CHEN LIP KEONG v. EVOLUTION MASTER FUND LTD SPC, SEGREGATED PORTFOLIO M

HCA575/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 575 OF 2010

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DECISION

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1.  This is an application by the plaintiff for summary judgment upon his summons dated 1 June 2010.

2.  The orders sought by the plaintiff on his summons can be summarized as follows :

(a) a declaration that, the plaintiff having paid off what was due to the defendant under the Loan Agreement dated 13 June 2007 (as varied), the Share Mortgage dated 13 June 2007 (“Mortgage”) and the Supplemental Agreement relating to a Share Mortgage dated 10 June 2009 (“2^nd Mortgage”) between the plaintiff as mortgagor and the defendant as mortgagee have been duly discharged;

(b) a declaration that the defendant now holds 55,070,746 shares (“Balance Shares”) in Nagacorp Limited mortgaged by the plaintiff to the defendant under Mortgage and 2^nd Mortgage and all dividends declared thereon since 31 March 2010 on trust for the plaintiff absolutely;

(c) an order that the defendant do transfer the Balance Shares and the Dividends (if any) back to the plaintiff or as directed by the plaintiff;

(d) an order that the defendant do account for all its dealings with all the shares in Nagacorp Limited mortgaged by the plaintiff to it under the Mortgage and 2^nd Mortgage (of which the Balance Shares form part) and all the profits made and/or benefits derived by the defendant therefrom;

(e) an order that the defendant do pay to the plaintiff any profit/benefit found on the taking of such account to have been made/derived by the defendant;

(f) damages for the defendant’s failure to return the Balance Shares to be assessed;

(g) interests;

(h) costs;

(i) further or other relief.

Background

3.  Prior to October 2006, the plaintiff became acquainted with Frank Dominick, the then Managing Director and partner of the Evolution group of companies, of which the defendant is a member.

4.  In October 2006, Nagacorp Limited (“Nagacorp”) became listed on the Mainboard of the Hong Kong Stock Exchanges and Clearing Ltd.

5.  By a Loan Agreement dated 13 June 2007 (“the Loan Agreement”) the defendant agreed to lend the plaintiff US$15 million repayable within 12 months of the date of drawdown.

6.  By a Share Mortgage also dated 13 June 2007, the plaintiff mortgaged, charged and assigned by way of fixed charge 114,333,658 shares held by the plaintiff in Nagacorp and such other shares, if any, issued as a result of the consolidation, division or sub-division of the mortgaged shares (“Charged Secuirities”) in consideration of the defendant agreeing to make the loan available to him upon the terms and conditions of the Loan Agreement. 

7.  Pursuant to the Loan Agreement, the plaintiff served Notice of Drawing on the defendant specifying the Drawdown Date to be 18 June 2007.

8.  On 18 June 2007 the plaintiff duly delivered to the defendant 114,333,659 shares in Nagacorp and received from the defendant the amount of the loan net of certain agreed deductions.

9.  Thereafter the plaintiff continued to explore with Frank Dominick other business opportunities.

10.  Some time prior to 19 November 2007, the plaintiff delivered to Frank Dominick a further 10,000,000 shares in Nagacorp.  The fact that these 10,000,000 shares was delivered to the defendant is not in dispute, however the purpose for which these 10,000,000 shares were delivered by the plaintiff to the defendant is a matter in dispute factually between the parties and will be dealt with later in this judgment.

11.  On 6 June 2008 the plaintiff and the defendant entered into a Supplemental Loan Agreement (“1^st Supplemental Agreement”) whereby the repayment date of the loan in respect of the Loan Agreement was extended to 24 months after the Drawdown Date.

12.  On 23 September 2008, due to share price movement, the defendant required the plaintiff to deliver a further 27,088,159 shares in Nagacorp so as to maintain the value of the Charged Securities at not less than US$30 million.  In compliance thereof, on the following day, the plaintiff delivered to the defendant a further 30,000,000 shares in Nagacorp.

13.  On 10 June 2009, a Second Supplemental Loan Agreement (“2^nd Supplemental Agreement”) was entered into between the plaintiff and the defendant further extending the repayment date of the loan as follows :

(a) US$7.5 million to be repaid on or before 30 June 2009 (giving credit for all cash dividends received from time to time up to 30 June 2009); and

(b) US$7.5 million on or before 31 October 2009.

14.  On the same date, a Supplemental Agreement to the Share Mortgage (“2^nd Mortgage”) was entered into between the plaintiff and the defendant whereby the further 40,000,000 shares in Nagacorp already delivered by the plaintiff to the defendant were pledged as further security for the loan thereby increasing the Charged Securities from 114,333,659 shares to 154,333,659 shares in Nagacorp.

15.  By November 2009, only US$7.5 million of the loan was outstanding. On 9 November 2009, the plaintiff and defendant entered into a Third Supplemental Loan Agreement (“3^rd Supplemental Agreement”) whereby the repayment date of the outstanding balance of US$7.5 million was further extended as follows :

(a) US$2 million to be repaid on or before 31 December 2009; and

(b) US$5.5 million to be repaid on or before 31 March 2010.

16.  On 31 December 2009, the plaintiff repaid US$2 million to the defendant.

17.  On 29 January 2010, the defendant received a dividend of US$375,745 from Nagacorp in respect of the shares held by it as security for the loan.

18.  By email dated 10 February 2010, Richard Chisholm, the General Counsel and Chief Compliance Officer of the defendant, was asked to confirm the balance of the principal loan after taking into account the dividend of US$375,745 received by the defendant.

19.  By email dated 11 February 2010, Chisholm confirmed that the remaining balance of the principal loan was US$5,124,375.35 and that there will be another interest payment of US$140,615.44 due on 31 March.

20.  By a further email dated 23 March 2010, Chisholm further confirmed that 154,333,659 shares in Nagacorp had been pledged to the defendant and that there were 737,087 dividend shares.  Chisholm further stated in his email that “all of these shares will be released immediately upon repayment of the loan.”

21.  By an email dated 28 March 2010, Chisholm was asked to confirm that :

(1) the amount to be repaid was US$5,264,990.79;

(2) repayment would be made by two remittances;

(3) upon receipt of the fund, the defendant would release the 155,070,746 pledged shares (in scriptless form) in the following manner :

(a) 100,000 shares to DMG securities account

(b) 55,070,746 shares to LGT Bank securities account.

In response thereto, by email dated 29 March 2010, Chisholm replied as follows :

“This looks fine. Confirmed.”

22.  On 30 March 2010, US$1,767,990.79 was paid through a family owned company of the plaintiff, on the plaintiff’s behalf, to the defendant who acknowledged receipt of same on 1 April 2010.

23.  Also on 30 March 2010, the defendant was informed that US$3.5 would be paid by DMG & Partners Securities Pte. Ltd. (“DMG”), being the plaintiff’s new financier, to the defendant.  At the same time, the defendant was instructed to release 100 million shares in Nagacorp to DMG and 55,070,746 shares in Nagacorp to LGT Bank.

24.  By email dated 30 March 2010, Richard Chisholm indicated that the defendant will not be releasing the shares in Nagacorp until the entire loan is repaid.

25.  On 31 March 2010, by a delivery versus payment mechanism via the Central Clearing and Settlement System, DMG paid US$3.5 million to the defendant and the defendant in turn released 100 million shares in Nagacorp to DMG.

26.  On 1 April 2010, the plaintiff chased the defendant for return of the balance shares in Nagacorp and by letter dated 8 April 2010, Messrs Richards Butler, the plaintiff’s solicitors, gave the defendant until close of business on the following day to release the balance of 55,070,74 shares in Nagacorp to LGT Bank failing which legal proceedings will be commenced.

27.  In reply to the letter from Messrs Richards Butler, Chisholm, by email dated 9 April 2010 stated :

“It’s clear that your client has not provided you with the entire story. The obligations under the loan agreement have not been met. In addition, the counterparty has been in default. Lastly, there are other obligations that your client has breached.”

28.  By letter dated 9 April 2010, from Messrs Richards Butler to the defendant, the unparticularized allegations made in Chisholm’s email of 9 April 2010 was denied at the same time demanding the release of the Balance Shares.

29.  By letter dated 19 April 2010 to the defendant, Messrs Richards Butler threatened immediate legal action against the defendant if the 55,070,746 shares were not returned to the plaintiff.

30.  On the same day Messrs Simmons & Simmons by letter to the plaintiff’s solicitors indicated that they were acting for the defendant and promised a substantive response before close of business on 23 April 2010.

31.  By letter dated 23 April 2010 the defendant’s solicitors wrote to the plaintiff’s solicitors alleging that :

(1) the plaintiff has in the past been late in making repayment of principal and interest on various occasions (setting out a table of specific late payments and penalty interest attracted) for which a total of US$182,063.50 in penalty interest was payable by the plaintiff;

(2) another Event of Default had occurred under Clause 14.1(13) of the Loan Agreement in that shares in Nagacorp had consistently traded below HK$1.43 per share with the consequence that the defendant was entitled to be indemnified against all costs and expenses which it has suffered;

(3) accordingly, the defendant was under no obligation to release the shares which was still held by the defendant until all the Secured Obligations including the penalty interest had been fully discharged by the plaintiff;

(4) a sum of HK$134,750,000 would become payable by the plaintiff to the defendant by close of business on 7 May 2010 under an oral agreement made in 2008 which obliged the plaintiff to buy from the defendant at its request, up to 55 milllion shares in Nagacorp at the predetermined price of HK$2.45 per share.

32.  On 26 April 2010, upon ex parte application by the plaintiff, an injunction order was granted to the plaintiff restraining the defendant from dealing with the Balance Shares.

33.  That ex parte injunction order was continued on 30 April 2010 by Hon Yam J who further ordered the defendant to lodge the share certificates of the Balance Shares with the Registrar of the High Court within 3 working days.

34.  After two further orders made by Hon Poon J on 7 and 14 May 2010 respectively rejecting the applications by the defendant for change of registered ownership of the Balance Shares and extending time for the defendant to comply with the order of Hon Yam J, the share certificate of the Balance Shares were ultimately lodged with the Registrar of High Court on 18 May 2010.

Plaintiff’s claim

35.  It is the plaintiff’s case that by emails including those dated 23 March , 29 March and 30 March 2010, the defendant had confirmed to the plaintiff in unequivocal terms that all of the shares held by the defendant as securities for the loan would be transferred back to the plaintiff or as directed by him upon the defendant receiving the amount of US$5,264,990.79 being the sum owed by the plaintiff to the defendant as at the date of those emails.

36.  The plaintiff duly repaid the sum of US$5,264,990.79 by 31 March 2010 but despite having repaid that amount to the defendant, the defendant has only released 100,000,000 shares of Nagacorp back to the plaintiff, leaving the Balance Shares still outstanding, being the subject matter of the plaintiff’s claim herein.

37.  Unknown to the plaintiff, the defendant had prior to 31 March 2010 used all the Nagacorp shares as security for a margin loan facility given to the defendant by its prime broker, CGML.  After 31 March 2010, the defendant continued to pledge the Balance Shares to CGML.

38.  The plaintiff’s case is premised upon the basis that the plaintiff has discharged all its obligations under the Loan Agreement as well as the Mortgage and 2^nd Mortgage and is therefore entitled to have all the charged securities returned to him being a right both in contract as well as in equity.

39.  On that same basis, the plaintiff says that the Balance Shares are held by the defendant as a constructive trustee for the plaintiff and for which the plaintiff has a proprietary right to call for the return of the Balance Shares as well as any income which they have produced.

40.  Furthermore, the plaintiff says that the defendant, as trustee for the plaintiff, has to account to the plaintiff as beneficiary for its actions as trustee and as such, the defendant will not be permitted to retain a benefit acquired or profit made by it from the use of the trust property arising from its wrongful retention of the Balance Shares after 31 March 2010.  That should include any benefit which the defendant was able to gain as a result of leveraging the Balance Shares as security with CGML.

Defence raised by the defendant to plaintiff’s claim

41.  The Defence and Counterclaim was filed by the defendant on 21 June 2010.

42.  Firstly, by way of defence, the defendant says that the plaintiff has not fully discharged his Secured Obligations under the Loan Agreement.

43.  In this respect, the defendant relies on the fact that the plaintiff has been consistently late in making repayment of interest and principal under the Loan Agreement between March 2008 and March 2010.

44.  A schedule detailing and particularizing such late repayment by the plaintiff appears in Exhibit “RC-2” referred to in the Affirmation of Richard Chisholm.

45.  In the circumstances, the defendant says it is entitled to claim default interests for such late repayments pursuant to clause 5.4 of the Loan Agreement.

46.  The amount of default interests claimed by the defendant comes to US$163,787.45 and is contained in a table titled ‘Calculation for Default Interest’ also included in Exhibit “RC-2”.

47.  It is therefore the defendant’s case that the default interests amounting to US$163,787.45, being part of the Secured Obligations of the plaintiff under the Loan Agreement, has not been paid by the plaintiff.

48.  Secondly, the defendant also raises by way of defence to the plaintiff’s claim reliance on clause 15.1 of the Loan Agreement which provides that the plaintiff, upon demand, is obliged to indemnify the defendant against all reasonable losses, expenses and liabilities which the defendant may sustain or incur when an event of default (as defined in clause 14 of the Loan Agreement) occurs.

49.  It is the defendant’s case that at least three Events of Default had occurred as follows :

(a) delay by the plaintiff in making repayments of interest and/or principal being an Event of Default under clause 14.1(1) of the Loan Agreement;

(b) it is not disputed that the share price of Nagacorp shares has fallen below HK$1.43 per share for more than 3 consecutive trade days during the currency of the Loan Agreement, thus constituting an Event of Default under clause 14.1(13) of the Loan Agreement; and

(c) the plaintiff, by failing to perform the obligations under the Put Option Agreement, there occurred an Event of Default under clause 14.1(8) of the Loan Agreement as it is alleged by the defendant that the Put Option falls under “any agreement relating to borrowing or other matters”.

50.  It is therefore the defence case that by reason of the occurrence of the above Events of Default or any one of them, the defendant is entitled to seek indemnity against the plaintiff for all losses, expenses and liabilities that the defendant may sustain or incur as a result thereof.

51.  Thirdly, it is alleged by the defendant that a Put Option Agreement was concluded orally between the plaintiff and the defendant some time towards the end of October 2007 and that the 10 million shares in Nagacorp were delivered by the plaintiff to the defendant in November 2007 as security for the plaintiff’s performance of the Put Option Agreement.

52.  It is the defendant’s case that the terms of the Put Option Agreement between the plaintiff and the defendant were as follows :

(a) the defendant would purchase up to 55,000,000 shares in Nagacorp;

(b) the plaintiff would find a buyer to purchase such shares from the defendant at HK$3 per share;

(c) the profit would be split between them equally; and

(d) in the event that the plaintiff could not find a buyer to purchase the Nagacorp shares at HK$3 per share, the plaintiff would himself purchase the shares from the defendant at HK$2.45 or pay the defendant the difference between what the defendant sold the shares for and HK$2.45 per share or find a buyer who would purchase the shares at that price.

53.  The defendant further says that it had acquired about 44,000,000 shares in Nagacorp at the cost of HK$2.45 per share between 30 October 2007 and 20 March 2008, which it would not have done but for the Put Option Agreement between it and the plaintiff.

54.  It is the defendant’s case that on or about 23 April 2010, the defendant exercised the Put Option to sell to the plaintiff the 55,000,000 shares in Nagacorp at HK$2.45 per share but that the plaintiff failed to honour his obligation to pay for such shares and was therefore in breach of the Put Option Agreement between them.

55.  Quite apart from the defendant counterclaiming against the plaintiff the sum of HK$134,750,000 (55,000,000 shares x HK$2.45 per share) less the sums it has or will realize from the sale of the shares under the Put Option Agreement, the defendant also raises by way of defence that it is entitled to set off the amount counterclaimed against any claim which the plaintiff may have against the defendant.

Plaintiff’s application for summary judgment

56.  On the point of late repayment and default interests, the plaintiff contends that the first late repayment on the defendant’s own case became due as far back as 17 March 2008 but that at all times throughout the duration of the Loan Agreement the defendant had accepted such late repayment without the slightest indication of claiming default interest.

57.  Neither was there any mention of any default interest being owed by the plaintiff in any of the Supplemental Agreement to extend the loan.

58.  Even in the email exchanges in February and March 2010, Chisholm confirmed without any qualification the outstanding amount of the loan which the plaintiff had to repay to the defendant in order to redeem the Charged Securities and which did not include any default interests now claimed.

59.  The plaintiff had relied upon the unequivocal confirmation contained in the emails from Chisholm in February and March 2010 and had caused such outstanding amount to be repaid to the defendant.

60.  It was not until Messrs Simmons & Simmons’ letter of 23 April 2010 that default interests was mentioned for the first time.

61.  The plaintiff therefore says it is clear that the defendant did not intend to claim default interest, until the plaintiff threatened legal proceedings whereupon it became necessary for the defendant to contrive an excuse to retain the Balance Shares.

62.  On that basis, it was submitted that the defendant is estopped, either by representation or by convention, from making a claim for default interest now.

63.  As for the defence that there had occurred Events of Default thereby enabling the defendant to invoke clause 15.1 of the Loan Agreement, it was submitted by the plaintiff that firstly, the defendant is estopped (as already submitted above) from claiming any other amount other than US$5,264,990.79 relying on the unequivocal representation made in the February and March 2010 emails from Chisholm and which had been paid by the plaintiff already. Therefore the defendant is also barred from asserting any Event of Default under clause 14.1 so as to invoke clause 15.1 of the Loan Agreement.

64.  In this respect, it was also submitted by the plaintiff that the defendant’s claim for the legal costs and expenses incurred in respect of the 1^st, 2^nd and 3^rd Supplemental Agreements and for the 2^nd Mortgage that :

(a) such costs had not been substantiated by the defendant;

(b) none of the Supplemental Agreements nor the 2^nd Mortgage required the plaintiff to pay the defendant’s costs and expenses for negotiation, preparation or execution of such documents; and

(c) The defendant made its first demand for such alleged costs and expenses in Messrs Simmons & Simmons’ letter of 23 April 2010 without particulars but purported to particularize same only in the Defence and Counterclaim.

65.  The plaintiff further submits that clause 15.1 of the Loan Agreement require a causal link between the Event of Default and the losses, expenses and liabilities sought to be indemnified.

66.  The defendant has not shown any causal link since none of the alleged costs or expenses occurred due to the timing of any repayment by the plaintiff or movement in share prices of Nagacorp shares, but was the result of a series of negotiated agreement between the parties to extend the term of the loan and for additional security.

67.  Moreover, since clause 6.2 of the Loan Agreement expressly contemplate such agreement to extend by providing the plaintiff the right to extend the repayment date, therefore mutual agreement between the parties for extension of the repayment date cannot be an “Event of Default” under the Loan Agreement.

68.  As for the defence raised by the defendant in respect of the Put Option, the plaintiff submits that firstly, on the defendant’s own case, only 10 million of the shares in Nagacorp concerns the alleged Put Option and that the remaining 45,070,746 shares in Nagacorp has nothing to do with it.

69.  It is also submitted by the plaintiff that the defendant’s claim for set-off is misconceived and that no set off is possible, whether legal or equitable, since on the defendant’s own case on the Put Option, it can be no more than a counterclaim arising out of a totally separate and distinct transaction.

70.  The plaintiff further submits that the defendant’s allegations in respect of the Put Option is not credible.

71.  In this respect, the plaintiff’s case is that the 10 million shares in Nagacorp were given to the defendant to demonstrate the plaintiff’s goodwill and financial strength in view of a prospective further loan for between US$30 million and US$50 million from the defendant.  When that further loan did not materialize, the plaintiff agreed in June 2009 to let the defendant retain the 10 million shares in Nagacorp as part of the further security since the loan under the Loan Agreement was due to be fully discharged in some four months time.

72.  This case of the plaintiff is supported by not only the plaintiff’s email to Dominick dated 2 June 2009, but also by the 2^nd Mortgage which states that the 10 million shares in Nagacorp were allocated to the Loan Agreement, not to any alleged Put Option.  It is also supported by the emails in February and March 2010 from Chisholm confirming that 154,333,659 shares in Nagacorp (which includes the 10 million shares) would be returned upon payment by the plaintiff of US$5,264,990.79, which has since been paid by the plaintiff.

73.  The reasons for which the plaintiff says that the defendant’s case on the Put Option is incredible and makes no commercial sense are that :

(a) the defendant cannot explain why in none of the emails or the 2^nd Mortgage there is no mention that the 10 million share in Nagacorp was provided as security for the alleged Put Option;

(b) when the original loan of US$15 million had to be secured by US$30 million worth of shares in Nagacorp, the defendant cannot explain how it was willing to let the alleged Put Option involving HK$134,750,000 be secured by only HK$23.4 million worth of shares in Nagacorp;

(c) even then, the defendant was willing to relinquish such meager security for the alleged Put Option and allow those 10 million share in Nagacorp to be allocated to the Loan Agreement, when the Loan Agreement was already over collateralized at the time;

(d) the defendant’s story changed between what was stated in Messrs Simmons & Simmons’ letter of 23 April 2010 and the affirmation of Chisholm dated 28 June 2010 in the following way.  In Messrs Simmons & Simmons letter, it was stated that the Put Option was entered into in 2008 under which the plaintiff was obliged to purchase from the defendant up to 55,000,000 shares in Nagacorp at HK$2.45 per share and demand was made for the plaintiff to pay HK$134,750,000 by close of business on 7 May 2010 with no further particulars given. After the plaintiff pointed out in his 1^st and 2^nd affirmations that the put option was discussed along the line of the draft sent to him by Dominick as an integral part of a further loan of US$30 million to US$50 million from the defendant but which did not materialize, and that on 25 March 2008, the market price of Nagacorp shares was at HK$1.77 hence it would be commercial nonsense for the plaintiff at that time to grant a standalone put option to the defendant at HK$2.45 per share, the defendant changed its story in Chisholm’s affirmation to say that the Put Option was made in October 2007, and not 2008, when the shares of Nagacorp were doing better, and that the plaintiff was to attempt to find a buyer first for the shares, the subject of the Put Option, at HK$3 per share, for which the plaintiff and the defendant would split the profit 50/50 if such a buyer could be found, failing which the plaintiff would have to purchase the shares himself at HK$2.45;

(e) the alleged Put Option which the defendant says was entered into in October 2007 if it existed, must be a transaction of considerable magnitude, yet for two and a half years, there was not one single mention of it in any documents until Messrs Simmons & Simmons’ letter dated 23 April 2010.  Not only was it not made in writing, it was not even evidenced in writing.  It is inconceivable that such a deal would have been made as an entire oral agreement.  In this respect, the so called “proposed head of terms” produced by the defendant does not bear semblance to the alleged Put Option. The unsigned draft written put option was dated March 2008 even thought the defendant’s case is that the alleged Put Option was entered into in October 2007.  The explanation given by the defendant, namely, that having decided in October 2007 it was not necessary to record the alleged Put Option in writing, but by March 2008, it then decided that the alleged Put Option should be formalized, thus sending the draft to the plaintiff, but gave up after receiving no responses from the plaintiff, strains the bounds of credibility. Moreover, the covering email to the draft agreement makes no mention of any oral agreement which the parties had entered and the written draft makes no mention of the 50/50 profit split which was alleged to be a term in the alleged Put Option.  Furthermore, the written draft included an option period running from the first to the second anniversaries of the date of the Loan Agreement but which is not part of the alleged Put Option as pleaded.  In any event, such option would have expired before the date (23 March 2010) of the letter from Messrs Simmons & Simmons.

(f) the plaintiff also relies on the email sent by Dominick to the plaintiff dated 9 April 2010 stating :

“ Evolution would like to keep 45,000,000 shares and enter into a new share mortgage agreement on those shares. Evolution would like to enter into a PUT with you or one of your entities for the shares at a strike price of 2.3 HK$ with a six month expiry.”

… to say that the contents of that email puts it beyond doubt that the alleged Put Option did not exist;

(g) the Put Option, as now alleged, makes no commercial sense as it would have been far more profitable for the plaintiff to purchase the shares in the market (since the share price was consistently less than HK$2.45 per share during October 2007) and then sell them on at HK$3.00 per share.  Moreover, it should be noted that the defendant does not suggest that the Put Option was subject to any time limit, thus the defendant could hold on to the shares for any length of time even if its price plummeted.  Since there is no suggestion that the plaintiff held any corresponding call option, there would be no way for the plaintiff to stop or limit his losses.  Nor is there any explanation as to how the plaintiff could find a buyer at HK$3 per share when the share price was consistently below HK$2.45 per share; and

(h) there is also undisputed evidence that the defendant wanted to sell 48,000,000 Nagacorp shares in the market and sought assistance from the plaintiff to do so.  At that time Nagacorp shares were trading at below HK$1 per share.  If the defendant did hold the alleged Put Option, it makes no sense for the defendant to do that since the defendant could simply have sold up to 55,000,000 shares to the plaintiff at $2.45 per share.  The attempted explanation by the defendant (that in late December 2009/early January 2010 the defendant had wanted to exercise the Put Option and had asked the plaintiff to find a buyer for the shares) misses the point since it is not a term of the alleged Put Option that the plaintiff had to secure a buyer at HK$3 per share before the defendant could exercise the Put Option against the plaintiff.

Defendant’s opposition to summary judgment

74.  It is contended by the defendant that the factual and/or legal disputes involved in the present case are numerous, complex and intertwined and that therefore the present case is not one that should be disposed of by way of summary procedure.

75.  In a nutshell, the defendant points to the factual and/or legal disputes involved include the following :

(1) in relation to the Loan Agreement :

(a) the plaintiff being late in making payments of interest and/or repayment of principal under the Loan Agreement, which would entitle the defendant to claim default interest thereunder;

(b) whether such late payment by the plaintiff amount to an ‘event of default’ under the Loan Agreement entitling the defendant to claim indemnity for the legal costs expended;

(c) whether the plaintiff has failed to discharge his Secured Obligations under the Loan Agreement and the Share Mortgage, thereby entitling the defendant to withhold the 45 million odd share (on the defendant’s case) or the 55 million odd shares (on the plaintiff’s case) in Nagacorp;

(d) whether the defendant has waived its entitlement and/or been estopped from claiming entitlement to the default interest for late payment; and

(e) whether the defendant has waived the right to claim and/or been estopped from claiming indemnity from the plaintiff for such default.

(2) in relation to the oral agreement for Put Option :

(a) whether the parties have orally concluded the agreement for Put Option;

(b) if so, what were the terms of the Put Option;

(c) whether the agreement for Put Option is void on the ground of illegality;

(d) whether the 10 million Nagacorp shares delivered by the plaintiff in November 2007 were for the purpose of securing the plaintiff’s performance of the Put Option agreement; and

(e) whether as a result of clause 14.1(8) of the Loan Agreement, the failure of the plaintiff to pay for the shares under the Put Option amounts to an Event of Default for the purposes of the Loan Agreement and the Share Mortgage, thus entitling the defendant to exercise the mortgage over all the shares held under it.

(3) In relation to the alleged sub-mortgage of the mortgaged shares in CGML :

(a) during the currency of the Share Mortgage (as amended by the supplemental agreement) whether the defendant is entitled to sub-mortgage the mortgaged shares to another party; and

(b) whether such sub-mortgage amounted to an assignment of  “all or any of [defendant’s] rights and benefits under this Share Mortgage” which is prohibited by Clause 19.2 of the Share Mortgage subject to the exceptions stated thereto.

76.  It was also submitted by the defendant that the primary defence of the defendant to the plaintiff’s claim was that the amount owed by the plaintiff has not been fully paid off, therefore the mortgage cannot be discharged and the defendant has legitimately retained the shares which is claimed by the plaintiff.

77.  It was also submitted by the defendant that the plaintiff has been shifting in its stance in this matter.  Initially the plaintiff sought to rely on waiver, but there is no clear statement by the defendant in any of the February/March 2010 emails to say that the defendant has waived the default interest to which the defendant was entitled due to the late payments.

78.  Moreover, clause 20.3 of the Loan Agreement states as follows :

“Save as may be expressly otherwise provided herein, time is of the essence of this Agreement but no failure or delay on the part of the Lender to exercise any power, right or remedy hereunder shall operate as a waiver thereof nor shall a waiver by the Lender of any particular default by the Borrower affect or prejudice the right, power or remedy of the Lender 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 the Lender of any power, right or remedy hereunder preclude any other or further exercise thereof or the exercise of any power, right or remedy.”

and clause 20.5 states :

“No waiver of any Event of Default shall be effective unless in writing signed by the Lender.”

79.  It was therefore submitted by the defendant that given the above provisions in clauses 20.3 and 20.5 of the Loan Agreement, the plaintiff has now changed its stance to estoppel rather than waiver.

80.  It was also submitted by the defendant that whatever representation was made by the defendant in the February/March 2010 emails now relied on by the plaintiff, those representation cannot amount to a clear and unequivocal representation that the defendant would forego the default interest and/or the legal costs which the defendant now says it is entitled to due to the events of default by the plaintiff, therefore estoppel does not arise.

81.  The defendant further submitted that in so far as the plaintiff relies on estoppel by convention, estoppel does not operate when a creditor agrees to accept a lesser sum in discharge of a greater.  In the present case there is, moreover, no evidence of a true accord, and the plaintiff did not act upon any representation made by the plaintiff to its detriment.

82.  As for the Put Option which the defendant says was orally agreed between the parties, but denied by the plaintiff, the defendant submits that is a factual dispute between the parties which can only be determined after hearing evidence at trial with findings of fact made by the court.

Discussion

83.  One of the main issue which is central to the dispute between the parties is the claim by the defendant for default interests due to the late payments made by the defendant during the currency of the Loan Agreement.

84.  It is based on such default interests now claimed by the defendant that the defendant says the plaintiff has not discharged his Secured Obligations under the Loan Agreement and which entitled the defendant from retaining the mortgage shares.  This is the primary defence relied on by the defendant in respect of the claim by the plaintiff for the Balance Shares.

85.  The plaintiff has not disputed that there has been delay when making payments by the plaintiff under the Loan Agreement in the manner detailed in the Schedule of Payment Dates and Calculation for Default Interest contained in Exhibit “RC-2” referred to in the Affirmation of Richard Chisholm dated 28 June 2010. All that has been said by the plaintiff (in paragraphs 8, 9 and 10 of the plaintiff’s Third Affirmation dated 4 August 2010) was that the alleged Default Interest had never been raised by the defendant until the solicitor’s letter of 23 April 2010 and that after the plaintiff had pointed out in his Second Affirmation some periods of alleged delay overstated by the defendant, the defendant has now reduced the amount now claimed.

86.  However, the plaintiff says that the defendant is estopped (estoppel by representation as well as estoppel by convention) from alleging or claiming the non-payment of default interest by relying on the February/March 2010 emails from Chisholm as to what was the total amount of the outstanding loan from the plaintiff to the defendant under the Loan Agreement.

87.  On the other hand, it cannot be disputed by the defendant that the amount of the loan said to be outstanding under the Loan Agreement as stated by Chisholm in his February/March 2010 emails has already been paid by the plaintiff to the defendant.

88.  The explanation given by Chisholm as to what was stated by him in the February/March 2010 emails is contained in paragraph 55 of his affirmation dated 28 June 2010 which is as follows :

“Dr Chen also asserted that certain emails which I had sent (see paragraphs 22-28 of Dr Chen’s First Affirmation and paragraphs 20-26 of Dr Chen’s Second Affirmation) released him from the obligation to Default Interest and the amount due under the indemnity. Those emails were sent under the erroneous understanding that all sums due from Dr Chen had been (or were about to be) repaid and I was unaware of the outstanding Default Interest and the amounts payable under the indemnity until the issue was drawn to my attention. This, without more, does not preclude the Fund from claiming Default Interest against Dr Chen.”

89.  Given that above explanation now put forward by the defendant to explain the February/March 2010 emails from Chisholm, if it can be shown to be an honest and genuine mistake on the part of the defendant as to the outstanding default interest, it would not be right to invoke estoppel, without more, to bar the defendant from so claiming.  After all, estoppel is a concept based on unjustness and unconscionability.

90.  Account must also be taken of the combined effect of clauses 20.3 and 20.5 of the Loan Agreement to the effect that delay on the part of the defendant to exercise its rights thereunder would not amount to a waiver.

91.  Therefore whether or not the failure of the defendant to claim default interest before 23 April 2010 was due to an honest and genuine mistake on the part of the defendant must depend on the facts and circumstances prevailing during the currency of the Loan Agreement and evidence in that respect will need to be gone into.

92.  In this respect, some support can be found in paragraph 1065 of Halsbury’s Laws of England (Fourth Edition Reissue) under the heading “ ESTOPPEL BY CONVENTION” wherein it is stated :

“There can be no estoppel by convention where, although both parties are laboring under a common mistaken apprehension, it cannot be said that they have acted on the basis of that apprehension.”

93.  The fact that throughout the currency of the Loan Agreement, nothing has been said by either party as to default interest upon the late payments by the plaintiff (at least until 23 April 2010) cannot, by itself, be conclusive of the matter.  The matter can only be determined when relevant evidence has been heard in explanation as to why that was so.  At this interlocutory stage, it is not possible for any findings of fact to be made.

94.  On this point alone, it would warrant the matter to go to trial.

95.  Furthermore, quite apart from the above, there are other factual issues in dispute between the parties which can only be resolved after hearing evidence and findings of facts made.

96.  Those other factual issues in dispute would include the purpose for which the plaintiff delivered the further 10 million Nagacorp shares to the defendant in November 2007, whether, as alleged by the plaintiff, those 10 million Nagacorp shares formed part of the Charged Securities under the Loan Agreement, or whether as alleged by the defendant, they were security for the Put Option.

97.  Linked to that factual dispute, would be a further factual dispute as to whether or not the parties have orally agreed upon the Put Option as alleged by the defendant and the terms thereof.

98.  Although it has to be recognized that the plaintiff has, in this hearing, put forth some cogent reasons to say that the oral Put Option alleged by the defendant is not believable, it is unnecessary for me to come to any determination on that in view of my finding above that on the first line of the defence, namely the default interest point, the matter should go to trial.  Moreover it has to be recognized that the Put Option, being the subject matter of the counterclaim by the defendant, it will need to be dealt with at trial in any event.  And only if the defendant succeed in its counterclaim on the Put Option can then question of set-off be properly decided as to whether it comes within an “Event of Default” as envisaged by the Loan Agreement.

99.  Quite apart from the factual dispute between the parties, the defence now raised by the defendant would also involve the interpretation and construction of a number of clauses of the Loan Agreement, including (but not limited to) clauses 14.1(1), (3) and (8) as to whether there were the Events of Default alleged by the defendant and also clause 19.2 as to whether the defendant had assigned its rights and benefit under the Share Mortgage by pledging the Balance Shares to GCML.

100.  Not only would the constructions of those clauses be themselves fact sensitive but that they are also interwoven with the factual disputes already referred to above and in particular relating to the Put Option alleged by the defendant.

Conclusion

101.  From the above analysis, it can readily be seen that this is not a suitable case for summary judgment.

102.  It has been said time and again by these courts that summary judgment should only be granted in clear and obvious cases where there is no defence to the claim.

103.  The present case is one involving not only disputed facts but also complex questions of law as well as construction of contractual terms and therefore not a case suited for summary judgment.  It is not for this court to conduct a mini-trial on affidavits but that this matter must go to trial.

104.  The summons applying for summary judgment was taken out by the plaintiff on 1 June 2010. That summons was for hearing before the master on 21 June 2010.

105.  On 21 June 2010 the defendant filed its Defence and Counterclaim (albeit titled only as “Defence”, that pleading in its body did contain a “Counterclaim” from paragraph 49 onwards).  A Reply and Defence to Counterclaim was filed by the plaintiff on 13 August 2010.

106.  Normally, I would have granted unconditional leave to defend to the defendant.  However since the Defence and Counterclaim has already been filed, it would be futile for me to make that order.

107.  Accordingly, the plaintiff’s summons is hereby dismissed.

Costs

108.  Unless the parties can agree on the costs order to be made, both parties are to lodge written submissions on costs to my clerk with 14 days of the handing down of this Judgment and a ruling on costs will be made separately after receipt of the parties’ written submissions.