Sa And Another v Kb

Judgment Date04 November 2011
Subject MatterConstruction and Arbitration Proceedings
Judgement NumberHCCT24/2011
CourtHigh Court (Hong Kong)
HCCT24/2011 SA AND ANOTHER v. KB

HCCT 24/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 24 OF 2011

____________

IN THE MATTER of an Arbitration
and
IN THE MATTER of Section 2GC of the Arbitration Ordinance (Cap 341)

____________

BETWEEN
SA 1st Plaintiff
FT 2nd Plaintiff
AND
KB Defendant

____________

Before: Deputy High Court Judge G Lam, SC in Chambers
Date of Hearing: 19 October 2011
Date of Judgment: 4 November 2011

_______________

J U D G M E N T

_______________

A. INTRODUCTION

1. This is an application by originating summons by the Plaintiffs, SA and FT, for an order restraining the Defendant, KB, from proceeding further with an arbitration pending the final determination of the dispute between the parties herein in Guangdong Provincial Higher People’s Court Case No X/2010 or until further order. I shall refer to the parties as SA, FT and KB respectively. The arbitration was commenced in Hong Kong by KB by notice of arbitration dated 3 March 2010.

B. THE UNDERLYING DISPUTE

2. The underlying dispute between the parties concerns a piece of land in Zhuhai, on which a hotel complex called the G Hotel has been erected. This property was originally owned by a subsidiary of a Macanese company called ZKG, and was mortgaged to a creditor company in the BC group.

3. The Macanese company was wound up on 4 October 2004. As part of its restructuring exercise, the creditor company’s rights were transferred to another Macanese company called SPRE (“FT Macau”), and it was planned that FT Macau would sell the assets to an interested third party.

4. The NW group was among those who expressed an interest in purchasing the assets, partly because it was owed money by the Zhuhai city’s business enterprises and hoped that it could effectively obtain repayment of such indebtedness by way of set-off against any premium payable for the change of user and of plot ratio for the land. Accordingly, the NW group entered into discussions with Mr X, the owner of SA, it being contemplated that SA would indirectly acquire the assets in question from FT Macau. The negotiations bore fruit and eventually SA decided to arrange for the sale of the assets to the NW group, which decided that it would make such purchase through a subsidiary, namely, KB.

5. On 16 April 2006, KB, SA, FT and FTZ signed a letter of intent in relation to the acquisition of the assets by KB. The gist of the agreement is that KB would acquire from SA the entire shareholding in FT, which would hold FTZ. Although FTZ had not been incorporated at that time, the parties knew that it was being incorporated as a subsidiary of FT and intended that it would acquire the assets in question from FT Macau. The consideration for the purchase was HK$208 million. It is specified that the agreement is governed by Hong Kong law.

6. On 18 May 2006, FT entered into an agreement with FT Macau for the acquisition of the assets in question.

7. By 19 June 2006, KB had paid the first two instalments of HK$50 million each to SA.

8. In August 2006, pursuant to the letter of intent, FTZ, which had been incorporated on 18 April 2006, changed its legal person representative and executive director from Mr X to a representative of KB and changed its registered address to an address designated by KB. KB had also obtained the corporate seal of FTZ. Effectively, KB had taken control of FTZ.

9. Two particular provisions in the letter of intent have given rise to a dispute between the parties as to whether it is still valid and subsisting. Clause 6.1 of the letter of intent provides:

“If, within 360 days of the execution of this Letter of Intent, the Parties to this Letter of Intent have not signed corresponding definitive contracts (agreements) for the purpose of further performance of this Letter of Intent, this Letter of Intent shall terminate.”

Clause 7.3 provides:

“If, within 360 days of the execution of this Letter of Intent, the Parties to this Letter of Intent have not signed corresponding definitive contracts (agreements) for the purpose of further performance of this Letter of Intent, or even though corresponding definitive contracts (agreements) have been executed, the abovementioned transaction is not eventually completed due to cause(s) that Party B cannot be held responsible, Party A shall refund to Party B all amount and interests paid (interest to be calculated based on the prime rates of HSBC Bank).”

10. The parties signed two memoranda on 2 April 2007 and 10 October 2007 respectively extending the completion period, ultimately to 12 April 2008.

11. It is not in dispute that no further document was signed to extend the completion period, and that no formal agreement of sale and purchase was executed. However, notwithstanding clauses 6.1 and 7.3, KB contends that the letter of intent has not expired and remains valid and of full force, and that the parties had acted on that basis up to early 2010.

12. On 19 January 2010, KB caused the legal person representative and executive director of FTZ to be changed to one Mr Geng.

13. On 20 January 2010, however, solicitors for SA and Mr X issued a letter to KB stating that the letter of intent had been terminated. On 12 February 2010, the solicitors wrote to specify that the termination was based on clauses 6.1 and 7.3 of the letter of intent. SA contends that the agreement has expired as a result of which it tendered to KB the sum of HK$100 million that KB had paid together with interest.

14. For the purposes of this application it is unnecessary for me to go into the details of the arguments on both sides advanced in support of their respective contentions or to assess the merits of such arguments.

C. THE CLAIM IN THE ARBITRATION

15. At this point it is material to note that as regards dispute resolution, clause 7.2 of the letter of intent provides:

“All Parties agree that all disputes and controversies arising from or related to this Letter of Intent shall first be resolved by all Parties through friendly discussion. If no resolution could be reached through discussion, the said disputes and controversies shall be governed by the court of the place at which the main assets of the All Aforementioned Assets are located and/or arbitrated by an arbitration tribunal in Hong Kong. Unless otherwise held, all fees and expenditures (including litigation costs and lawyer fees) shall be borne by the losing party.”

16. Invoking clause 7.2 of the letter of intent, by a notice of arbitration dated 3 March 2010, KB commenced arbitration in the HKIAC against SA, FT and FTZ with the nature of the claim and relief being specified as follows:

“(i) A declaration that the [letter of intent] as revised by the two extension memoranda has remained valid and subsisting and binding on all the parties thereto;

(ii) Specific performance of the [letter of intent] as so revised including but not limited to the transfer of all the shares in FT to KB;

(iii) FT be restrained from permitting the transfer or dealing of any of its shares to any party other than to KB or such other party as it so directs and/or from disposing or transferring or otherwise dealing with any of its asset or property and/or instructing, directing or otherwise authorizing [FTZ] to change its legal representative or management or to dispose or transfer or otherwise deal with any of its asset or property without the consent and/or authority of KB;

(iv) Damages for breach of the [letter of intent] as so revised with interest thereon; …”

17. It is this arbitration which SA and FT now apply to restrain KB from further progressing, pending determination of another set of proceedings being conducted in Guangdong.

D. THE VARIOUS PROCEEDINGS IN HONG KONG AND THE MAINLAND

18. The dispute about the continued validity and effect of the letter of intent has spawned a large number of separate sets of proceedings both in Hong Kong and in Mainland China. It is necessary to set out the relevant steps taken in these proceedings.

19. Shortly after commencing the arbitration in Hong Kong, on 11 March 2011, KB discovered that an application had been submitted in the name of FT to two Zhuhai government authorities, namely, the Administration for Industry and Commerce and the Science, Industry & Trade, Informatization Bureau, to change FTZ’s legal person representative, memorandum and articles, and registered address.

20. To preserve the status quo, KB commenced proceedings in Hong Kong on 11 March 2010 by originating summons in HCCT No 16 of 2010 seeking an injunction in aid of the arbitration, pursuant to section 2GC of the Arbitration Ordinance, to prevent, inter alia, the disposal of the shares in FT and FTZ, alteration of the legal person representative, company documents, company seal and registered address of FTZ. An urgent ex parte injunction in the terms sought was granted by Saunders J on 12 March 2010.

21. SA retorted with two steps. First, on 26 March 2010, it commenced a civil claim against KB (with FT and FTZ joined as third parties) in the Zhuhai City Intermediate People’s Court in respect of the letter of intent under Civil Claim No X/2010 (“the Zhuhai Action”). SA sought, inter alia, an order confirming that the letter of intent had expired, an order that KB should accept a refund of all moneys paid with interest, and an order that KB return various corporate documents and seals of FT and FTZ as well as other original documents.

22. Secondly, in Hong Kong, by a summons taken out in HCCT No 16 of 2010 dated 19 April 2010, SA and FT sought an order to set aside the service of KB’s...

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