accept that for the present purpose, there is a question to be tried on:

(1)	Whether there was a breach of the Confidentiality Undertaking; and
(2)	Whether Mr Lieu has suffered loss and damage as a result of such a breach.

40.  However, the central issue under this claim for determining the Injunction Summons is whether it is triable that such damages are likely to exceed the earnest money, so as to deprive JZD the right to enforce Share Charge and appoint the Receivers.  This is the central issue because:

(1)	Clause 13.2 of the Share Charge[7] provides that the security provided under it shall be considered to be continuing to cover any sum which shall for the time being constitute the balance due from the Chargors to JZD over the earnest money (and the interest thereof).
(2)	In other words, JZD is still entitled to enforce the security even if there is only one dollar outstanding due by Mr Lieu to it.
(3)	Thus, unless it can be shown that at the time when the Receivers were appointed (and perhaps until now), Mr Lieu’s claim for damages already exceeds and extinguishes the entire earnest money and interest accrued thereon, there is nothing to challenge the validity of the appointment of the Receivers.

41.  In relation to this issue, I am not satisfied that there is a serious question to be tried on whether such damages would be of such a quantum to exceed or extinguish the earnest money at the time of appointment of the Receivers or by now.  This is so because:

(1)	Mr Lieu’s claim is for unliquidated damages for breach of the Undertaking Confidentiality.  The burden is on him to provide sufficient evidence which condescends to sufficient particulars at this stage to show that it is at least triable that the quantum to be awarded at trial would be sufficient to extinguish the earnest money and the interest thereof.
(2)	However, Mr Lieu has clearly failed to show this:
	(a) There is nothing in the pleading or the evidence filed by Mr Lieu which seeks to put an estimate on what the likely quantum of the damages would be, let alone any evidence to support the quantification. (b) In the way the matters were pleaded, and the evidence in support of the loss, Mr Lieu’s claim can only at best be described as a loss of chance in not having been able to secure either of the two unidentified potential purchasers to complete the sale of the alleged 70% interest in Pine Valley for the alleged offers.  (c) In relation to this loss of chance, it is important to note that there is similarly nothing in the pleading or the evidence to indicate or to enable one at least to assess at what stage Mr Lieu was in his negotiations with these two potential purchasers.  In other words, there is nothing to even remotely suggest on how likely that, if without the alleged breach of the Confidentiality Undertaking by JZD, Mr Lieu would have been able to secure the transaction with either of these two potential purchasers.   In this regard, it is also pertinent to note that Mr Lieu did not even say in his affirmations that he would have entered into a binding agreement with either of these 2 unidentified purchasers to purchase 70% interest in Pine Valley at the offer if not because of their getting to know the price mentioned in the Framework Agreement. (d) Simply put, other than a bare assertion in the affirmation (and in submissions) that the quantum of damages will certainly exceed the earnest money, there is not a scintilla of credible evidence (even noting that this is only at an interlocutory stage) to support the same.

42.  I am therefore of the view that the set-off claim does not raise a relevant serious question to be tried to entitle Mr Lieu’s application for the injunction. 

C2.1.2         The forfeiture claim

43.  In order to appreciate the basis of this claim, one has to first understand the relevant parts of the Framework Agreement and how the obligations to repay the earnest money was provided thereunder.

44.  The parts of the Framework Agreement which are relevant for the present purposes are in summary as follows:

(1)	JZD had the intention to purchase from Mr Lieu 400 issued shares (i.e., 80% interest) in Super Cruise. Subject to the results of the due diligence to be carried out and the negotiations for the formal sale and purchase agreement, the consideration for the purchase is not exceeding RBM 200 million (clauses 1 and 2).
(2)	The consideration is to be paid in two parts.  The first part in the sum of RMB 26 million  (i.e, the earnest money) is to be paid to Mr Lieu after the preparation of the Share Charge is completed[8].  The second part is to be paid upon the completion of the sale and purchase (clause 2.4).
(3)	The Share Charge is to only secure Mr Lieu’s repayment obligation of the earnest money provided specifically under clauses 3.2.1, 3.2.2 or 3.2.5.
(4)	Clause 3 sets out various specific circumstances when the earnest money is repayable by Mr Lieu to JZD.  Relevant for the present claim of forfeiture is that the earnest money is repayable after receipt of JZD’s written notice of withdrawal from the transaction issued pursuant to clause 7.2, and such repayment shall be made no later than 31 December 2008.
(5)	Clauses 7.1 and 7.2 together provide that on the date of completion of due diligence (which is no later than 30 days after the completion of the procedures of providing the Charged Shares as security under the Share Charge), JZD shall issue to Mr Lieu a notice of satisfaction of the result of the due diligence, or a notice of withdrawal from the transaction.  If neither of these notices is issued, JZD would be regarded as having been satisfied with the result of the due diligence.    I shall call this express contractual completion date of due diligence as provided in the Framework Agreement the “DD End Date”.
(6)	The pre-conditions for completing the sale and purchase of the shares in Super Cruise are that (a) JZD issues a notice of satisfaction of the due diligence before the DD End Date, (b) the signing of a shareholders’ agreement of Super Cruise, and (c) the formal sale and purchase agreement is approved in the general meeting of JZD and by the Hong Kong Stock Exchange (clause 4).
(7)	The validity of the Framework Agreement is until 31 December 2008.  The parties shall carry out as soon as possible the negotiations for the sale and purchase agreement and the shareholders’ agreement, and use their best endeavours to complete the signing of the sale and purchase agreement by 31 December 2008.

45.  The forfeiture claim is premised on various alleged breaches of the Framework Agreement by JZD, pleaded at para 31 of the Amended Statement of Claim as follows:

“31.	The Plaintiff forfeited the Deposit [i.e., the earnest money] because the Defendant was in breach of the Framework Agreement as Amended and his other obligations as particularized below. As the Deposit has been forfeited, there is nothing to be refunded to the Defendant.
Particulars of breach
	i. The Defendant failed to conduct proper due diligence of the Company and to carry out requisite steps towards completion of the sale and purchase as the Defendant was obliged to do under the Framework Agreement as Amended; ii. Furthermore, the Defendant was obliged under clause 7.1 of the Framework Agreement as amended by clause 2.1(f) of the Addendum to complete its due diligence within 30 working days of the extension of the Share Charge and to either issue a withdrawal notice or a notice of satisfaction at the end of the due diligence exercise (‘the DD End Date’); clause 7.2 of the Framework Agreement provided that if the Defendant did not issue any notice at the DD End Date, the Defendant would be deemed to have been satisfied with the due diligence; iii. The Defendant failed to complete its due diligence within 30 working days as aforesaid; iv. Neither notice of withdrawal or notice of satisfaction was issued by the Defendant on the DD End Date and therefore the Defendant was deemed to have been satisfied with the results of its due diligence; v. However, the Defendant then took no concrete step to complete the sale and purchase but, in breach of the Assurance and the Common Understanding and its promise to the Plaintiff to pay RMB 200 million for the 80% shareholding of the Company regardless of any valuation in consideration of the Plaintiff foregoing his negotiations with Hua Fa and engaging in negotiations with the Defendant, endeavoured to press the Plaintiff to reduce the price for the sale and purchase of the 80% Shares by raising requisitions such as on land title issues and other matters which the Defendant was already well aware of even before the Framework Agreement was signed on 27 August 2008.”

46.  The pleading was not signed by counsel.  At the hearing, Mr Tommy Lo (counsel for Mr Lieu) clarifies the basis of the claim further as follows:

(1)	He is not relying on the fact JZD has not entered into the formal sale and purchase agreement as a breach of the Framework Agreement as he accepts that there is no such obligation in the agreement.
(2)	He is also not relying on the pleaded “Assurance and Common Understanding” as any contractual or legal obligation created on the part of JZD.
(3)	He rests the claim for JZD’s breach of the Framework Agreement on the basis that it was not entitled to raise any objection in the due diligence exercise as to the land title or on any other matters because (a) JZD was deemed to have accepted the due diligence under clause 7.2 (since no notice of dissatisfaction or withdrawal was issued before the D D End Date), and/or (b) the land title queries related to matters already disclosed to JZD before the commencement of the due diligence.

47.  I am of the view that the claim on forfeiture as pleaded and as explained above does not raise a serious question to be tried.  My reasons are as follows:

(1)	I agree with Ms Chan that there is no provision in the Framework Agreement which provides Mr Lieu the right of forfeiture when JZD is in breach of it.   Without such an entitling clause, the mere fact that there is a breach of the agreement does not necessarily give rise to a right of forfeiture.  The innocent party’s remedy lies primarily in damages.
(2)	I accept that in the absence of such an express forfeiture clause:
	(a) if a sum is paid as a deposit (ie, a sum intended to be received as a security for the completion of the transaction), it will be assumed that it is intended to be forfeited to the recipient if the payor defaults in the transaction; (b) if the money is expressly paid as a deposit, this could be regarded as equivalent to a forfeiture clause.   To this, the Court looks to the substance of the payment as to whether it constitutes a deposit as properly understood in the sense described above. Cf: Chitty on Contracts (30thed), para 26-146 and footnotes 753, 754.
(3)	However, given that it is accepted by Mr Lo (fairly so) that there is no obligation under the Framework Agreement for JZD to complete the transaction and enter into sale and purchase agreement, I do not think it is arguable that the RMB26 million (albeit described as “交易保證金”, which could be translated as  “security for the transaction”, in the Framework Agreement), the sum was paid in its true nature as a deposit.
(4)	In the premises, there is no question of a right of forfeiture of the earnest money even if there was any breach on the part of JZD of the Framework Agreement.

48.  On the other hand, I note that it is also part of Mr Lieu’s claim that the Defendant could not claim refund of the earnest money under the circumstances prescribed under clauses 3.2.1, 3.2.2 or 3.2.5 of the Framework Agreement, therefore the Share Charge is not enforceable.  This is pleaded at paras 34 to 36 of the Amended Statement of Claim as follows:

“34. As a further alternative, even if it is held that the Deposit or any part thereof is refundable (this is denied), the Share Charge is enforceable as security only to secure refund in the circumstances as provided in clauses 3.2.1, 3.2.2 or 3.2.3 of the Framework Agreement as Amended.

 35.       No notice of satisfaction or notice of withdrawal was issued on the DD End Date.  The Plaintiff has complied with all its obligations under the Framework Agreement as Amended.  It is therefore averred by the Plaintiff that the Defendant is not claiming for refund in any of the circumstances as provided in clauses 3.2.1, 3.2.2 or 3.2.3 of the Framework Agreement as Amended.”

49.  As summarized above, the security provided under the Share Charge is only for the repayment obligations of the earnest money arising from clauses 3.2.1, 3.2.2 or 3.2.5 of the Framework Agreement. 

50.  The effects of these clauses are:

(1)	If JZD finds serious problems under the due diligence, it is entitled to issue the notice of withdrawal under clause 7.2 and require Mr Lieu to repay the earnest money.  Upon receipt of the notice of withdrawal, Mr Lieu shall repay the earnest money no later than 31 December 2008 (clause 3.2.1).
(2)	Mr Lieu shall repay 90% of the earnest money if any of the following occurs:
	(a) JZD still issues a notice of withdrawal pursuant to clause 7.2 even though it has found no major problems under the due diligence. (b) The sale and purchase transaction was not approved by the Hong Kong Stock Exchange for reasons not because of JZD’s fault. (c) The sale and purchase transaction was not approved by the shareholders of JZD for reasons not because of JZD’s fault. (clause 3.2.2)
(3)	If the sale transaction cannot be completed because of Mr Lieu’s failure to comply with the Framework Agreement or the formal sale and purchase agreement, the earnest money shall be repaid to JZD forthwith, without prejudice to JZD’s rights to claim further (clause 3.2.5).

51.  In relation this part of Mr Lieu’s case, in my judgment:

(1)	Clause 3.2.2 is irrelevant as JZD is not relying on this to demand for the repayment of the earnest money.  JZD is demanding for full repayment but not 90% of it.
(2)	Clause 3.2.5 is also not relevant.  It is not JZD’s case that the parties were not able to complete the sale because of Mr Lieu’s breach of the Framework Agreement or the formal sale and purchase agreement.
(3)	On the other hand, insofar as clause 3.2.1 is concerned, it is clearly arguable as to whether JZD was deemed to have been satisfied with the due diligence and thus lost the right to ask for the return of the earnest money by issuing a notice of withdrawal under clause 7.2:
	(a) It is arguable that, upon proper construction of clause 7.1 and 7.2 (read together with the other provisions set out above), the due diligence should be completed by the DD End Date, and any notice of dissatisfaction or withdrawal should be issued by then. (b) It is common ground that JZD had not issued any such notices by the contractual DD End Date. (c) It is however Ms Chan’s submissions that the evidence shows that the parties continued to negotiate and discuss about the due diligence results until early May 2009.   This, counsel further submits, must amount to (i) an agreement by the parties to extend the DD End Date until a reasonable time after the original date, and/or (ii) a waiver or estoppel on the part of Mr Lieu to insist on the right to have any such notices issued by the original DD End Date. (d) With respect to Ms Chan, at this interlocutory stage, I can only say that it is triable as to whether there was such an agreement to extend the time or a waiver.    (e) In the premises, it is similarly triable as to whether it was still open to JZD to purportedly issue the notice of withdrawal on 27 May 2009 pursuant to clause 7.2 and to demand repayment of the earnest money under clause 3.2.1.

52.  Given that it is triable as to whether JZD was entitled to demand repayment of the earnest money under clause 3.2.1 of the Framework Agreement, it is also triable as to whether they were entitled then to enforce the Share Charge, which is to secure specifically and only the repayment obligation under (for the present purpose) this clause.

53.  I therefore conclude that there is a serious question to be tried as to whether JZD is entitled to demand repayment of the earnest money under clause 3.2.1

C2.1.3         The revocation claim

54.  As mentioned above, the Undated Documents were required under the Share Charge to be provided to JZD (as chargee) obviously for the purpose to facilitate any enforcement of Share Charge in securing the interest in the Charged Shares.  Some of these documents (such as the resignations) were stated to be irrevocable. 

55.  The purported revocation of these documents under the Revocation Written Resolutions is clearly to prevent any proper enforcement of the Share Charge.

56.  It is Mr Lieu’s case that he and Ms Chen (qua directors of Super Cruise) were entitled to pass a board resolution to revoke these very documents signed by them (also as directors) because:

(1)

There was no more liability to repay the earnest money as supported by the set-off claim and the forfeiture claim.

(2)

In any event, these documents, when they were signed, were not in the best interest of company.   When further asked, Mr Lo (for Mr Lieu) explains that they were not for the interest of the company, because it was unknown (when these blank and undated documents were signed) who would be appointed to be the directors in replacement of Mr Lieu and Ms Chen, and such uncertainty was not in the best interest of the company.  Mr Lo further says he relies on the general principle that a director must act in the best interest of the company to support these submissions.

57.  Given my above view that it is triable as to whether JZD was entitled to demand repayment of the earnest money under the Framework Agreement and to thus enforce the Share Charge, I am prepared to accept that it is triable as to whether Super Cruise was entitled to revoke some of those Undated Documents by the Revocation Written Resolutions on the basis that the liability to repay the earnest money no longer arises. 

58.  This would be sufficient to dispose of the question as to whether the revocation claim raises a triable issue.   But for completeness sake, I will also say that I cannot see how it can be seriously contended that these documents could be revoked on the basis that they were not in the best interest of the company.   They would only be relied upon by the chargee when the Charged Shares should be transferred to it, who would by then hold 80% interest in the company.  In those circumstances, it is difficult to see why the chargee should not be entitled to appoint whomever it deems appropriate to be directors of the company.

C3.    Sufficiency of damages as remedy

C3.1  Whether damages is a sufficient remedy for Mr Lieu if injunction not granted

59.  If the injunction is not granted, the Receivers would be able to sell the Charged Shares.  As mentioned above, they have secured a purchaser to purchase Super Cruise/Pine Valley at the price of HK$172 million.

60.  At the same time, it has also always been Mr Lieu’s expressed and continuing intention to sell these shares.  His main complaint is only they should worth a lot more, in the region of RMB200 to 300 million.

61.  In the circumstances, if at trial it turns out that the injunction is wrongly refused, and Mr Lieu can show that he could have sold the shares at a higher price, the loss to be suffered by him is clearly monetary in nature and compensatible by damages.  It is not part of Mr Lieu’s case that JZD (as a listed company) is unable to meet these damages.

62.  Mr Lo for Mr Lieu however submits that if the Charged Shares are to be sold by the Receivers, Mr Lieu would also suffer damage to his reputation, which is not compensatible by damages.  He says there is damage to the reputation because outsiders would be under the impression that Mr Lieu is unable to pay off his debt and thus his assets (the Charged Shares) have to be taken over by Receivers and be sold.  In support of his submissions, Mr Lo relies on the authority of Jinlin Sun v Kenneth Chi Shing Cheung & Styland (unrep., HCA 3544/2003, 13 October 2003, Reyes J).

63.  In Styland, the plaintiffs sought an interim injunction to appoint receivers over Styland, which was a listed company.  The plaintiffs were some of the shareholders of Styland, who brought a derivative action against various directors of Styland for breach of common law and fiduciary duties owed to the company in relation to certain transactions entered into by the company and certain circulars issued by it. 

64.  Reyes J refused to appoint the interim receivers on the basis that the appointment would have served no useful purpose vis-à-vis the wrongdoings alleged by the plaintiffs and was thus not required or justified.    However, the learned judge went on to deal with question of balance of convenience for completeness.  It was in this context that he ruled at paragraphs 36 and 37 of his judgment that the defendants (i.e., the directors) would suffer irreparable damage to their reputation if the injunction was subsequently shown to be wrongly granted with the receivers taking over the management of the company from them.

65.  Reyes J’s said observation is understandable in that in Styland, the main allegations against the defendant were that they (as directors of a listed company) were in breach of fiduciary duties in causing the company to enter into the wrongful transactions.   Thus, the appointment of the receivers would have a direct effect on the impression of the outsiders on the propriety (and thus reputation) of these defendants in their conducts as directors of a listed company. 

66.  However, whether an appointment of a receiver would have such an effect on the reputation of the defendant must be looked at and assessed in each case in context and should not be taken too far.

67.  In my view in the present case, it is farfetched and unrealiastic to say that Mr Lieu’s reputation would be affected simply because the receivers were allowed to sell the Charged Shares.  In particular, in the present case, the appointment of the Receivers were not made by the Court but by JZD pursuant to the Share Charge entered voluntarily by Mr Lieu himself.  It is Mr Lieu who is now seeking to prevent JZD from exercising their contractual right of appointment.  This is a very different context from Styland.

68.  I therefore do not accept that the refusal of the injunction, if later proven to be wrong, would cause loss to Mr Lieu which is not compensatible by damages. 

69.  On this basis alone, I would refuse the grant of the injunction as sought.

C3.2  whether damages is a sufficient remedy for JZD

70.  If I am wrong in my above conclusion on the first head of American Cyanamid, the Court then assess whether, if JZD is to succeed at trial, it would have suffered loss because of the granting of the injunction, which could not be adequately compensated by damages.

71.  JZD may only suffer a loss as a result of a wrongful grant of the injunction if the sale price of the Charged Shares after trial would not be sufficient to pay off the earnest money together with the accured interest accrued. 

72.  This loss is monetary in nature and thus prima facie compensatible by damages.

73.  Ms Chan for JZD however contends that damages are unlikely to be a sufficient remedy because:

(1)	Mr Lieu is clearly not in a position to pay any such loss.
(2)	There is a chance that there would be no buyer of the Charged Shares by that time.
(3)	Alternatively, the price of the Charged Shares may drop to such a level that it would not be sufficient to satisfy all or part of the then outstanding sum of the earnest money together with interest.   This is particularly so as the Receivers’ report shows that Pine Valley is continuing to incur losses under Mr Lieu’s present management for its daily operation.

74.  I am not persuaded by Ms Chan’s submissions:

(1)	In my view, with the evidence before me, the chance that there would be no purchaser whatsoever for the Charged Shares is a low one.  This is a substantial club and it is a matter of price whether there is a purchaser.
(2)	The Receivers at present are able to secure a purchaser who is willing to pay HK$172 million for the Club.
(3)	In considering whether JZD will suffer any irreparable damage by a wrongful grant of the injunction, the Court has to realistically assess what is the likely loss that they would suffer in the light of the evidence before it.  The exercise is not intended to be an exact science, but to consider on a rough estimate whether damages that may be suffered could be sufficiently protected by the undertaking as to damages.
(4)	Mr Lieu has through his legal representatives offered to put  up HK$ 9million to fortify his undertaking as to damages.
(5)	In my opinion, the HK$9 million fortified undertaking as to damages is sufficient for the time being to compensate the loss that JZD may suffer as a result of the injunction.  This would mean that JZD would only not tobe sufficiently compensated if the sale proceeds of the Charged Shares after trial would not be able to cover the earnest money and accrued interest to the extent of more than HK$9 million.  There is no evidence at present to suggest that such a scenario has a likely chance of occurring.

75.  For the above reasons, I conclude that damages would be a sufficient remedy for JZD if the injunction is wrongly granted provided:

(1)	Mr Lieu provides an undertaking as to damages fortified to the extent of HK$9 million.
(2)	There would be a speedy trial, so as to reduce the quantum of the accrued interest.
(3)	There be liberty to apply by JZD for further fortification of the undertaking as to damages when circumstances changes, in particular in relation to the valuation of the Charged Shares.

76.  Therefore, if I had come to the conclusion that damages is not a sufficient remedy for Mr Lieu, but is a sufficient one for JZD, I would have granted the injunction subject to the following:

(1)	Mr Lieu do make payment of HK$ 9million in cash into Court as fortification of the undertaking as to damages within 14 days from the date of the order[9].
(2)	There be liberty to apply.
(3)	There be an order for speedy trial of the action herein.

C4.    Balance of convenience

77.  Again, if I was wrong above, and that I had to come to the question of balance of convenience, I would have also granted the injunction to preserve the status quo, subject to the same directions I have suggested at paragraph 76 above. 

C5.    Conclusion under the Injunction Summons

78.  For the reasons I have set out above, I dismiss the Injunction Summons.  I further make an order nisi that JZD’s costs of the Injunction Summons be in the cause.

D.      The Striking Out Summons

D1.    The objected paragraphs

79.  By the Striking Out Summons, JZD applies to strike out:

(1)	Paras 14, 15, 29-39 and 41-47 of the Amended Statement of Claim; and
(2)	Paras 10(iii), 11(ii)-(iii), 19, 27(i), 32 to 34, 40 to 51 and corresponding references in paragraphs 57 to 74 of Amended Reply and Amended Defence to Counterclaim.

80.  This striking out application is made on the grounds that the objected pleas are frivolous and vexatious and/or constitute an abuse of process. 

81.  JZD also applies to strike out all allegations purportedly made on behalf of Super Cruise in the Amended Reply and Amended Defence to Counterclaim on the ground that they were made by Mr Lieu in breach of an undertaking given to the Court on 29 October 2009.  That undertaking provides that until the determination of the Want for Authority Summons, Mr Lieu will not take or cause to be taken any steps in this action on behalf of Super Cruise.

82.  Ms Chan has advanced separate arguments in support of the striking out applications.  I will explain them in greater detail as I deal with each of them below.

D2.    The specific grounds for striking out

83.  Paragraphs 29-31, 33-37 and 41-47 of the Amended Statement of Claim plead (by way of amendments to the original Statement of Claim) the various allegations in support of the forfeiture claim and the revocation claim (as discussed above under the Injunction Summons). They are repeated in various paragraphs in the Amended Reply and Amended Defence to Counterclaim. 

84.  Ms Chan submits that they should be struck out as:

(1)	They amount to an attempt to resile from an admission of liability to pay the earnest money.
(2)	They are bound to fail.

85.  On the ground of an attempt to resile from admission, Ms Chan says as follows:

(1)	In the original Statement of Claim, the only claim is for damages for JZD’s alleged breach of the Confidentiality Undertaking, which is further pleaded to set-off against the earnest money.
(2)	This must amount to at least an implied admission that there was a liability on Mr Lieu to repay the earnest money, otherwise there is simply no question of set-off.
(3)	Thus, in pleading by way of amendments the newly added forfeiture claim and revocation claim in the Amended Statement of Claim, which are premised on or resulted in an allegation of no liability to repay the earnest money at all amount to attempts to resile from the earlier admission.
(4)	As no leave has been granted to Mr Lieu to withdraw the admission, these new pleas should not be allowed, and thus the paragraphs in support of them must be struck out.

86.  I am prepared to accept that the original Statement of Claim can be regarded as containing an implied admission of liability to repay the earnest money. 

87.  The question is whether leave should be given to Mr Lieu to withdraw the admission and so as to plead these additional claims.

88.  Leave to withdraw an admission should normally be given in circumstances where:

(1)	It can be done without injustice to the other party, and there is normally no injustice if the other party can be compensated by costs.
(2)	There is no question of bad faith.
(3)	A triable issue with reasonable prospects of success is raised.
See:  Hong Kong White Book 2010, para 27/3/9.

89.  Applying these principles, I am satisfied that leave should be granted to Mr Lieu to withdraw the admission and plead those additional claims as:

(1)	Nothing is shown to me that JZD would suffer any uncompensatible injustice if leave if given at this early pleading stage.
(2)	I have not seen anything to show bad faith on the part of Mr Lieu in pleading these additional claims.  The mere fact that the new allegations enable Mr Lieu to resile from the admission cannot per se amount to bad faith, as Ms Chan appears to suggest at paragraph 90.3 of her skeleton submissions[10].  This is particularly so as some of these new claims are premised on legal arguments regarding the proper construction of the relevant clauses in the Framework Agreement.
(3)	These additional claims (as discussed above) are in my view at least arguable.

90.  Ms Chan further contends that these alternative claims based on the new allegations are bound to fail as they are either not arguable as a matter of law, or could not possibly be established at trial when viewed against (a) the admission, (b) the lack of mentioning of these in the correspondence between the parties when the dispute first arose, and in the early affirmations filed in these Summonses, and (c) the fact that they were only introduced in the pleadings by way of amendments.

91.  Although Ms Chan’s submissions have some force, suffice for me to say that, for the reasons I have given above under the Injunction Summons and after reading the evidence before me as a whole, I am not convinced that this is a clear and obvious case where I can say at this early stage that these alternative claims and allegations in support thereof are bound to fail as a matter of law or on the limited evidence before me.  These should be ventilated at trial.

92.  As a result, I will not strike out the objected paragraphs on either of these grounds as submitted by Ms Chan.

93.  On the other hand, as I mentioned in my discussion under the Injunction Summons, Mr Tommy Lo for Mr Lieu at the hearing confirmed that it is not Mr Lieu’s case that the “Assurance” and “Common Understanding” as pleaded at paragraph 14, 15 and 31(v) of the Amended Statement of Claim have any legal or binding effect.   They were pleaded, Mr Lo says, only by a way of background.  These paragraphs read as follows (the underlined parts are the amendments made at the Amended Statement of Claim):

“14.	In the course of the Plaintiff's negotiations with the Defendant and subsequent to the signing of a Confidentiality Undertaking dated 8 August 2008 (‘the Confidentiality Undertaking’) by the Defendant in favour of the Company and its shareholders namely the Plaintiff and Ms Chen, and in view of and in reliance on the Defendant's promise to pay RMB 200 million for 80% of the Company based on the agreed valuation of RMB 250 million for the entire ownership of the Company, the Common Understanding (as defined in the paragraph immediately below) and the Defendant's assurance to the Plaintiff (‘the Assurance’) that the sale and purchase would be completed on or before the end of October, 2008 and the Defendant's undertaking not to breach its obligations of confidentiality under the Confidentiality Undertaking, the Plaintiff through his solicitors Messrs. Arculli Fong & Ng released due diligence documents and materials relating to the Company and Pine Valley on 9 August 2008 to Messrs. Chiu & Partners, solicitors acting for the Defendant at that time.
15.	It was agreed between the Plaintiff and the Defendant that the Defendant would not in the course of its own due diligence raise any issue covered in valuation reports and past due diligence materials (complied for purpose of the Plaintiff's previous negotiations with other potential purchasers) which the Plaintiff would voluntarily supply to the Defendant even before the Framework Agreement was signed, in particular those on land title and indebtedness of the Company due to the Plaintiff or companies controlled by the Plaintiff, and the Defendant would not press for any price reduction based on any such said issue  (‘the Common Understanding’).
…
31.	The Plaintiff forfeited the Deposit because the Defendant was in breach of the Framework Agreement as Amended and his other obligations as particularized below.  As the Deposit has been forfeited, there is nothing to be refunded to the Defendant.
Particulars of breach
i.	…
…
v.	However, the Defendant then took no concrete step to complete the sale and purchase but, in breach of the Assurance and the Common Understanding and its promise to the Plaintiff to pay RMB 200 million for the 80% shareholding of the Company regardless of any valuation in consideration of the Plaintiff foregoing his negotiations with Hua Fa and engaging in negotiations with the Defendant, endeavoured to press the Plaintiff to reduce the price for the sale and purchase of the 80% Shares by raising requisitions such as on land title issues and other matters which the Defendant was already well aware of even before the Framework Agreement was signed on 27 August 2008.”

94.  Given counsel’s confirmation that the “Assurance” and “Common Understanding” as pleaded do not carry any legal effects, I do not see any relevance of them being so pleaded which, if allowed to remain in the pleading, may need to be proved at trial (as they are denied by JZD).  These would result in incurring unnecessary costs and time, and/or would unnecessarily distract the issues at trial.

95.  In the premises, I will exercise my power on the Court’s own motion under O. 18 r 19(1) of the Rules of High Court (Cap 4) to strike out paragraphs 14, 15 and 31(v) in the following manner on the basis that they disclose no reasonable cause of action, and/or it is frivolous or vexatious and/or it may prejudice, embarrass or delay the fair trial of he action.

“14.	In the course of the Plaintiff's negotiations with the Defendant and subsequent to the signing of a Confidentiality Undertaking dated 8 August 2008 (‘the Confidentiality Undertaking’) by the Defendant in favour of the Company and its shareholders namely the Plaintiff and Ms Chen, and in view of and in reliance on the Defendant's promise to pay RMB 200 million for 80% of the Company based on the agreed valuation of RMB 250 million for the entire ownership of the Company, the Common Understanding (as defined in the paragraph immediately below) and the Defendant's assurance to the Plaintiff (‘the Assurance’) that the sale and purchase would be completed on or before the end of October, 2008 and the Defendant's undertaking not to breach its obligations of confidentiality under the Confidentiality Undertaking, the Plaintiff through his solicitors Messrs. Arculli Fong & Ng released due diligence documents and materials relating to the Company and Pine Valley on 9 August 2008 to Messrs. Chiu & Partners, solicitors acting for the Defendant at that time.
15.	It was agreed between the Plaintiff and the Defendant that the Defendant would not in the course of its own due diligence raise any issue covered in valuation reports and past due diligence materials (complied for purpose of the Plaintiff's previous negotiations with other potential purchasers) which the Plaintiff would voluntarily supply to the Defendant even before the Framework Agreement was signed, in particular those on landtitle and indebtedness of the Company due to the Plaintiff or companies controlled by the Plaintiff, and the Defendant would not press for any price reduction based on any such said issue  (‘the Common Understanding’).
31.	The Plaintiff forfeited the Deposit because the Defendant was in breach of the Framework Agreement as Amended and his other obligations as particularized below.  As the Deposit has been forfeited, there is nothing to be refunded to the Defendant.
Particulars of breach
	… v. However, the Defendant then took no concrete step to complete the sale and purchase but, in breach of the Assurance and the Common Understanding and its promise to the Plaintiff to pay RMB 200 million for the 80% shareholding of the Company regardless of any valuation in consideration of the Plaintiff foregoing his negotiations with Hua Fa and engaging in negotiations with the Defendant, endeavoured to press the Plaintiff to reduce the price for the sale and purchase of the 80% Shares by raising requisitions such as on land title issues and other matters which the Defendant was already well aware of even before the Framework Agreement was signed on 27 August 2008.”

96.  At the same time, insofar as the Amended Reply of the Plaintiff (by original action) and Amended Defence to Amended counterclaim filed by King & Wood dated 11 November 2009 is concerned, I will also strike out the references to the 3^rd Defendant (i.e, Super Cruise) at the heading of the first page and the backsheet of the pleading which show that the pleading was filed by King & Wood for and on behalf of Super Cruise, as this is in breach of the undertaking given by Mr Lieu to the Court as submitted by Ms Chan.

D3.    Conclusion under the Striking Out Summons

97.  For the reasons given above, under the Striking Out Summons:

(1)	I will strike out the references to the 3rdDefendant (i.e, Super Cruise) at the heading of the first page and the backsheet of the pleading which show that the pleading was filed by King & Wood for and on behalf of Super Cruise.
(2)	I will dismiss the rest of the Summons.

98.  On the Court’s own motion, I will also strike out paragraphs 14, 15 and 31(v) of the Amended Statement of Claim in the manner as set out in paragraph 95 above.

99.  Although Mr Lieu is substantially successful in opposing the Striking out Summons, as explained above, Mr Lieu only so succeeds because I have decided to exercise my discretion to grant him leave to resile from the admissions, which leave he had not sought before amending the pleading. 

100.  In the circumstances, I think a fair and just costs order under the Striking out Summons should be no order as to costs.  I therefore make an order nisi that there would no order as to costs under the Striking out Summons.

E.      The 3 applications under HCMP 1893/2009

101.  I can deal with these applications quickly.

102.  Insofar as the Joinder Summons and the Intervening Summons are concerned, the parties have agreed at the hearing that they should be granted.   I so make the orders in terms of the Summonses.  I further make an order nisi that costs of these 2 Summonses be in the cause of the Originating Summons. 

103.  Mr Lieu seeks the following substantive reliefs under the Originating Summons:

"(1)	the Form D2A (notification of change of secretary and director) dated 22 July 2009 filed with the Companies Registry on 22 July 2009 by Borrelli Walsh Limited be withdrawn and/ or removed from the registry and such withdrawal and/ or removal to take effect on the day next following the date of this order;
(2)	the Form R1 (change of address of registered office) dated 31 July 2009 filed with the Companies Registry on 31 July 2009 by Borrelli Walsh Limited be withdrawn and/ or removed from the registry and such withdrawal and/ or removal to take effect on the day next following the date of this order;
(3)	(3) further or alternatively, the following documents be accepted by the Registrar for registration:
	(a) the Form R1 (change of address of registered office) dated 13 August 2009 filed with the Companies Registry on 13 August 2009 by the Company; and (b) special resolutions passed on 17 August 2009 by the members of the Company at the Extraordinary General Meeting of the Company held on 17 August 2009."

104.  The application is made pursuant to s 348 of the Companies Ordinance (Cap 32) (“the CO”), which provides as follows:

“348.	Power of Registrar to refuse to register certain documents
(1)	The Registrar may refuse to register or accept for registration any document delivered to him under this Ordinance if it appears to him that-
	(a) the document is manifestly unlawful or ineffective; (b) the document is incomplete or altered; or (c) any signature on the document, or digital signature accompanying the document, is incomplete or altered.
(2)	Without limiting the generality of subsection (1), where any form is specified under section 2A for use in relation to any purpose of this Ordinance, the Registrar may refuse to register or accept for registration any form used for that purpose that deviates from the form so specified.
(3)	Any person aggrieved by a decision of the Registrar under subsection (1) or (2) may, within 42 days of the decision, appeal to the court against the decision and the court may, subject to subsection (4), make such order as it may deem just, including an order as to costs.
…”

105.  It is not disputed that, in deciding whether the Registrar was correct in her decision to register or accept for registration documents delivered to her in applying s. 348 of the CO, the Court would have regard to the following principles:

(1)	In determining whether the Registrar’s decision was in error, the Court would consider whether those documents ought to be filed are “manifestly unlawful” or “manifestly ineffective”:  Re Tongda Group Holdings Ltd (HCMP 1356/2004, 30 September 2004, Kwan J), paras 41-45.
(2)	In an appropriate case, the Court may direct the Registrar under s. 348 to remove a document from the register or to accept a document for registration:  Re Tongda, supra, paras 36-40.
(3)	The Court may refuse to order a removal where the public could have relied on the document filed and its removal would only cause confusion:  Re Tongda, supra, paras 43-45.
(4)	The Registrar may accept amending or corrective return for registration where there has been an error or inaccuracy in a return originally filed:  Re Hang Lung Properties Ltd [2008] 2 HKLRD 196, 205-208 per Barma J.

106.  Mr Jenkin Suen, counsel for the Registrar, also draws my attention to s 348A of the CO, which provides as follows:

“The [Registrar] shall not be responsible for verifying the truth of any statement made in any document delivered to him for registration.”

107.  In the present application, Mr Lieu says the Registrar was wrong in accepting the objected documents for registration filed by the Receivers, because she was put on alert as to Mr Lieu’s complaints that the Receivers were wrongly or invalidly appointed through various letters sent to her by Mr Lieu’s solicitors.  These letters set out some of the disputes between the parties on the appointment.   

108.  Given ss 348 and 348A of the CO, Mr Lieu can only succeed if he can show that the Form D2A and Form R1 filed by the Receivers are manifestly (and thus plainly) unlawful or ineffective without the need to engage into any detail investigations.

109.  In my judgment, Mr Lieu has clearly failed to show that the said documents are manifestly unlawful or ineffective:

(1)	Mr Lieu’s challenge to the validity of these documents is premised only and principally on the alleged invalid appointment of the Receivers on the various grounds set out above under the Injunction Summons.
(2)	As explained above, I have come to the view that some (and not all) of these grounds are at best arguable at this stage, and their merits can and should only be resolved at trial.   It must be noted that even Mr Lieu’s counsel only seeks to contend that those grounds give rise to triable issues, but not that they have such strong merits that they are bound to succeed.
(3)	In the circumstances, I simply cannot see how it could be suggested that the objected Form D2A and Form R1 filed by the Receivers are (even with the objections made by Mr Lieu through his solicitors) manifestly unlawful or ineffective.
(4)	In the absence of manifest unlawfulness or ineffectiveness, Mr Lieu has therefore failed to show that the Registrar was wrong in accepting these documents for registration.

110.  Given that the Registrar was correct in registering these documents, I am also of the view that it was correct for her to refuse registering the Form R1 and the special resolutions sought subsequently to be filed by Mr Lieu for and on behalf of Super Cruise, as these will cause confusion to the public.

111.  For these reasons, I dismiss the Originating Summons.  I also make an order nisi that costs be to the Registrar and JZD to be paid by Mr Lieu, to be taxed if not agreed.

F.      The Want for Authority Summons

112.  King & Wood (“K&W”) filed a Notice to Act and the Acknowledgment of Service purportedly for Super Cruise (as the 3^rd Defendant by Counterclaim) under HCA 1645/2009.

113.  Where a solicitor’s authority to act for a party is in question, the burden is on the solicitor to prove that she is so duly authorized.  If a solicitor acknowledges service for a defendant without his knowledge or authority, other than the defendant himself, the plaintiff may also apply to strike out the acknowledgment of service:  Hong Kong White Book 2010, para 12/3/9.

114.  In the present case, for reasons of the above discussion and conclusion set out under the Injunction Summons and the Originating Summons, it is clear that when the Notice to Act and the Acknowledgment of Service were taken out, K&W could not have been certain that they had proper authority to act for Super Cruise since:

(1)	Receivers have been appointed over Super Cruise pursuant to the Share Charge.
(2)	Mr Lieu and Ms Chen had already been replaced as directors of Super Cruise as demonstrated by the Undated Documents duly signed by them.  These company documents have also been filed with the CR.  Subject to these being set aside, they appear to be prima facie valid.
(3)	Thus, even though Mr Lieu and Ms Chen believed that they had good reasons to challenge the Receiver’s appointment and to set aside the registration of those company documents, their authority as directors of Super Cruise to instruct K&W to act for the company must be at least in doubt and not certain, unless and until these documents are set aside.  That was the whole purpose of the Originating Summons.
(4)	In the premises, I am not satisfied that it has been shown to me that K&W had clear authority to act for Super Cruise when the Notice to Act and the Acknowledgment of Service were filed.

115.  I will therefore strike out the Notice to Act and the Acknowledgment of Service filed on behalf of Super Cruise as the 3^rd Defendant by Counterclaim under HCA 1645/2009. 

116.  This comes to the question of costs.

117.  Although I strike out the Notice to Act and the Acknowledgement of Service for the above reasons, it must be pointed out that in the Counterclaim, Super Cruise is only joined as a nominal defendant, with no substantive relief sought against it.   It is therefore entirely beyond me as to why it was thought necessary by perhaps Mr Lieu to file an Acknowledgment of Service for Super Cruise, other than perhaps seeking to assert the position on the dispute on the validity of the appointment of the Receivers and thus who has proper control over the company.  If that is the case, it is in my view entirely inappropriate to do so in such a way.  That dispute should be, and has been put squarely and properly in the original claim itself.

118.  But because of this, it has triggered the Want for Authority Summons representing yet another interlocutory application under the action, which is entirely unnecessary. 

119.  Yet further, this Summons was taken out purportedly by Super Cruise (as the 3^rdDefendant by Counterclaim) through the Receivers instructing Wilkinson & Grist.   Given the dispute on whether the appointment of the Receivers is valid, which I have found to be arguable, I am equally puzzled as to why it was also thought appropriate to issue this Summons by Super Cruise instead of JZD as the plaintiff by Counterclaim.  This is particularly so as Ms Chan (for JZD) in her written submissions also submits that the plaintiff has a right to strike out the acknowledgment for want for authority.   This seems to me to be another example where the parties are using this interlocutory application simply to “show” that they should be the one in control of the company.

120.  In my view, both sides have acted inappropriately in the way they have advanced in this application, which have escalated costs and wasted time.  This should not be endorsed.  In the circumstances and in the exercise of my discretion, I will make an order nisi that there should be no order as to costs under the Want for Authority Summons.

Mr. Charles SUSSEX, S.C. leading Ms. Frances LOK (on 10 February 2010), Ms. Frances LOK (alone on 29 March 2010), Mr. Tommy K.K. HO (alone on 19 & 20 May 2010), instructed by Messrs King & Wood, for the Plaintiff (by original action), for 1^st, 2^nd and 4^th Defendants (by counterclaim) in HCA1645/2009; and for the Applicant & Mr Lieu in HCMP 1893/2009.

Ms. Linda CHAN, instructed by Messrs Wilkinson & Grist for the Defendant (by original action), for the Plaintiff (by counterclaim) and the 3^rd Defendant (by counterclaim) in HCA1645/2009; and the Receivers (on behalf of Super Cruise) in HCMP 1893/2009.

Mr. Jenkin SUEN, instructed by Department of Justice, for the Respondent in HCMP 1893/2009.