CACV by tyndale

VIEWS: 16 PAGES: 13

									                                 CACV 395/2003 & CACV 397/2003
                                                CACV 395/2003
               IN THE HIGH COURT OF THE
     HONG KONG SPECIAL ADMINISTRATIVE REGION
                    COURT OF APPEAL
               CIVIL APPEAL NO. 395 OF 2003
           (ON APPEAL FROM HCA NO. 148 OF 2003)
                 _________________________
BETWEEN


            CASH SMART ENTERPRISES LIMITED         Plaintiff
                           and
          BRIGHT PROSPECTS ASSOCIATES LIMITED 1st Defendant
                       LI TAT TING                 2nd Defendant
                CHAN, TING KWAN TYRONE             3rd Defendant
                 _________________________
                                                CACV 397/2003
               IN THE HIGH COURT OF THE
     HONG KONG SPECIAL ADMINISTRATIVE REGION
                    COURT OF APPEAL
               CIVIL APPEAL NO. 397 OF 2003
           (ON APPEAL FROM HCA NO. 148 OF 2003)
                 _________________________
BETWEEN
            CASH SMART ENTERPRISES LIMITED         Plaintiff
                           and
          BRIGHT PROSPECTS ASSOCIATES LIMITED 1st Defendant
                       LI TAT TING                 2nd Defendant
                CHAN, TING KWAN TYRONE             3rd Defendant
                                      -   2   -


                         _________________________
Before: Hon Rogers VP and Le Pichon JA in Court
Date of Hearing: 9 September 2004
Date of Judgment: 9 September 2004
Date of Handing Down Reasons for Judgment: 30 September 2004
                     _________________________

                         REASONS FOR JUDGMENT
                         _________________________

Hon Rogers VP:


1.           I agree with the judgment of Le Pichon JA.


Hon Le Pichon JA:


2.           These are appeals from the order of Barma J. dated 5 December
2003 granting summary judgment to the plaintiff against the 1st and
2nd defendants. At the hearing, the appeals were dismissed with costs for
written reasons to be handed down later. This we now do.

Background


3.           The plaintiff was a special-purpose company whose only business
was to enter into and carry out the subscription agreement it entered into on
26 July 2001 with, inter alia, the 1st and 2nd defendants. Implementation of the
subscription agreement involved the issue of a convertible note (“the note”) by
the 1st defendant to the plaintiff and the execution of a note instrument (“the
instrument”) by the 1st defendant which set out the conditions subject to which
the note was issued. The subscription agreement, note and instrument were
varied by the first supplemental agreement, a revised convertible note and a
                                      -   3   -


revised note instrument all dated 18 January 2002 and the second supplemental
agreement dated 23 July 2002 (collectively “the agreements”).


4.           The agreements came about following a decision to try to float the
business of a theme park in Panyu operated by a Sino-foreign co-operative joint
venture. The foreign partner of that joint-venture was the 1st defendant which
was owned by the 2nd defendant. The 2nd defendant made arrangements for the
3rd defendant and two other individuals to acquire between them 30% of the
shareholding in the 1st defendant. Following the liquidation of Gilbert
Holdings Ltd (“Gilbert”), a listed Hong Kong company in August 2000, the 1st
and 2nd defendants entered into an agreement with its liquidators for a
restructuring of Gilbert, using a Bermudan company called Surge Holdings Ltd
(“Surge”) into which the foreign partner’s interests in the theme park
joint-venture would be injected. Surge was to be listed on the Stock Exchange
of Hong Kong through listing by introduction following Gilbert’s restructuring.


5.           The listing of Surge needed financing and discussions between the
parties culminated in the subscription agreement and related documentation.

6.           In paragraphs 9 to 40 of his judgment, the judge summarised the
background leading to the execution of the subscription agreement and
described in meticulous detail the contents and effect of each of the agreements
as well as the events leading up to the issuance of the writ in these proceedings
on 13 January 2003. It is unnecessary for the purposes of these appeals to
rehearse the detail which appears in that judgment. The more significant terms
of the agreements are highlighted below.


7.           Under the subscription agreement, the plaintiff agreed to subscribe
to the note at a face value of $35 million. In return, the plaintiff was entitled to
nominate two directors to the board of Surge who were to remain in that
                                      -   4   -


position unless the plaintiff’s shareholding fell below 5% of the issued share
capital. The plaintiff agreed to its name and a description of the subscription
agreement being included in all submissions to for Hong Kong Stock Exchange
in connection with the proposed listing, with the plaintiff being given the
opportunity to review and comment and the 1st defendant was obliged to inform
the plaintiff of any material changes to matters relating to the listing and the
restructuring proposal. The plaintiff was given joint control over the
designated account into which the subscription monies were paid in that the
account could only be operated on the joint signatures of one representative of
each of the plaintiff and the 1st defendant and the plaintiff was to be provided
with, inter alia, the management accounts, audited profit and loss accounts and
balance sheet. The plaintiff was also granted a put option by the 2nd and
3rd defendants entitling it to require the 2nd and 3rd defendants to acquire from
the plaintiff all of the shares it was to acquire on conversion of the note in the
event that listing were not achieved by 28 September 2001. The 2nd and
3rd defendants guaranteed the performance by the 1st defendant of its obligations
to the plaintiff under the subscription agreement and related documents.


8.           Under the instrument, the principal amount of the note was to be
repaid in the event that automatic conversion of the note into shares in Surge did
not occur on or before 21 September 2001. Condition 6 of the instrument
provided for automatic conversion of the outstanding principal amount of the
note into shares of Surge at a price of $0.168 per share. However, such
automatic conversion was subject to conditions as to capitalisation, offer price
etc which were capable of being waived by the plaintiff. There were also
provisions for the repayment of monies payable under the note and instrument
in two instalments should automatic conversion not take place and for
adjustments to be made to the conversion price designed to ensure that the
interest in Surge to be acquired by the plaintiff would be maintained at about
                                      -   5   -


11%. The note was to bear simple interest at 4% and the plaintiff was to be
indemnified by the 1st defendant against, inter alia, its legal fees and costs in the
event of the 1st defendant default under the note.


9.           The listing did not proceed as speedily as had been anticipated and
by the first supplemental agreement dated 18 January 2002, the time limits were
extended to 5 March 2002 for automatic conversion and to 15 March 2002 for
the listing. Other changes were also reflected: listing would be by way of an
initial public offering rather than by way of introduction, the number of shares
to the issued would be reduced and the original placing price correspondingly
revised upwards to an offer price of between $0.54 and $0.65 per share with
automatic conversion at $0.54 per share. However, it was provided that in the
event of the offer price exceeding $0.54, the plaintiff was to make a top-up
payment to ensure that it paid the same price per share as placees and
subscribers to the public offer.   It was also provided the 1st defendant would
bear all reasonable costs and expenses incurred by the plaintiff in connection
with the first supplemental agreement.


10.          About two weeks later, the plaintiff’s solicitors sent a bill for legal
fees in the amount of $191,283 in relation to the revised arrangements for
settlement by the 1st defendant. The bill was rendered in traditional narrative
form. The description of work done was extremely detailed, with particulars
of the disbursements incurred.


11.          Notwithstanding the revised deadlines, they could not be met and
that led to the parties’ entry into the second supplemental agreement on 23 July
2002, extending the conversion date to 31 July 2002 and the listing date to
15 August 2002. The second supplemental agreement contained important
changes including a lockup period of six months in respect of shares acquired
by the plaintiff on automatic conversion, compensation by the 2nd and
                                       -   6   -


3rd defendants to the plaintiff in respect of any shortfall that the plaintiff would
otherwise suffer between the value of the shares it received on conversion and
the price of $35 million which the plaintiff paid them in the event of the offer
price being lower than $0.54 and full conversion taking place notwithstanding
this. The 1st defendant also agreed to pay all reasonable costs and expenses
incurred by the plaintiff in connection with the first and second supplemental
agreements.


12.           Within days of the second supplemental agreement, the plaintiff’s
solicitors sent a bill for legal fees in the amount of $81,407 in relation to the
second supplemental agreement to the 1st defendant for settlement. Again, it
was rendered in traditional narrative form.        The 1st defendant failed to pay
either of the bills.


13.           By 30 July 2002, when it became apparent that the key conversion
deadline and requirements could not be met, the plaintiff, the 2nd defendant and
a Mr Leung entered into a put option deed under which the plaintiff was given a
put option in respect of the shares in Surge that it would acquire on conversion.
It entitled the plaintiff to require the 2nd defendant to purchase the whole of its
shareholding arising from conversion at a price of $36.4 million. The option
was exercisable only during a window of one week commencing one year after
the date of Surge’s listing subject to certain acceleration provisions.

14.           On the 31 July 2002, the note as revised was converted into
66 million shares in Surge at $0.54 per share. Interest at 4% from 26 July
2001 totalling $1,423,013.70 became payable.           On 19 August 2002 the offer
price was fixed at $0.34 per share which was $0.20 per share below the
conversion price. Accordingly, the 2nd and 3rd defendants became liable to pay
the shortfall of $13.2 million to the plaintiff under clause 5.2 of the second
supplemental agreement within 14 days. No such payment was made.
                                        -   7   -


15.          On 13 January 2003, the plaintiff commenced proceedings
claiming:

             (1)      $1,423,013.70 in respect of the note interest, together
                      with default interest of $90,000.74 as at 14 May 2003
                      (and accruing at $311.89 per day thereafter);

             (2)      $272,330 in respect of the plaintiff’s legal costs in
                      connection with the supplemental agreements; and

             (3)      $13.2 million being the shortfall amount payable
                      under clause 5.2 of the second supplemental
                      agreement.

16.          Whilst the first two claims were made against all the defendants,
judgment was sought against the 1st and 2nd defendants as primary debtor and
guarantor respectively. The third claim was made against the 2nd and
3rd defendants but the judgment in relation to it was sought against the
2nd defendant only.


The judgment below


17.          The judge entered summary judgment in respect of all three claims.
The defence raised by the 1st and 2nd defendants to the interest claim was that
the agreements as well as the guarantee provisions were unenforceable by virtue
of sections 23, 18 and 22 of the Money Lenders Ordinance because the
transaction at the heart of the agreements was in substance a loan and the
plaintiff was a moneylender who did not have a moneylender’s licence.


18.          After reviewing in detail the submissions made by the plaintiff and
the defendants on the true effect of the agreements, the judge set out his
approach to the question in paragraph 58 of his judgment:
                                         -   8   -


             “        In my view, the court’s approach to the question of whether a
             particular transaction is or is not a loan is to be answered by first
             considering the terms of the agreements by which the transaction is
             governed, in order to ascertain the rights and obligations thereby
             created. If those rights and obligations amount in substance to a loan
             of money, the transaction will properly be characterised as a loan. In
             cases which such obligations do not point clearly in one direction or
             the other, or where, although as a matter of form the transaction is not
             one of loan, but there are provisions or circumstances which suggest
             that it may in fact and substance be a loan, it will be necessary to
             consider other evidence, such as evidence of the parties’ intentions in
             entering into the transaction. In these latter cases, there may well be
             conflicts of evidence which are not capable of being determined in an
             application for summary judgment.”

19.          Applying this approach, the judge reached the conclusion that on
an objective consideration of the substance and effect of the transaction
constituted by the agreements, the terms of the transaction and the obligations
thereby created pointed “inescapably to the transaction being in substance an
agreement by the plaintiff to acquire an investment in Surge and not to make a
loan of money to the 1st defendant”. In reaching this conclusion, the judge
considered that “the single most compelling factor” was the automatic
conversion of the amount outstanding into shares upon the conditions precedent
contained in condition 6.1 of the instrument and revised instrument being
complied with. Having regard to the fact that neither party had a choice in the
matter upon compliance with the conditions, it was a transaction “whereby the
plaintiff was agreeing to acquire a stake in what was to be a newly listed
company (Surge), rather than to lend money to the first defendant in order to
enable it to fund that company’s listing”.


20.          In coming to his conclusion, the judge did not pay regard to the
evidence of the 2nd defendant because, in his view, that evidence was not
admissible where the terms of the agreement are clear and not in dispute. In
any event, he was of the view that the evidence of the 2nd defendant not take
                                       -   9   -


matters further. The judge also rejected the further submission that the
transaction might be partly an investment in shares and partly a loan.


21.          Given the judge’s conclusion that the transaction was not a loan,
whether wholly or in part, the issue of the plaintiff being a money lender did not
strictly arise. The judge went on to rule that even if this transaction could be
regarded as partly a loan, that in itself would not render the plaintiff a money
lender. In his view, the defences based on the Money Lenders Ordinance were
not even arguably available to the 1st and 2nd defendants.


22.          As regards the plaintiff’s claim for legal costs, the judge noted that
the 1st and 2nd defendants were only putting the plaintiff to proof of the
reasonableness of such costs and had put forward no positive case that the bills
were in fact unreasonable. The judge granted summary judgment to the
plaintiff on the basis that the 1st and 2nd defendants had failed to lay any
evidentiary foundation such as would raise a triable issue as to the
reasonableness of the costs.


23.          On the plaintiff’s shortfall claim, the judge granted summary
judgment and rejected the contention of the 2nd defendant that his obligation to
pay the shortfall under clause 5.2 of the second supplemental agreement was
discharged by the put option deed. The judge reached the conclusion that the
provisions were not inconsistent and that they addressed different risks.
Whilst clause 5.2 ensured that the plaintiff would be protected in the event of
the shares being issued at a price lower than the conversion price, the put option
addressed the carrying risk to the plaintiff since it was only exercisable within
the one week window which could not occur until a period of time after the
listing.
                                      -     10   -


This appeal


24.           Mr Yuen S. C. who appeared for the 1st and 2nd defendants
submitted that the judge was wrong to have entered summary judgment on any,
much less all, of the plaintiff’s claims.    However, the arguments advanced on
appeal were no different from those that had been made to the judge.


The Moneylenders Ordinance defence


25.           It was submitted that the judge’s analysis was faulty and that he
had reached the wrong conclusion.         It would not appear to have been
Mr Yuen S.C.’s case that the judge had overlooked material provisions in the
agreements. Indeed, the judge’s description of the provisions of each of the
agreements was full and comprehensive. In so far as Mr Yuen sought to
suggest that the judge’s reference to “the single most compelling factor” meant
that he had had regard only to that factor, that submission is plainly
unsustainable given paragraphs 61 to 81 of the judgment which, painstakingly,
dealt with Mr Yuen’s submissions as to the significance and meaning of various
provisions in the agreements, such as the submission that the 1st defendant had
an option as to how the $35 million advance was to be repaid, the significance
of the provisions in the instrument providing for repayment of the subscription
monies in certain events and those relating to the payment of interest on the
amount of the note as well as the fact that the $35 million was intended to
finance the listing of Surge.


26.           In my view, the judge’s reasoning was unassailable. The 1st and
2nd defendants were nowhere near beginning to demonstrate that the judge had
gone seriously wrong in his analysis, much less that he had overlooked any
material point. I agree with the judge that the fact that the advance was to be
used to finance the listing was in itself neutral. Whilst there were some
                                       -   11   -


provisions that might be consistent with the transaction being a loan, there were
many provisions whose inclusion can only be consistent with an intention to
protect the position of the plaintiff, “to ensure that the plaintiff gets, in real
terms, a shareholding in Surge to the extent and value it [had] bargained for”.
Moreover, had the transaction had been no more then a loan, the provisions in
the first supplemental agreement requiring the plaintiff to advance further
monies (by way of a top-up payment) should the issue price exceed $0.54 per
share would be inexplicable. I agree with the judge that the agreements were
in substance an investment by the plaintiff and not a loan.


27.           Mr Yuen then submitted that the judge should not have excluded
the 2nd defendant’s evidence and was wrong to have done so.          The test stated
by the judge at paragraph 58 of his judgment quoted above is unexceptionable.
That was the test that was applied.     In a clear case such as the present, where
there is no doubt and no ambiguity, the judge is not bound to have regard to
extrinsic evidence.


The legal costs defence

28.           The two bills of costs were rendered in January and July 2002.
The bills were never queried at the time and no steps were ever taken to tax
them. At the end of March 2003, some 14 months after the first bill was
submitted and after the close of pleadings, the solicitors for the 1st and
2nd defendants requested a breakdown of the two bills which, it is common
ground, was never answered, whether before or after the date of the Order 14
summons which was issued in May 2003.


29.           The bills related to costs incurred by the plaintiff in connection
with the first and second supplemental agreements and related documentation.
The solicitors who prepared all this documentation were solicitors to the
                                        -   12   -


defendants. It is not a case where a party is being asked to pay legal costs in
respect of a transaction to which he was not privy. To the contrary, the
defendants were in a position to form a view on a rough and ready basis as to
the reasonableness of the legal costs sought from the legal costs that they
themselves had to incur in relation to the common transaction and
documentation. If what was sought had been out of line, they would have been
in a position to challenge its reasonableness. This they never did.      Therefore,
I do not accept that without the breakdown sought, the 1st and 2nd defendants
were not in the position to challenge the reasonableness of the costs sought.
The defence raised is wholly unmeritorious and the judge was quite right in
rejecting it.

The defence to the shortfall claim


30.             In rejecting the defence, the judge’s reasoning was that clause 5.2
of the second supplemental agreement and the put option addressed different
risks. Mr Yuen failed to demonstrate that that conclusion was wrong.
Clause 5.2 of the second supplemental agreement was plainly directed at the
shortfall (if any) arising at the time of the automatic conversion. The risk of
the price of the shares not being maintained at the issue price in the 12 months
or alternatively 6 months following listing was a different risk altogether. It
was designed to protect the plaintiff from a fall in value of the shares after
listing in contrast to a lower price of the shares at listing. Given that the
plaintiff was not in a position to realise the shares immediately after conversion
because of the six month lockup provision contained in the second supplemental
agreement the put option gave some protection against a sustained fall in share
price. The option is only exercisable during the option period, namely, the
period of one week commencing from the anniversary of the listing date or if it
was accelerated by reason of clause 8.3 (default on the part of the grantor of the
                                       -   13   -


put option to pay the guarantor the amount as provided by clause 4) to the
period of one week commencing from the expiration of the lockup period. The
put option is but another provision designed to protect the value of the
plaintiff’s investment. Whilst clause 5.2 also has that objective, the timeframe
is totally different. The put option ensures that it would be maintained at the
time the option became exercisable which the parties chose to be a year (or
six months if accelerated) from the listing date.


31.          If, as is my view, the judge was right about different risks being
addressed, that is the end of the matter so far as the raising of a triable issue is
concerned. I do not accept that the resolution of that issue involves any
dispute of fact as suggested by Mr Yuen.




            (Anthony Rogers)                          (Doreen Le Pichon)
             Vice-President                            Justice of Appeal


Mr Kevin Patterson, instructed by Messrs Johnson, Stokes & Master,
   for the Plaintiff/Respondent in both appeals

Mr Law Man Chung, instructed by Messrs Hampton, Winter & Glynn,
   for the 1st Defendant/Appellant in CACV 397/2003

Mr Rimsky Yuen, SC, instructed by Messrs Richards Butler,
   for the 2nd Defendant/Appellant in CACV 395/2003

								
To top