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HCA 1221 2006 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1221 OF 2006 BETWEEN PINE ENTERPRISES LIMITED Plaintiff and CYBER STRATEGY LIMITED 1st Defendant LECTURE KIT COMPANY LIMITED 2nd Defendant and WOO PAK HAY EDWARD 1st Third Party LAW SHIU KAI ANDREW 2nd Third Party HCCW 593 2005 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES WINDING UP PROCEEDINGS NO 593 OF 2005 IN THE MATTER of Union Resources Educational Development Limited AND IN THE MATTER of Sections 168A and 177 1 f of the Companies Ordinance Cap 32 2 97 BETWEEN PINE ENTERPRISES LIMITED Petitioner and LECTURE KIT COMPANY LIMITED 1st Respondent UNION RESOURCES 2nd Respondent EDUCATIONAL DEVELOPMENT LIMITED HCA 1221 2006 and HCCW 593 2005 are heard and tried together pursuant to the order of High Court Judge Poon dated 31 July 2007 Before Deputy High Court Judge To in Court Dates of Hearing 17 21 24 25 27 28 September 2007 2 3 October 2007 5 6 8 9 12 14 November 2007 4 7 8 14 30 31 January 2008 and 1 4 February 2008 Date of Judgment 14 March 2008 J U D G M E N T INTRODUCTION 1 This is a trial of two actions namely HCCW 593 2005 and HCA 1221 2006 ordered to be tried together pursuant to the order of Poon J The dispute arose out of four agreements in connection with the sale by Pine Enterprises Limited Pine of its shares in Union Resources Educational Development Limited UR Limited to Lecture Kit 3 97 Company Limited Lecture Kit The shares in UR Limited were duly transferred to Lecture Kit on 13 May 2003 Pine complained of breach of the agreements On 1 August 2005 Pine petitioned for the winding up of UR Limited on just and equitable ground under HCCW 593 2005 On 7 June 2006 Pine also commenced action HCA 1221 2006 against Lecture Kit and its parent company Cyber Strategy Limited Cyber Strategy for breach of agreement Cyber Strategy and Lecture Kit counterclaimed against the 1st and 2nd Third Parties for false representation I consider the main action is HCA 1221 2006 2 The Plaintiff and the 1st Third Party are represented by Mr Poon SC and Ms Linda Chan The Defendants are represented by Miss Angela Gwilt and Mr C Y Li who joined in as leading counsel on the 12th day of trial The 2nd Third Party who is a practising solicitor appeared in person except for the last day of the trial when he is represented by Ms Elsie Yiu 3 By the seventh day of the trial the parties were still entangled in pre trial matters Rather than to have both actions adjourned and re fixed I considered it in the best interest of all parties to continue hearing the main action and to adjourn the winding up action Hence on my own motion I adjourned HCCW 593 2005 to a date to be fixed and continued hearing HCA 1221 2006 I am glad to have taken that course because as the evidence unfolds it became obvious that the evidence in the winding up action would be highly prejudicial to the Defendants in the main action and the evidence in the main action would also be prejudicial to the Respondents in the winding up action In this judgment I shall refer to some of the evidence in the winding up action for the purpose of setting out the background in which the material issues which I have to decide in the 4 97 main action arose I do not rely on any of those evidence in my assessment of credibility of witnesses or finding of fact in the main action I make no finding of fact in respect of the winding up action either not even a provisional view 4 On the 13th day of trial shortly after opening the defence case the Defendants offered to discontinue the third party proceedings against the 2nd Third Party Andrew Law with costs The offer was not accepted because of disagreement on the scale of costs Andrew Law continued as a third party But for all practical purposes the Defendants have abandoned their claim against Andrew Law The issue as between the Defendants and Andrew Law is whether Andrew Law is entitled to have his costs on indemnity basis 5 The dispute is about two of the four agreements On 12 April 2003 Pine Cyber Strategy and Lecture Kit entered into three agreements in connection with the sale and purchase of shares in UR Limited On the same day they also entered into a fourth agreement with UR Limited to regulate their management of UR Limited 6 Under the Sale and Purchase Agreement Lecture Kit purchased from Pine 51 of its shares in UR Limited i e 510 002 shares and Pine purchased from Cyber Strategy 20 of its shares in Lecture Kit i e 1 000 shares In essence that was a share swap agreement The principal asset of UR Limited was and still is its wholly owned subsidiary Union Resources Limited Educational Development Yanjiao Company Limited UREDY which owns a piece of land the Campus in the People s Republic of China PRC 5 97 7 Under the Lecture Kit Shareholders Agreement Cyber Strategy agreed to repurchase Pine s 1 000 shares in Lecture Kit at HK 12 5 million if Lecture Kit is not listed by 12 April 2005 and Cyber Strategy agreed to deposit its 510 002 shares in UR Limited with Messrs Andrew Law 2 the user representation the Campus could be used and or developed as a hotel spa sports centre or residential buildings paragraphs 5 g and 6 d of the AD 3 the vacant possession representation the Campus was not occupied by others paragraph 5 h of the AD 4 the loan representation the amount of loan owed by UR Limited to Edward Woo was HK 53 547 843 and 5 the mortgage representation the Campus could be mortgaged to obtain finance The first three representations are based on paragraphs 5 f 5 g 5 h and 6 d of the AD 2 the representation must be made with knowledge that it is false i e it must be wilfully false or at least made in the absence of any genuine belief that it is true 3 the representation must be made with the intention that it should be acted upon by the plaintiff or by a 14 97 class of persons which will include the plaintiff in the manner which resulted in damage to him 4 it must be proved that the plaintiff acted upon the false statement and 5 it must be proved that the plaintiff has sustained damage by so doing Based on the above principles Mr Poon SC argues that assuming for the present purposes that the non disclosures were representations nowhere in the AD Cartwright Misrepresentation Mistake And Non Disclosure 2nd ed paragraph 17 19 and Simms v Conlon 2006 EWCA Civ 1749 at paragraphs 87 127 and 128 23 The pleadings have drawn a clear distinction between non disclosure and false representation It is manifestly clear that non disclosure is relied on as an alternative basis for rescinding the four agreements Fraud is not a necessary element for non disclosure In the 15 97 circumstances it is not necessary to plead the matters referred to by Mr Poon SC The way in which the defence is pleaded cannot be said to be commendable However the non disclosures have been fairly pleaded In paragraph 7 of the AD 2 the non mortgageability non disclosure the Campus could not be mortgaged to obtain finance paragraph 6 c i of the AD 2 whether UR Limited owed Edward Woo director s loan in excess of HK 53 547 843 and 3 whether the Campus was mortgageable under PRC law and the legal issues are 4 whether the Plaintiff was under a legal duty to make the non disclosures complained of and 5 whether on a true construction of the Option Agreement the 510 002 shares in UR Limited were released to the Custodian as security for 17 97 payment of all sums owed by Cyber Strategy and Lecture Kit to Pine Dramatis Personae 27 Hereunder are the main entities and characters involved in the main action 28 Pine Enterprises Limited 松茂企業有限公司 Pine This is the plaintiff in HCA 1221 2006 and the petitioner in HCCW 593 2005 It is a company incorporated in Hong Kong Its shareholders are Mr Woo Pak Hay Edward Edward Woo and his wife Ms Huen Pui Lan Edward Woo is the director who is actively involved in the management of Pine 29 Union Resources Educational Development Limited 聯合資 源 教育發展 有限公司 UR Limited This company was incorporated in Hong Kong on 23 December 1986 with Edward Woo holding 1 000 002 shares and the remaining share held by his wife In November 1994 the company changed to its present name Since then it has been used by Edward Woo as the vehicle to pursue educational services and business The only substantial asset of the company was and still is its wholly owned subsidiary established in the PRC UREDY It is the 2nd Respondent in HCCW 593 2005 30 Union Resources Educational Development Yanjiao Company Limited 聯合資源教育發展 燕郊 有限公司 UREDY This is a wholly foreign owned enterprise established in the PRC on 30 September 1998 with a registered capital of US 4 819 000 It is a subsidiary of UR Limited Its only asset is the land use right which is the 18 97 usual form of land holding in the PRC over the Campus which is a piece land at Yanjiao Development Zone in Sanhe City of Hebei Province of about 100 000 square metres with built up areas of 40 000 square metres Edward Woo was the legal representative of UREDY until 13 June 2003 when he was replaced by Gary Ho 31 Asian Information Resources Holdings Limited 亞洲訊息 控股 有限公司 AIR Holdings This is a company listed in the GEM board of the Stock Exchange of Hong Kong Ltd Stock Exchange It has a web of subsidiaries including AIR Logistics Beijing AIR and Eleson Inc which is the parent company of Cyber Strategy Lecture Kit and subsequently of UR Limited and UREDY 32 Eleson Inc This was a wholly owned subsidiary of AIR Holdings It is the parent company of Cyber Strategy which in turn holds Lecture Kit On 13 September 2005 AIR Holdings sold Eleson Inc together with its entire line of subsidiaries to Beijing Olympics Limited for HK 50 000 33 Cyber Strategy Company Limited 數碼策略有限公司 Cyber Strategy This is a wholly owned subsidiary of Eleson Inc which in turn was a wholly owned subsidiary of AIR Holdings It is the parent company of Lecture Kit It is the 1st Defendant in HCA 1221 2006 34 Lecture Kit Company Limited 靈卓傑有限公司 Lecture Kit This is a company incorporated in Hong Kong It is a subsidiary of Cyber Strategy which in turn was a subsidiary of AIR Holdings It is the 1st Respondent in HCCW 593 2005 and the 2nd Defendant in HCA 1221 2006 19 97 35 China Institute of Defence 2 machines means of transport and other property owned by the mortgagor 3 the land use right to the State owned land State owned houses and other things firmly fixed on the land which the mortgagor is entitled to dispose of according to law 4 State owned machines means of transport and other property which the mortgagor is entitled to dispose of according to law 5 The land use right to barren hills barren gullies barren hillocks waste flood land and other unreclaimed land contracted by the mortgagor according to law and consent for the mortgage of such right is obtained from the party granting the contract and 6 Other property that may be mortgaged according to law A mortgagor may at the same time mortgage all the property listed in the preceding paragraph 63 97 Article 36Where houses on State owned land acquired in accordance with law are mortgaged the land use right to the State owned land occupied by the houses shall be mortgaged at the same time Where the land use right to State owned land acquired by means of granting is mortgaged the houses on the State owned land shall be mortgaged at the same time The land use right to land used by a township town or village enterprise may not be mortgaged separately Where factories and other buildings of township town or village enterprises are mortgaged the land use right to the land occupied by such buildings shall be mortgaged at the same time Article 37The following property may not be mortgaged 1 ownership of the land 2 the land use right to the land owned by the collectives such as cultivated land house sites private plots and private hills with the exception of those provided in sub paragraph 5 of Article 34 and sub paragraph 3 of Article 36 of this Law 3 education facilities medical and health facilities of schools kindergartens hospitals and other institutions or public organizations established in the interest of the public and other facilities in the service of public welfare 4 property in relation to which the ownership or the right of use is unknown or disputed 5 property sealed up distrained or placed under surveillance in accordance with law or 6 other property which may not be mortgaged as prescribed by law 121 It is the common opinion of the two experts that the land use right of the Campus is property within the meaning of article 37 3 of the Guarantee Law and is therefore mortgageable and that UREDY having lawfully obtained the land use right has the right dispose of it by way of mortgage It is the further opinion of Professor Lin that the buildings on the Campus being buildings on state owned land acquired in accordance 64 97 with law are also mortgageable under article 36 That opinion is not disputed by Mr Jia 122 The dispute between the two experts is on the proper interpretation of article 37 3 Professor Lin s opinion is that article 37 3 only prohibits mortgage of educational facilities of any institution 事業單 位 or public organizations 社會團體 established in the interest of the public 以公益為目的 Mr Jia s opinion is that mortgages of educational facilities of all kinds of schools and kindergartens regardless of their set up or whether for public purposes or for profit are prohibited by article 37 3 Mr Jia s opinion is to say the least astounding because on that opinion the words in the interest of the public would be rendered meaningless I think those words are not there for no purpose They cannot be ignored 123 A reading of the Chinese text of article 37 3 is illuminating The article reads as follows 3 學校 幼兒園 醫院等以公益為目的的事業單位 社 會 團體的教育設施 醫療衞生設施和其他社會公益 設施 It is clear from the Chinese text that what are not mortgageable are educational facilities 教育設施 medical and health facilities 醫療衞生設 施 and facilities in the service of public welfare 其他社會公益設施 of certain entities 事業單位 社會團體 Those entities are schools kindergartens and hospitals which are qualified by the words in the interest of the public 以公益為目的 It then follows that only the facilities of those institutions and public organizations established in the interest of the public may not be mortgaged Facilities of similar but 65 97 private institutions or organisations are mortgageable I think this interpretation makes better sense 124 Under cross examination Mr Jia sought to justify his interpretation by referring to the historical background in the setting up of non profit making educational organizations under the communist regime in 1949 That hardly makes sense in interpreting a statute promulgated in 1995 after all the social and economic changes in China especially in the last twenty years When cross examined by counsel about the absurd result his interpretation may have on the right of private schools and private hospitals to mortgage their facilities for expansion and development Mr Jia then became evasive and notably irritable He simply answered the question by asserting his legal expertise Mr Jia then said that article 37 3 had been rectified or amended or supplemented by two other statutory provisions 125 Firstly Mr Jia referred to regulation 8 2 of Measures on the Administration of Mortgage of Urban Real Estate Amendments 1997 城市房地産抵押管理辦法 1997 修正 Mortgage Administration Measures 1997 This regulation provides 第八條 下列房地產不得設定抵押 一 權屬有爭議的房地產 二 用於教育 醫療 市政等公共福利事業的房地產 三 列入文物保護的建築物和有重要紀念意義的其他建 築物 四 已依法公告列入拆遷範圍的房地產 五 被依法查封 扣押 監管或者以其他形式限制的房 地產 66 97 六 依法不得抵押的其他房地產 English translation Article 8 The following real estates shall not be mortgaged 1 A real estate whose ownership is in dispute 2 A real estate used for education medical care civil planning and other undertakings of public welfare 3 Buildings protected as culture relics and other buildings that have important memorial significance 4 A real estate that has been announced to be demolished according to law 5 A real estate that is legally confiscated seized controlled or restricted by other means 6 Other real estates that can t be mortgaged according to law Mr Jia asserted that regulation 8 2 prohibits mortgage of any educational facilities 126 Under cross examination Mr Poon SC suggested to Mr Jia that the Mortgage Administration Measures 1997 could not override the Guarantee Law That was refuted by Mr Jia Mr Li submits that Mr Poon SC s suggestion was not supported by the expert evidence of Professor Lin 127 With respect Mr Jia s statement is a very over sweeping statement The Guarantee Law is of the nature of a superior law made by the National People s Congress The Mortgage Administration Measures 1997 are administrative measures promulgated by the Ministry of Construction of the PRC 中華人民共和國建設部 which are of the nature of an inferior legislation According to my knowledge of the PRC legal system as I learned from other cases such inferior legislation cannot have the effect of amending a superior legislation such as the Guarantee Law 67 97 Mr Li is right that there is no evidence from Professor Lin to the above effect and Mr Jia has refuted the suggestion of Mr Poon SC However Hong Kong Special Administration Region is part of the PRC Basic legal principles such as these must be such well known fact that I am entitled to take judicial notice of It would be absurd for the Hong Kong courts to say it does not recognise the National People s Congress as the supreme law making body and that the laws made by the Ministries are of an inferior nature 128 An examination of the title note and the first article of the Mortgage Administration Measures 1997 will demonstrate the point The title note reads 題注 1997 年 5 月 9 日 建設部令第 56 號發布 根 據 2001 年 8 月 15 日 建設部關于修改 城市房地産抵押 管理辦法 的决定 修正 English translation Promulgated by Order No 56 of the Ministry of Construction on 9 May 1997 Amended according to the Decision of the Ministry of