ELEGANT MARK INVESTMENT LTD v. DAI YUMIN

HCA 212/2020

[2021] HKCFI 3168

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 212 OF 2020

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DECISION

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INTRODUCTION

1.  This is the plaintiff’s application for summary judgment for the outstanding balance of the principal of a loan owed by the defendant in the sum of HK$60,256,918.20, together with unpaid interest up to 7 November 2019 amounting to HK$23,545,201.64, and interest on the balance at 36% p.a. from 8 November 2019 up to full payment. 

2.  The loan was advanced by the plaintiff on 19 December 2017 (“the Loan”).  The principal sum was HK$100,000,000.  The parties signed a loan agreement dated the same date (“the Loan Agreement”).  The Loan was repayable in three months’ time.

3.  The plaintiff is a licensed moneylender.  Mr Wong Tin Lung (“Wong”)  is its sole director.  Its sole shareholder is a BVI company, of which Wong is the sole director and shareholder.  According to its case, the plaintiff is all along operated by Wong and Mr Ng Kwok Wai (“Wai”).  Further, the plaintiff says that it was Wai’s elder brother, Ng Kwok Fai (“Fai”), who referred the defendant to the plaintiff for the Loan.  Wai made a total of four affirmations in support of the summary judgment application.  Fai also made an affirmation for the plaintiff.

4.  How the Loan came about in December 2017 is hotly disputed.  The defendant does not deny borrowing the Loan and entering into the Loan Agreement.   But he alleges that the Loan is but just one part of an elaborate and sophisticated arrangement involving multiple parties in relation to an intended acquisition by China Regenerative Medicine International Limited (“CRMI”), a Hong Kong listed company, of interest in a PRC company known as Anhui Huayuan Pharmaceutical Company Limited (“Anhui Huayuan”). 

5.  The defendant says that the plaintiff and other parties engaged in wrongful conduct, including making false representations to him, in the negotiation of the intended acquisition.  What they did amount to a conspiracy to injure him.  It is a key part of his case that Fai was a party to the conspiracy and that even though he held no formal title or position with the plaintiff, he was in fact its ultimate controller.  The plaintiff was hence a party to the conspiracy when it extended the Loan to him.  He is entitled to claim damages against the co-conspirators, including the plaintiff.  Such damages would effectively set off any liability he has under the Loan.  Further or alternatively, the Loan should be set aside. 

6.  In the circumstances, the defendant says that he has a bona fide defence on the Loan and no summary judgment should be entered.  He has filed two affirmations to oppose the application.  Shortly after the present action was commenced (but before the summary judgment summons was taken out), the defendant and All Favour Limited, his related company, commenced an action against, among others, the plaintiff in HCCL 4/2020 in respect of the alleged conspiracy.

DRAMATIS PERSONAE

7.  It is convenient to set out at the outset the multiple parties involved in the alleged conspiracy. 

8.  Anhui Huayuan is 100% held by Lung Hang Investment Limited (“Lung Hang”), which is in turn owned partly and indirectly by China Huarong Asset Management Company Limited (“China Huarong”), a Hong Kong listed company.  The acquisition was intended to be made by way of CRMI acquiring the entire share capital of Lung Hang.

9.  CRMI is principally engaged in research and development, production and sales of tissue engineering and regenerative medicine products. 

10.  On the CRMI side, the relevant parties are as follows.

11.  The defendant was the sole ultimate owner of All Favour.  All Favour held approximately 21% in CRMI.  The defendant personally held further shares in CRMI. 

12.  At the material time:

(a)  Chen Chunguo (“Chen”)  was an executive director of CRMI.

(b)  Clifford Ip was its in-house legal counsel.

(c)  Clarence Mui was its chief financial officer.

(d)  Terry Dang was the defendant’s personal assistant.

13.  In the intended acquisition, Grand Harbour Corporate Finance Limited (“Grand Harbour”)  was appointed as CRMI’s financial adviser.

14.  On the China Huarong side, the relevant parties are as follows.

15.  Bai Tianhui (“Bai”)  was the General Manager of China Huarong International Holdings Limited (“Huarong International”), until around January 2019 when he was arrested in mainland China for suspected bribery. 

16.  Huarong International is a subsidiary of China Huarong. 

17.  Huarong International indirectly owns 83.3% of Sacred Heart Healthcare Limited Partnership (“Sacred Heart”), which in turn owns 100% of Lung Hang.

18.  In HCCL 4/2020, the defendant and All Favour claim against five defendants whom they say were the co-conspirators:

(a)  Bai;

(b)  Yang Zhihui (“Yang”);

(c)  Fai;

(d)  the plaintiff; and

(e)  Delight Profit Investments Limited (“Delight Profit”).

19.  Yang was a businessman.  In about August 2018, he was requested to assist in investigations into bribery concerning the China Huarong group.

20.  Chiu Ka Him was Fai’s employee.

LEGAL PRINCIPLES

21.  The Order 14 principles are well-known. 

22.  If the claim comes within the Order and the plaintiff has satisfied the preliminary requirements, he will prima facie be entitled to judgment.  The burden is then on the defendant to show why judgment should not be entered.  To resist summary judgment, a defendant needs to show that there is a triable issue or an arguable defence.

23.  Summary judgment is only for clear cases.  It ought not to be applied in cases where there are serious material factual disputes, or a difficult point of law not fit for summary determination, unless it is obvious that the defence put forward is “frivolous and practically moonshine”.

24.  In evaluating the evidence, the court should first determine whether, factually, what the defendant says is believable.  If so, the court should then consider whether as a matter of law what he says amount to an arguable defence in law.  See, eg, Schindler Lifts (Hong Kong)  Ltd v Ocean Joy Investments Ltd [2003] 1 HKC 438 at para 10.

25.  On the first question, the question is not whether the defendant’s assertions are to be believed; it is whether those assertions are believable: Ng Shou Chun v Hung Chun San [1994] 1 HKC 155 at 158.  It is not appropriate to embark on a mini-trial of the action on affidavits.  The mere assertion of a given situation by the defendant does not ipso facto ground leave to defend.  The court will not take what the defendant says at face value but will test it against the evidence disclosed including contemporaneous documents and the inherent probability of the defence.

THE PLAINTIFF’S CASE

26.  Mr Nigel Kat, SC, appearing with Mr Chase Pun for the plaintiff, emphasised that the claim against the defendant is very straightforward.  It is a simple claim for money lent.  By raising the alleged conspiracy only after the present action was commenced and filing affirmations with exhibits running to almost 1,000 pages, what the defendant is trying to do is to paint a very complicated picture revolving around the Loan and convince the court that the action should go to trial.  Mr Kat submitted that most of the exhibits are irrelevant and the defendant’s assertions are groundless and misconceived.

27.  As disclosed by the affirmations of Wai and Fai, the plaintiff’s case is as follows.

28.  The plaintiff was established in about 2013.  It is operated by Wai and Wong since its establishment.  As a licensed moneylender, the plaintiff obtains funds from various investors and then lends money to its clients and gains the difference in interest rate.

29.  In 2013 and 2014, Fai was one of the plaintiff’s investors providing funds to it.  However, at the time when the intended acquisition was negotiated and was ongoing, Fai was no longer the plaintiff’s investor.  Also, he has never held any office or position in the company.  He was not, and has never been, the ultimate controller of the plaintiff as alleged by the defendant.

30.  The plaintiff admits that it was Fai who referred the defendant to it for the Loan.  Fai also assisted the defendant in liaising with the plaintiff from time to time and sending over documents between the two parties.  Later, Fai also assisted the plaintiff in chasing the defendant for repayment of the Loan, as he is the person most familiar with the defendant.

31.  It is common ground that on 19 December 2017, the plaintiff made the Loan to the defendant by advancing the sum of HK$100,000,000 to All Favour by bank transfer. 

32.  Mr Kat highlighted that in the Loan Agreement, the defendant expressly confirmed that he had been invited to seek independent legal advice and that he had not entered into or signed any agreement with any third party for or in relation to the procuring, negotiation, obtaining or application of the loan, guaranteeing or securing the repayment of the loan.

33.  The Loan was for three months and should be repaid in full by 19 March 2018.  However, the defendant was not able to make timely repayment. 

34.  By agreement of the parties documented in the form of supplemental agreements, the repayment date was extended a number of times.  Meanwhile, the defendant made a number of partial repayments.

(a)  Pursuant to the First Supplemental Loan Agreement dated 19 March 2018, the repayment date was postponed to 19 April 2018.

(b)  On about 21 March 2018, the defendant paid a sum of HK$2,958,904.11.

(c)  On about 10 May 2018, he repaid a further sum of HK$30,000,000.

(d)  On about 12 June 2018, he repaid a further sum of HK$2,416,861.70.  The parties entered into the Second Supplemental Loan Agreement dated the same date.  It was agreed that the outstanding principal sum was HK$70,000,000 and the repayment date was further postponed to 29 July 2018.  Furthermore, in the event of default, interest shall accrue at the rate of 36% p.a.

(e)  The defendant again defaulted.

(f)   On about 2 August 2018, he repaid a further sum of HK$7,367,671.

35.  There then followed a series of correspondence in 2018 between the plaintiff’s solicitors and Clifford Ip, who acted on behalf of the defendant in relation to the Loan.  In his submissions, Mr Kat relied on some of the letters exchanged.  It is unnecessary for me to quote all of the extracts here save to reproduce a couple of them as examples.  Mr Kat’s point is a simple and indisputable one.  Clifford Ip, in unequivocal terms, acknowledged the Loan and repeatedly asked for time extension on behalf of the defendant.

36.  As an example, in reply to a demand letter sent by the plaintiff’s solicitors dated 20 August, Clifford Ip wrote in a letter dated 23 August 2018:

“… owing to the fact that several of [the defendant’s] finance plans have not, as yet, come through as planned, Mr. Dai [ie the defendant] would, at this juncture, like to request for:

(1)  an extension till 25 September 2018 (i.e. of one (1)  month)  for the repayment on his part of half (50%)  of the aggregate outstanding amounts owed to your clients, and

(2)  an extension till 31 October 2018 for the repayment of the remaining half of the said amount, and all other outstanding amounts (daily interest accrued during the period from 26 September to 31 October 2018)  to your clients

…

In view of the above, grateful if you could bring Mr Dai’s above repayment request and undertaking to your clients’ attention at this stage – for purposes of seeking their consent and agreements to the same …” (original emphasis)

37.  In that letter, Clifford Ip expressly confirmed the outstanding amounts, including principal and interest, owed by the defendant.

38.  On 20 September 2018, the defendant paid a sum of HK$7,000,000 to the plaintiff. 

39.  Later, by letter dated 29 November 2018, Clifford Ip similarly acknowledged the Loan but referred to the “financial/cash flow difficulties experienced” by the defendant and asked for a further time extension.  He wrote:

“Accordingly, grateful if you could … confirm whether [the plaintiff is], under current circumstances, willing to grant Mr. Dai the requested time extension for the repayment of the relevant outstanding amounts owed and payable to them by Mr. Dai.”

40.  The defendant made no further repayment.  On 8 March 2019, a statutory demand for the total sum of HK$83,393,972.60 was served on the defendant personally.  Since then, Clifford Ip, acting on behalf of the defendant, made a number of repayment proposals to the plaintiff.  They were rejected.  It is unnecessary to reproduce the correspondence here.  It is indisputable that Clifford Ip acknowledged the Loan and repeatedly asked for time extension.  No application was made to set aside the statutory demand.

41.  On 20 September 2019, the plaintiff petitioned for the defendant’s bankruptcy in HCB 5753/2019.  The defendant was personally served with the bankruptcy documents.

42.  On 23 October 2019, the defendant repaid a sum of HK$1,000,000 to the plaintiff together with the sum of HK$180,000 for its costs.  I should point out here that that would appear to be the last payment made by the defendant in relation to the Loan.

43.  Then, after some negotiation, on 12 November 2019, the parties entered into a Deed of Settlement, in which they agreed the following:

(a)  The defendant acknowledged that as at 7 November 2019, he was indebted to the plaintiff the outstanding principal of the Loan in the sum of HK$60,256,918.20 together with accrued interest up to that date. (The above sums are the sums for which the plaintiff now seeks summary judgment.)

(b)  He agreed to repay the sums in three instalments on 31 December 2019, 31 March 2020 and 30 June 2020.

(c)  He agreed to an interest rate of 36% p.a. for any unpaid amount to apply until payment in full.

(d)  He agreed to be liable for all costs, charges and expenses, including legal fees on indemnity basis, incurred by the plaintiff in relation to the Deed of Settlement and the Loan Agreement, as amended.

(e)  The parties shall procure the withdrawal of the bankruptcy proceedings.

44.  On the same day, the parties, both legally represented, signed a consent summons.  Leave was granted to the plaintiff to withdraw the bankruptcy petition.

45.  On 30 December 2019, that is one day before the first instalment date, Clifford Ip wrote to the plaintiff’s solicitors requesting a time extension to pay the first instalment until 24 January 2020. The request was rejected.

46.  Fai assisted the plaintiff to chase the defendant for repayment in accordance with the Deed of Settlement.  The defendant repeatedly told Fai that he needed more time to arrange for repayment.  In the evidence, the plaintiff has produced some WeChat messages between Fai and the defendant from December 2019 to March 2020.  At one point, the defendant said that he would make repayment in RMB instead of HK$ and requested the plaintiff to arrange for an RMB bank account so that he could repay in RMB. 

47.  Not being prepared to wait further, the plaintiff eventually commenced the present action on 9 March 2020 to claim the outstanding amounts under the Loan.

48.  Even after the issue of the writ, on 16 March 2020, the defendant still requested Fai to give him further time to make repayment, suggesting that he would have money around 20 April.

49.  The point which is evident from the above chronology, submitted Mr Kat, is that up to this juncture, the defendant had never raised any allegation of misrepresentations or conspiracy.  When being chased for repayment, he had simply sought time extension again and again, often citing cash flow problems as his difficulties.  It was only on about 8 May 2020 that he, together with All Favour, raised the allegation of misrepresentations and conspiracy against the plaintiff and others for the first time in HCCL 4/2020.

50.  The plaintiff says that it is clear that the defendant’s claim is a recent fabrication which is used as a delaying tactic and excuse to avoid repaying the Loan.

51.  In summary, the plaintiff says that it has a straightforward claim against the defendant for the outstanding amounts due under the Loan.  Summary judgment ought to be granted.

THE DEFENDANT’S CASE

52.  The defendant’s case is, in essence, that the Loan Agreement is part of a complex arrangement and cannot be considered in isolation and out of context.  He says the context is as follows.

The meeting on 9 October 2017

53.  On about 9 October 2017, the defendant and Chen (CRMI’s executive director)  met with Bai, Yang and Fai in Hong Kong to discuss the sale of Anhui Huayuan to CRMI (“the 2017 meeting”).

54.  There, Bai orally represented to the defendant the following (“Bai’s representations”):

(a)  Anhui Huayuan is a highly lucrative project held by Huarong International.

(b)  The project would work very well with CRMI’s business as both were involved in medical technologies and products.

(c)  By acquiring the project, CRMI could spin it off for separate listing very soon and could earn a fortune.  As the substantial shareholder of CRMI, the defendant would benefit indirectly.

(d)  If CRMI purchased Anhui Huayuan, Bai could cause Huarong International to offer a special deal to CRMI by selling it at cost (HK$3.6 billion)  or slightly above cost, notwithstanding that Huarong International had itself acquired the project at HK$3.6 billion.

(e)  Various parties expressed an interest in acquiring Anhui Huayuan at a very high premium.  Nevertheless, Bai was prepared to procure Huarong International to sell it to CRMI at cost or just slightly above solely by reason of his acquaintance with Chen.

(f)   Huarong International would carry out a formal internal audit soon and afterwards, Huarong International could decide to keep the project for itself or sell it to other purchasers at a premium.

(g)  In order to ensure that CRMI was to benefit from the acquisition of the project, it would have to be concluded as soon as possible and in particular while Bai still remained in charge of Huarong International.

55.  As a further incentive to All Favour and the defendant to acquire the project, during the meeting, Bai, Yang and Fai further orally warranted to the defendant that:

(a)  Bai would cause Huarong International to contribute HK$1 billion, as part of the consideration for the intended acquisition, by way of equity investment into CRMI.

(b)  Yang would contribute HK$600 million as part of the consideration for the acquisition, by way of equity investment into CRMI.

56.  Fai further warranted and represented that:

(a)  He was well regarded as experienced in corporate finance matters, and very well connected in the corporate finance sectors, as well as in dealing with the Hong Kong Stock Exchange for IPO and pre-IPO matters.

(b)  He had already followed up with Anhui Huayuan for some time.  Hence, he was very familiar with it and could confirm its profitability and earning potential.

(c)  He could provide a “one-stop” service for the completion of the acquisition and for the spinning off of the project for further listing soon afterwards by arranging all necessary professionals, including financial advisers and lawyers, for liaising with the HKEX.

57.  At the meeting, Bai insisted upon the following as soon as possible, before Huarong International decided instead to sell Anhui Huayuan to other parties or to keep the project to itself:

(a)  There would be at least some contract documentation executed between Huarong International and CRMI, under which a substantial amount of non-refundable deposit was to be received by Huarong International from CRMI.

(b)  A mechanism would have to be in place by which insofar as Huarong International was concerned, Anhui Huayuan would be disposed of, regardless of whether CRMI managed to secure approval by the HKEX in the end.

58.  The defendant immediately raised his concern, including that CRMI was subject to the HKEX Listing Rules and that it could not possibly commit itself to the acquisition without the HKEX’s prior approval. In response, Fai orally advised the defendant (“Fai’s advice”)  that he could make the following arrangements to realise the acquisition (“Fai’s proposal”):

(a)  A memorandum of understanding was to be entered into between the seller of Anhui Huayuan and CRMI, together with a non-refundable deposit at such amount to be agreed between the parties to be made by CRMI.

(b)  For the purpose of making the non-refundable deposit, the defendant was to borrow the funds from Fai’s company.

(c)  In turn, the defendant could arrange for the same loan payment to be lent to CRMI as an interest-free shareholder’s loan, upon an undertaking to be made by the defendant that, among other things, he would not enforce the loan against CRMI for repayment.

(d)  The defendant was to further undertake that if CRMI was somehow unable to proceed with the intended acquisition and the transaction would have to be called off, the defendant would arrange for and/or nominate a different entity to acquire the project on the same terms.

59.  Both Yang and Fai orally warranted and assured the defendant that they could easily locate, arrange for and/or procure another party to acquire the project in place of CRMI, given Yang’s substantial financial strength and resources, as well as the extensive business network of both Yang and Fai.  They made further promises and assurances (“Yang and Fai’s representations”):

(a)  CRMI as the purchaser would only gain and would not suffer any loss from the intended acquisition of the Anhui Huayuan project.

(b)  CRMI could then make such non-refundable deposit to the seller, without criticism or even queries from the HKEX, given that there could be no loss to CRMI.

(c)  Fai would be fully capable of, competent for and indeed would arrange for securing the approval of the HKEX for the intended acquisition.

(d)  In the circumstances, All Favour and the defendant would suffer no loss from the acquisition.

60.  The defendant says that solely in reliance upon Bai’s representations, Fai’s advice and Yang and Fai’s representations and other assurances given at the 2017 meeting, All Favour and the defendant then proceeded with CRMI’s intended acquisition of Anhui Huayuan in accordance with Fai’s proposal.

Implementation of Fai’s proposal

61.  Yang worked together with Fai to carry out Fai’s proposal, including arranging for Messrs Hastings & Co and Grand Harbour to act as CRMI’s corporate lawyers and financial advisers.  The defendant says that Fai was the ultimate controlling shareholder of Grand Harbour.

62.  The defendant says that Fai was actively involved in the implementation process.

63.  There were two WeChat groups set up for the purpose of implementing Fai’s proposal. 

(a)  The participants of the first group comprised Fai (known as Dino in the group), Chiu Ka Him, Clifford Ip, Clarence Mui and Terry Dang.

(b)  The other group was named “DINO工作小組”. The participants included Chiu Ka Him, Clarence Mui and Fai.

64.  In his evidence, the defendant has produced extracts of some of the WeChat messages to show Fai’s active involvement.

(a)  On 8 December 2017, Fai sent out the drafts of the documentation for the Loan Agreement. 

(b)  After that, Fai regularly communicated with the other parties to follow up on the intended acquisition.  He provided answers on the fundamental aspects of the acquisition.  He oversaw its progress.

(c)  After the defendant defaulted on the Loan, Fai chased him up for repayment.  Fai had full particulars of the outstanding amounts of the principal and interest due under the Loan.

65.  In his written submissions, Mr Bernard Man, SC, appearing with Mr Justin Lam for the defendant, refer in particular to the following message sent on 11 June 2018 concerning repayment of the Loan in the first WeChat group:

“梅總呀，我嗰度搞咗好耐我先搞清楚。係佢過嚟幫你講下，等呀Ka Him之後同你通電話。佢係咁嘅，因為呢，佢第一，有一期就還咗嗰二百九十幾萬嘅利息，還咗二百九十幾萬嘅利息之後呢，跟住呢，呀，清左啦，但係之後呢就好似仲有，之後佢就隔咗一段時間呢，唔知隔咗一個月定幾耐呢，先至還嗰三千萬。咁還嗰三千萬嘅時候呢，咁你嗰，由還二百九十幾萬到你還三千幾萬嗰段時間咪有個利息差嘅，咁個利息差可能係百幾萬嘅，所以你還三千萬嘅時候呢，佢三千萬裏面首先嗰百幾萬要還咗嗰段期間嘅利息，然之後剩番落嚟三千幾萬冚（蓋）二千八百幾定二千八百幾嗰個呢，冚（蓋）咗先至用來還本金。所以呢你一億就減番二千八百幾呢，所以就變咗做七千一百幾萬嘅本金未還，應該係咁啦，計下啱唔啱。”

66.  Mr Man also highlights the following messages concerning the intended acquisition in the second WeChat group:

“陳總啊，梅總啊，葉律師啊，我看Ka Him跟陳總他們那邊看看那個協同效應那邊寫得…這兩天把它弄出來，然後我們去再跟你們那個律師Delpha碰一下看他行不行，行的話馬上開工做那個框架合同，然後做那個預審的文件，如果他不行的話，我們另外再找個律師。還是以你們的律師為主吧，如果可以的話。沒所謂啦，大家都是對這個事情好，好吧，因為可能是前面嚴格一點，後面就容易過關一點，如果前面寛鬆一點…” (21 November 2017)

“梅總啊，陳總啊，葉律師啊，我聽Ka Him他說你們剛才跟律師開會還是有個擔心，說這個五億的不可退回的訂金，交易所會覺得很複雜，比較奇怪，但是我個人的意見，表個態吧，就是說你最後要律師清楚保障就是這個8518 [ie CRMI] 不會有任何的損失，它不會因為就是說這個收購下它沒有一個不可能會簽那個大股東五億，做不成的話對吧，那我覺得這個交易所會理解為甚麼要這種安排的，這種安排啊不是沒有試過，最主要就是要保障這個8158沒有任何損失這一點，如果這一點做得到的話，我覺得基本上整個董事局沒有責任的。

可是作為董事的話你們要看清楚就是說，抓住一個重點就是說，如果做不成，老戴戴總大股東會不會找你們要錢，他不可能找你們要錢，因為有法律文件[inaudible]，所以不可能找你們要錢那就okay囉，好不好。我們還是要按這個方向去推動這個事吧。如果有改變的話馬上告訴我，因為我要跟兩邊老闆負責，要跟他們報告的事情。” (22 November 2017)

Clarence Mui: “律師問我們會不會把華源金融也一併收購?”

Fai: “應該不會。我再確認” (22 and 23 November 2017)

Agreements signed in relation to the intended acquisition

67.  Further, on about 8 December 2017, Fai took the lead and prepared the following documents to implement Fai’s proposal, which were subsequently executed and acted upon by the relevant parties.

68.  First, the Framework Agreement dated 10 December 2017 between Sacred Heart as seller and CRMI as purchaser in respect of the entire issued share capital of Lung Hang at a consideration of HK$3.8 billion.  Under the Framework Agreement, CRMI shall pay a non-refundable deposit of HK$100 million within 7 days of signing.  CRMI subsequently paid the deposit to Sacred Heart by cheque dated 17 December 2017.

69.  Second, the Loan Agreement.  On the date of the agreement, ie 19 December 2017, the plaintiff advanced HK$100,000,000 to All Favour.

70.  Third, the Shareholder’s Loan Agreement dated 10 December 2017 between All Favour as lender and CRMI as borrower.  All Favour agreed to advance HK$100,000,000 to CRMI as an interest-free and unsecured loan for the purpose of the intended acquisition.  On 19 December 2017, All Favour made the advance by bank transfer.

71.  Fourth, the Undertaking dated 10 December 2017 executed by the defendant in favour of Sacred Heart (“the defendant’s undertaking”).  He undertook that if closing of the intended acquisition did not occur on or before the date falling 12 months from the date of the Framework Agreement, the defendant shall, or shall procure any entity owned or controlled by him to, acquire from Sacred Heart the entire issued share capital of Lung Hang at a purchase price which is not lower than HK$3.6 billion in cash.

72.  Fifth, the Deed of Undertaking dated 21 December 2017 executed by All Favour in favour of CRMI (“the All Favour undertaking”).  The material parts are reproduced below:

“We hereby represent that it is our intention that if the Company [ie CRMI] (or its subsidiary)  proceeds with the Proposed Acquisition, the Company shall repay the Loan to us.  However, if the Company decides not to proceed with the Proposed Acquisition for whatever reason, the Company shall nominate us as a nominated purchaser to acquire the entire issued share capital of the Target Company in the Company’s stead (the “Arrangement”). In such event, the Earnest Payment paid by the Company [ie the sum of HK$100 million paid to Sacred Heart] shall form part of the consideration to be paid by us for acquiring the entire issued share capital of the Target Company and the obligation to repay the Loan by the Company under the Shareholder’s Loan Agreement shall be deemed discharged.  For the avoidance of doubt, if the Company exits from the Proposed Acquisition for whatever reasons, we will not request for the Company’s repayment of the Shareholder’s Loan and the Company will no longer have any repayment obligation over the Shareholder’s Loan towards us.

In light of the above, we hereby irrevocably and unconditionally agree, acknowledge and undertake that: -

1.  if the Company decides not to proceed with the Proposed Acquisition for whatever reasons, we, as the nominated purchaser, shall (at the request of the Company)  unconditionally assume the Company’s obligations in accordance with the terms and conditions of the Framework Agreement in the Company’s stead;

2.  as and when we are nominated by the Company to acquire the entire issued share capital of the Target Company in the Company’s stead, the obligation of the Company to repay the Loan shall be deemed discharged;

3.  we shall fully rely on the due diligence works conducted by the Company or its advisers/consultants and we shall acquire the entire issued share capital of the Target Company regardless whether the due diligence result on the Target Company and its subsidiaries (the “Target Group”)  is satisfactory. Accordingly, we will not separately carry out due diligence exercise on the Target Group on our own;

4.  we shall negotiate the terms of acquisition with the Vendor amicably and to complete the acquisition of the Target Company. We shall indemnify the Company against all claims, damages, costs and expenses that the Company may suffer in relation to our failure to complete the acquisition of the Target Company or to perform the terms of this Deed of Undertaking;

5.  we shall have no claim (and shall waive any such claim)  for any damages or compensation of any type or nature whatsoever against the Company:

(a)  in respect of the Loan upon us being nominated by the Company as the nominated purchaser of the Target Company; and

(b)  in respect of the Arrangement.” (underline added)

73.  Sixth, a loan agreement dated 29 May 2018 between Delight Profit as lender and the defendant as borrower in respect of a loan facility of up to HK$60 million at the interest rate of 36% p.a. to be repayable two months from the date of drawdown.  Shortly afterwards in June 2018, upon the advice of Yang and Fai, the defendant caused three remittances totaling RMB50 million to be made to the Anhui Huayuan project.

74.  On 10 December 2017, CRMI made an announcement on the HKEX regarding the intended acquisition, the Framework Agreement and the loan made under the Shareholder’s Loan Agreement.

The defendant’s discovery of the alleged conspiracy

75.  The defendant says that in about March 2020, upon consulting his own legal advisers and CRMI regarding Fai’s proposal, it transpired that the assurances and representations made by Bai, Yang and Fai at the 2017 meeting, including Bai’s representations, Fai’s advice and Yang and Fai’s representations, were untrue.

76.  The defendant points to a number of matters which indicate that, to the knowledge of Fai, Bai and Yang, the consideration for the intended acquisition was significantly higher than the true market value, and there were irregularities in respect of the series of transactions relating to the sale and purchase of Anhui Huayuan in the past four years which led to queries and serious concerns raised by the HKEX.

77.  The historical information concerning the ownership of Anhui Huayuan is as follows.

78.  As at 17 December 2015, 北京醫藥集團有限責任公司 (“Beijing Yiyao”)  held 60% of the shares in Anhui Huayuan.  Beijing Yiyao was an indirect subsidiary of China Resources (Holdings)  Co, Limited which since 2003 has been under the direct supervision of the State-owned Assets Supervision and Administration Commission. 

79.  On 28 January 2016, Beijing Yiyao (by public tender held in December 2015)  sold its 60% shareholding in Anhui Huayuan to 合肥盈澤營銷諮詢有限公司 (“Hefei Yingze”)  at a consideration of just under RMB270 million.  Given the background of Beijing Yiyao, the defendant says that the consideration must have been a fair market value.

80.  On 16 June 2016, the shares in Hefei Yingze was sold at RMB1 million to an indirect wholly owned subsidiary of Lung Hang.

81.  After a series of share transfers involving a number of entities, on 23 December 2016, the 100% shareholding in Lung Hang was acquired by Gold Best Holdings Ltd (“Gold Best”)  at a consideration of HK$2.8 billion.  This was approximately 8 to 9 times the consideration at which Beijing Yiyao sold its 60% shareholding in December 2015, just about a year before.  The ultimate owner of Gold Best was Yang Zhihui, who appears to be Yang, one of the participants in the 2017 meeting.

82.  On 13 March 2017, Gold Best indirectly acquired the remaining 40% shareholding in Anhui Huayuan at a consideration of about RMB270 million.

83.  Finally, on 9 October 2017, Gold Best sold its 100% shareholding in Lung Hang, which then held 100% of Anhui Huayuan, to Sacred Heart at a consideration of about RMB3.6 billion.  This was approximately 6 to 7 times the amount at which Beijing Yiyao sold its 60% shares in Anhui Huayuan in December 2015, less than two years ago.

84.  In his evidence, the defendant has exhibited two due diligence reports prepared by two PRC law firms in 2016 and 2017 setting out the particulars of some of the historical transfers of the Anhui Huayuan shareholding, as set out above. 

85.  On about 13 November and 19 December 2018, the HKEX repeatedly queried why the historical transfer price increased significantly from about RMB270 million (for 60% of the shareholding)  to about HK$3.6 billion (for 100%)  within two years.  The HKEX also raised concern about the fact that there were frequent changes in the shareholdings of Anhui Huayuan from January 2016 to October 2017.

86.  On about 11 January 2019, Messrs K&L Gates, newly engaged by CRMI, replied to the HKEX to the effect that based on the information provided by Sacred Heart, the relevant reasons behind were not known.

87.  It is the defendant’s understanding from CRMI that Sacred Heart has throughout been reluctant to explain the fluctuations in the transfer price of the shareholding in Anhui Huayuan despite requests from CRMI.  Hence CRMI was not able to satisfy the HKEX that either the consideration paid by Sacred Heart or the proposed consideration to be paid by CRMI was fair and reasonable.

88.  Further investigations revealed that Bai was arrested for suspected bribery on 22 January 2019 and Yang was requested to assist in investigations into bribery in the Huarong group of companies in about August 2018.

89.  In view of the above, it is the defendant’s case that Bai, Yang, Fai, the plaintiff and Delight Profit had conspired and acted in concert with one another to wrongfully implement Fai’s proposal, with the intention of defrauding and injuring All Favour and the defendant.

(a)  Sacred Heart purchased 100% indirect interest in Anhui Huayuan at a significant overvalue from Yang’s company, in stark contrast with the fair market value at which the 60% interest was sold by Beijing Yiyao by public tender in January 2016.

(b)  Bai was at that time the General Manager and in charge of Huarong International.  He anticipated that the PRC authorities would clamp down the Huarong group of companies for wrongful transactions.  As a result, Bai wished to arrange for a speedy disposal of Sacred Heart’s 100% indirect interest in Anhui Huayuan by whatever means possible.  As Sacred Heart purchased Anhui Huayuan from Yang’s company at a significant overvalue to Yang’s benefit at the expense of Huarong International, Yang was eager to resolve this problem for his own sake as well.

(c)  Bai, together with Yang and Fai (acting for himself and also for the plaintiff and Delight Profit), conspired and combined together wrongfully to implement Fai’s proposal, with the intention of defrauding and injuring All Favour and the defendant by arranging Sacred Heart to offload its 100% indirect interest in Anhui Huayuan at cost or slightly above cost to CRMI.  If unsuccessful, Anhui Huayuan would still be taken up by All Favour and/or the defendant at the same price, while the true market value was significantly less than that.

(d)  The object of the conspiracy was to enable Sacred Heart to dispose of Anhui Huayuan to CRMI as soon as possible in anticipation of possible actions by the PRC authorities against the Huarong group of companies for wrongful transactions.

(e)  Each of Bai, Yang, Fai and (through Fai)  the plaintiff and Delight Profit were fully aware of the above when they assisted Bai to implement Fai’s proposal. 

(f)  In the circumstances, Bai’s representations and Yang and Fai’s representations, including that the Anhui Huayuan project was a highly lucrative project and Huarong International could offer a special deal, were untrue and concealed the true fraudulent purpose of Fai’s proposal, to the knowledge of Bai, Yang, Fai and (through Fai)  the plaintiff and Delight Profit (“the alleged misrepresentations”).

90.  It is one of the defendant’s core contentions that Fai was the ultimate controller of the plaintiff and hence both of them were part of the conspiracy.  The defendant relies on the following.

91.  First, the Loan was all along arranged through and confirmed by Fai.

92.  Secondly, according to the plaintiff’s annual return, Wong reportedly lives in Tai Hang Sai Estate, a public housing estate.  This suggests that Wong is a mere nominee of the plaintiff.  In this application, however, the plaintiff has failed to procure Wong, its director and ultimate owner, to swear an affidavit to address this point.   Furthermore, even on the face of the materials produced by the plaintiff, Wong had played no apparent role in the negotiations and arrangements concerning the Loan.

93.  Thirdly, and similarly, even though Wai’s evidence is that the plaintiff has been operated by him and Wong since its establishment, the plaintiff’s own evidence does not show that Wai had played any apparent role in the Loan.  Wai failed to explain who on behalf of the plaintiff had made the decision to lend HK$100,000,000 to the defendant.  There is no evidence of any independent judgment made by either Wai or Wong in taking up the loan transaction with the defendant.

94.  The defendant contends that the evidence in fact suggests that Fai was actively participating in the Loan.

95.  Given that the defendant has a claim against the plaintiff (and others)  arising out of the alleged conspiracy and the alleged misrepresentations, he is entitled to claim reliefs against the plaintiff as a co-conspirator, including damages and the setting aside of the Loan.

96.  To sum up, the defendant opposes the summary judgment application.  He says that the affirmation evidence clearly reveals substantial disputes of fact as to what precisely was discussed by the participants in the negotiation and implementation of the intended acquisition of Anhui Huayuan, including the Loan Agreement.  These fact-sensitive matters need to be resolved by a full trial with discovery and cross-examination before judgment can be entered in favour of the plaintiff.  It is therefore misconceived for the plaintiff to effectively ask the court to conduct a mini-trial on affirmation evidence and make factual findings in its favour in a summary way.

THE PLAINTIFF’S EVIDENCE IN REBUTTAL

97.  In his defence filed in HCCL 4/2020, Fai admitted that he attended a meeting with the defendant, Chen, Bai and Yang on 9 October 2017.  Yang had asked him to attend given his experience in corporate finance matters and dealings with the HKEX.  However, he denied that he had made any oral warranty to the defendant during the meeting as alleged.  In fact, he was not familiar with Anhui Huayuan and did not confirm its profitability or otherwise.  

98.  At the meeting, the defendant expressed his wish to cause CRMI to acquire Anhui Huayuan.  Fai was asked for his view as to how likely CRMI would be able to complete the intended acquisition.  He then expressed his view that it would be unlikely to meet the listing requirements for a number of reasons. Bai required CRMI to pay a non-refundable deposit to the vendor to kick start the negotiation.  Fai then raised the concern that such a deposit would have listing implications and suggested that either Bai could allow the deposit to be refundable or, alternatively, the defendant might consider to shoulder the payment obligation of the deposit himself so that CRMI would not suffer any loss if the intended acquisition did not proceed.  Given all these issues, Fai suggested that professional legal and financial advice be sought.  The defendant asked him for recommendation and Fai recommended Grand Harbour. 

99.  Further, Fai understood from Yang that the defendant was in need of finance.  It was upon Yang’s request that Fai recommended the plaintiff to the defendant.  Fai denied that he was the ultimate controller of the plaintiff.

100.  Fai denied that he had made the warranty concerning Anhui Huayuan.  He further denied that he had advised or suggested the defendant or All Favour to make the intended acquisition or that he had suggested the arrangements referred to by the defendant as “Fai’s proposal”.  He emphasised that the contractual documents signed in relation to the intended acquisition appear to be binding arm’s length transactions entered into by commercially sophisticated parties who acted on their own judgment and/or having been duly advised by their own advisers.  He pleaded that he was not involved in the drafting, negotiation or execution of such contracts.

101.  It is also the plaintiff’s contention that the alleged representation that CRMI would only gain and would not suffer any loss from the intended acquisition is nonsensical at all.

DISCUSSION

102.  Having considered the evidence produced by the parties, I am satisfied that the defendant has succeeded in raising triable issues in relation to his claim of conspiracy and misrepresentations.  The factual allegations he makes in support of his claim are at least believable and cannot be rejected at this stage without a full trial. 

103.  Furthermore, if proved, the allegations amount to an arguable defence in law.  Where the defendant remains liable to repay the Loan, the conspiracy would arguably give rise to a substantial counterclaim by the defendant against the plaintiff in the sum of at least the principal and interest due under the Loan Agreement.  Furthermore, by reason of the misrepresentations, it is arguable that the Loan is liable to be set aside.  In that case, there is no obligation to repay the Loan in accordance with the contractual terms.  In addition, it is arguable that the defendant may not be obliged to make counter-rescission of the sum of HK$100,000,000, in whole or in part, as a matter of law, given that the defendant is not in a position to do so by reason of the wrongful conduct of the plaintiff (and others). 

104.  Given the above conclusion, it would be undesirable for me to undertake a detailed analysis of the evidence in this decision, save to highlight the materials based on which I consider that the defendant is able to surmount the Order 14 threshold.

Is the defendant’s factual case believable?

105.  I have set out the defendant’s factual case above in detail.  In the narrative, I have also specified the documentary evidence relied on by him.  It should be plain that some aspects of his case are consistent with contemporaneous documents.  As such, the defendant’s case is not supported merely by his bare assertions but appears to have some documentary support. 

106.  The key legal documentation executed in relation to the intended acquisition included the Framework Agreement, the Shareholder’s Loan Agreement, the All Favour undertaking and the defendant’s undertaking.  The dispute between the parties is how these documents came about in the first place. 

107.  The defendant says that the documents were signed following, among other things, Fai’s advice and to implement Fai’s proposal.  In the process, Fai had actively and regularly communicated with others.  In other words, Fai had played an important role in the intended acquisition.  On the other hand, Fai denies that he had given any such advice or made any such proposal.  He had only expressed some views in the 2017 meeting (see para 98 above).  But in general he says that he was not involved in the drafting, negotiation or execution of the contractual documents relating to the intended acquisition (see para 100 above).

108.  On this issue, it is first notable that Fai admits that he had attended the 2017 meeting.   Further, the defendant is able to point to some WeChat messages exchanged around the time, which arguably corroborates his case that Fai had indeed played a more important and involved role than Fai now appears to be portraying.  See paras 63 to 66 above.  In my view, in light of the WeChat messages, there is clearly room for the role played by Fai in the intended acquisition to be further explored at trial before this issue can be resolved.

109.  As regards the Loan itself, the plaintiff’s case is that Fai’s role was very limited.  He referred the defendant to it for the Loan.  He assisted the defendant in liaising with the plaintiff from time to time and sending over documents between the two parties.  Later, Fai also assisted the plaintiff in chasing the defendant for repayment of the Loan, as he is the person most familiar with the defendant.  But that is the extent of Fai’s role in relation to the Loan.  On the other hand, the defendant says that Fai was in fact the ultimate controller of the plaintiff.  He sent out the drafts of the documentation of the Loan Agreement.  He appeared to have full particulars of the outstanding amounts under the Loan.  Even according to Fai’s own evidence, he was in regular communication with the defendant from December 2019 to March 2020 chasing for repayment. 

110.  On this issue, the objective fact, as shown by the WeChat messages produced so far and his own evidence, that Fai was involved in chasing the defendant for repayment may go to support the latter’s case that Fai was indeed the controller of the plaintiff and that was why he was personally concerned with, and closely involved in, the defendant’s repayment.   The absence of evidence showing Wong and Wai’s involvement in the granting of the Loan and chasing for its repayment is also prima facie a point in the defendant’s favour.  This issue cannot be properly resolved summarily and should be tried.

111.  As regards the alleged conspiracy and its underlying rationale, the defendant relies on the previous consideration prices for the transfer of shareholding in Anhui Yuayuan.  He adduces as evidence the due diligence reports compiled by two law firms in 2016 and 2017 and CRMI’s submissions to the HKEX.  There appear to be irregularities in the previous disposals of the shareholding.  This aspect of the defendant’s case appears to be, in part, supported by objective facts. 

Delay in raising his defence

112.  The plaintiff emphasises that the claims of conspiracy and misrepresentations were only raised by the defendant for the first time after the plaintiff commenced the present action.  Since the original repayment date in March 2018, the defendant had repeatedly asked for more time to repay.  He had never raised any allegation of misrepresentations before.  It is clear, the plaintiff says, that the claims are fabricated by the defendant just to delay judgment being given to the plaintiff.  In his oral submissions, Mr Kat also argued that the defendant ought to have discovered the alleged conspiracy and the alleged misrepresentations latest by late 2018 when the HKEX raised the queries over the previous transfers in Anhui Huayuan with CRMI.

113.  On this issue, the defendant stated in his evidence that he only made the discovery in about March 2020 upon consulting his own legal advisers and CRMI and that this was a detailed process involving his legal advisers and a lengthy review of the relevant documents. 

114.  The question before me is whether the defendant’s allegation as to his discovery of the alleged conspiracy and misrepresentations is not capable of belief at all.  On the one hand, the defendant is a substantial shareholder of CRMI.  Furthermore, even on his own case, he was clearly in a position to procure CRMI to engage in the intended acquisition back in 2017.  There is therefore force in the plaintiff’s submission that the defendant ought to have been able to find out about the alleged conspiracy much earlier on, at least when the HKEX raised the queries with CRMI.  On the other hand, the defendant stressed that he has never held any position or title with CRMI.

115.  The resolution of the dispute on the alleged discovery involves weighing the parties’ respective cases against the relevant factual background.  On the whole, I do not think that it is possible to undertake this exercise on affidavit evidence alone.  The issue ought to be tried.

Overall assessment of the defendant’s factual case

116.  To conclude, the defendant’s case on the key factual disputes is not incapable of belief, when viewed against contemporaneous documents and the objective facts, and hence cannot be rejected outright summarily.

Arguable defence in law

117.  I am also satisfied that the defendant’s factual case is capable of giving rise to a defence to the plaintiff’s claim on the Loan as a matter of law.

118.  On the defendant’s factual case, the plaintiff, acting through Fai, was a co-conspirator.  In the statement of claim filed in HCCL 4/2020, the defendant pleads that his loss would include his personal liability to repay the Loan, including paying interest at the contractual rate.  He claims, among other things, damages.   It is arguable that that the damages would include the principal and interest payable by him under the Loan.  If granted, that would provide a defence to the plaintiff’s claim in the present action by way of set-off.

119.  The plaintiff argues that even if the conspiracy and misrepresentations claims are made out, in the event that the non-refundable deposit paid by CRMI to Sacred Heart is paid back to CRMI if the intended acquisition is cancelled, CRMI should then repay the shareholder’s loan to All Favour.  It follows that All Favour and the defendant would suffer no loss. 

120.  On this issue, the short point is that it is clearly arguable that according to the express terms of the All Favour undertaking, CRMI has no obligation to repay the shareholder’s loan.  See the underlined provision in the extract in para 72 above.  Insofar as the plaintiff is suggesting that the provision is not an operative one as it is only contained in the recital of the All Favour undertaking, that is a construction point that should be tried and cannot be determined definitively at this stage. 

121.  Furthermore, on this point, if there is any amount repaid by CRMI to All Favour notwithstanding the express terms in the undertaking, the amount simply cannot be determined or ascertained now.  Hence, one cannot say for sure the whole shareholder’s loan would be repaid to All Favour such that the defendant would suffer no loss at all under the conspiracy and misrepresentations claim.

122.  Lastly, it should be noted that the shareholder’s loan advanced by All Favour to CRMI is interest-free whereas the Loan carried interest at the rate stipulated in the Loan Agreement, as amended, and the Deed of Settlement.  The plaintiff now asks for summary judgment in respect of the outstanding sums under the Loan.  Even if the All Favour’s loan is fully repaid, the defendant (through All Favour)  would arguably still suffer the loss in the form of the contractual interest due under the Loan.  Summary judgment cannot be entered in the sums asked for by the plaintiff.

123.  In HCCL 4/2020, the defendant further asks for the Loan Agreement to be rescinded on the basis of the misrepresentations.  On his factual case, it is an arguably viable relief.  For that reason, prima facie, it would not be appropriate to grant summary judgment on the Loan.  Insofar as the plaintiff suggests that in the case of rescission, the defendant is liable to make counter-rescission of the sum of HK$100,000,000 and hence summary judgment should still be entered, this is an issue which cannot be resolved now. 

124.  As mentioned above, the defendant has raised an arguable case that All Favour would not have the right to compel CRMI to repay the shareholder’s loan pursuant to the terms of the All Favour undertaking.  Mr Man submitted that the defendant thus has an arguable defence of change of position as follows. 

125.  The defendant had transferred the HK$100 million received from the plaintiff to CRMI, via the shareholder’s loan advanced by All Favour, on a no-recourse basis.  This was done in order to implement Fai’s proposal, which was part of the alleged conspiracy.  There was hence a change of position in that the defendant is no longer able to return the sum of HK$100 million and that change was brought about by Fai’s own wrongful conduct.  In such circumstances, the sum need not be restored: Snell’s Equity (34^th ed)  at para 15-014.

126.  I agree that the defendant’s submission in this regard is at least arguable.  The issue of cross-rescission should be determined only after factual findings in relation to the alleged conspiracy are made.

Unconditional leave to defend or dismissal of the summons?

127.  For the above reasons, the defendant should be allowed to defend the claim.  No condition should be imposed.  This is not a case where the defence is a sham one or the court is prepared very nearly to give judgment for the plaintiff.

128.  Mr Man asked for the Order 14 application to be dismissed.  I do not consider that to be the proper order to make. 

129.  It is true that when the plaintiff took out the summary judgment application, it had already been made aware of the defendant’s claim based on the alleged conspiracy and the alleged misrepresentations in HCCL 4/2020.  (The writ there was indorsed with the statement of claim.)  However, the plaintiff’s stance was (and remains)  that all along since March 2018, the defendant had repeatedly acknowledged his liability to repay the Loan.  Hence it took the view that the claim in HCCL 4/2020 was merely a delaying tactic.  In the circumstances, the plaintiff still believed that there was no arguable defence to its claim at the time of the summons.   

130.  I have ruled that the alleged discovery is an issue which ought to be tried.  Nevertheless, given the chronology of events, I am of the view that the plaintiff’s belief at the time was not totally unjustified and its taking out of the application is not so objectionable as to justify a dismissal of the summons. 

CONCLUSION

131.  I order that the defendant do have unconditional leave to defend the action.

132.  I make an order nisi that the costs of the summons, including all reserved costs, be in the cause, with certificate for two counsel.