“By failing to prepare, you are preparing to fail”
In the recent judgement in Tang Chack Wing v Yung Woon Kwai (2021) HKCFI 2566, the decision handed down by Master Alan Kwong has made it clear that careful consideration should be undertaken by the plaintiff in an Order 14 Application. Subsequent proceedings may prove detrimental to the Order 14 Application and such action may be in breach of an agreement entered into by two parties.
What Exactly is an Order 14 Application?
An Order 14 Application is the summary judgment procedure (Order 14 of the High Court Civil Procedure Rules) in Hong Kong which enables a plaintiff to apply for final judgment on his claim without having to proceed to the full expense and delay of proceeding to a full trial. In essence, the plaintiff will have to prove that there is no defence to the claim by the defendant (clear cut cases).
In order to dismiss a summary judgment application, the defendant has to argue to the judge that there are ‘triable issues’ such that it is only appropriate for the case to proceed to trial. It is only where the judge considers that the issues raised by the defendant are ‘unbelievable’ that summary judgment will be granted.
So, What Happened?
The background facts of this case concern an Order 14 Application to seek summary judgment on 4 May 2021 by the Plaintiff (the “Action”).
The Plaintiff and the Defendant are the co-founders of a group of companies. The Plaintiff and the Defendant respectively owns 50% shareholding in four companies within the group of Companies (the “Companies”).
On 15 August 2019, the Plaintiff agreed to sell, and the Defendant agreed to buy, the Plaintiff’s shares in the Companies (the “Agreement”) at the consideration of HK$1 billion (the “Total Sum”). In short, the Agreement had the following key terms:
- the Total Sum was to be paid in installments; and
- Clause 3.3 of the Agreement stated that if the Defendant failed to pay any installment, he shall give 7 days’ advance notice to the Plaintiff, and the Plaintiff shall give the Defendant a period of 2 months for payment of the installment that is due and payable. If the Defendant still fails to make payment, all outstanding balance of monies payable under the Agreement would become immediately due.
On 15 September 2019, the Defendant paid the first installment in the amount of HK$10 million to the Plaintiff. However, the Defendant failed to pay the second installment. The Plaintiff gave the Defendant a period of 2 months to pay. The Defendant still failed to pay the 2nd installment, therefore, all the sums that will be payable under the Agreement became immediately payable. The total amount was HK$990 million (the “Outstanding Sum”).
On 16 October 2020, the Plaintiff, through his solicitors, issued a letter demanding the Defendant to pay him the Outstanding Sum. Due to the Defendant’s failure to pay the Outstanding Sum to the Plaintiff, on 29 October 2020, the Plaintiff commenced the present Action. In the Statement of Claim, neither acceptance of repudiation nor damages has been pleaded. Instead, the Plaintiff makes it clear that he claims for the Outstanding Sum pursuant to the contractual terms of the Agreement, and the Plaintiff even seeks “a decree of specific performance”. When the Defendant continued to default on the second installment after the grace period, the Plaintiff should decide whether (i) he would accept the Defendant’s repudiatory breach and treat the Agreement as discharged; or (ii) affirm the contract and seek to enforce Agreement.
This was not clearly pleaded in the Statement of Claim, but it appears that the Plaintiff has affirmed the Agreement despite the Defendant’s breach in light of the reliefs pleaded in the Statement of Claim. However, the Plaintiff only dealt with the ‘payment acceleration’ mechanism under Clause 3.3 of the Agreement when the Defendant defaulted on the payment of any instalment but failed to consider the transfer of shares when the Action commenced.
However, on 28 April 2021, the Plaintiff commenced winding-up proceedings (the “Winding-up Proceedings”). He sought to wind-up two of the Companies on just and equitable grounds.
The Defendant relied upon the defence arising from the subsequent development that took place after the present Action was commenced (i.e. the Winding-up Proceedings).
The Plaintiff argued that the Winding-up Petitions were irrelevant. This is because by commencing the present Action or issuing the pre-action letter, the Plaintiff had already accepted the Defendant’s earlier breach for failure to make payment pursuant to the Agreement. Hence, the Winding-up Proceedings were irrelevant.
The Court was not convinced that the Plaintiff had accepted the Defendant’s breach by commencing this Action or issuing the pre-action letter. On the contrary, Master Kwong stated that they were acts of enforcing the Agreement. The Plaintiff had kept the Agreement alive, so that he could sue to claim the Outstanding Sum against the Defendant. The Plaintiff did not seek to claim damages upon acceptance of repudiation. Instead, the Plaintiff made it clear that he claims for the Outstanding Sum pursuant to the terms of the Agreement.
The Court referred to Doherty v Fanigan Holdings Ltd  EWCA 1615 to state that the Defendant’s duties to pay and the Plaintiff’s duties to deliver the shares are “dependent obligations”, in that “neither party [is] entitled to enforce the performance of the other’s except against a perform of his/its own”. Master Kwong suggested that it would be unreasonable if the Plaintiff were entitled to the Outstanding Sum without honouring his contractual obligations to deliver or transfer the shares in the Companies to the Defendant. Therefore, if the Plaintiff takes steps to destroy the value of the shares or is unable to deliver the shares, he risks breaching the terms of the Agreement.
Master Kwong took the view that it was likely that the implied terms do exist, i.e. the Plaintiff shall not do anything which would diminish, negatively affect and/or destroy the value of the shares, and shall not do anything that would affect the Companies’ ability to operate.
The next question to consider is whether it is arguable that the Plaintiff breached the implied terms of the Agreement by commencing the Winding-Up Proceedings. Master Kwong agreed with this argument for the following reasons:
- Logically, clients or customers would not wish to deal with a company that is being subject to winding-up proceedings. They would wish to avoid the risks and uncertainty involved. A winding-up petition may cause severe harm to a company;
- If a winding-up order is made, a liquidator will be appointed to take over the affairs of the company. The directors of the companies would be stripped of their powers. The liquidator may dispose of the assets of the company, and the company will cease to operate; and
- There is an imminent risk that the Companies listed under the Agreement would be severely damaged or even destroyed. If this happened, the Defendant would not receive what he bargained for and this would defeat the purpose of the Agreement.
Master Kwong could not conclude that no ‘triable issues’ arose from the Plaintiff’s acts of taking out the Winding-up Petitions.
Furthermore, he suggested that it also seems arguable that the Plaintiff had shown an intention that he no longer wished to be bound by the terms of the Agreement:
- the Plaintiff said, in his affirmation, that he took out the winding-up petitions to protect his interest, i.e. if the Defendant did not pay him, he could realise his shareholding through the winding-up process. In an email from the Plaintiff’s daughter, it was also said that the Plaintiff was left with no option but to wind up the Companies so he could cash out his shares and retire;
- although the Defendant was the party that first breached the Agreement by failing to pay, the Plaintiff would still be under a contractual obligation to transfer and deliver the 50% shareholding in the Companies; and
- therefore, any statement that the Plaintiff sought to realize or cash out his shares would be indications that he no longer wished to be bound by the Agreement.
The ‘Decision’ was less shocking than the announcement made by Lebron James to play for the Miami Heat in 2010. The Court was satisfied that it is arguable that the Plaintiff had breached the Agreement and/or demonstrated an intention that he no longer wished to be bound by the Agreement. As such, the Defendant was arguably entitled to accept repudiation or termination of the Agreement on 9 July 2021. The Order 14 Application did not pass (at least Lebron does?) the test for satisfying the Court in granting the Defendant a summary judgment and Master Kwong granted unconditional leave to defend to the Defendant.
Doing things the ‘right’ way
An Order 14 Application is a useful tool for a plaintiff to ‘shorten’ the normal litigation process and to obtain a final judgment without the delay and cost of going through the normal interlocutory procedures leading to a full trial. However, parties (especially for the plaintiff) are reminded that if they subsequently proceed to commence an action (such as the Winding-up Proceedings) such action will be taken into account by the Court when considering the Order 14 Application, and may prove, as seen in this case, detrimental to the case of the plaintiff.
For the present case, if the Plaintiff has treated the Defendant as having repudiated the Agreement and proceeded to claim damages for the breach, both parties would have been discharged from further performance of the Agreement. Thus, what happens to the shares of the two companies would be irrelevant after the discharge of Agreement.
Unfortunately, despite “the skilful submissions” of the Plaintiff’s Counsel at the substantive hearing of the Order 14 Application, there is no denying that the Plaintiff had in fact affirmed the Agreement (i.e. elect to treat it as ongoing) and sought to hold the Defendant to it since day one.
“If the innocent party subsequently failed to perform his side of the bargain, he took the risk that the initial wrongdoer might turn the tables on him.” – Chao Keh Lung v Don Xia  2 HKLRD 11
In short, a meritorious court application may no longer be a “sure-win” if things start off on the wrong foot.