HG PROPERTY INVESTMENT HK LTD v. CHENG MEI HOLDINGS LTD (RECEIVERS AND MANAGERS APPOINTED) AND OTHERS

HCA 1469/2022

[2024] HKCFI 750

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1469 OF 2022

________________________

________________________

____________________

D E C I S I O N

____________________

A.  INTRODUCTION

1.  By Summons dated 13 July 2023 as amended at the hearing on 13 December 2023 (the “Amended Summons”), the plaintiff (“HG”) seeks, inter alia, to join the intended 4^th defendant, Goldstone Asset (HKSAR) Limited (“Goldstone”) as a party to these proceedings, and to allow the plaintiff to re-amend the Amended Writ of Summons and amend the Statement of Claim dated 2 March 2023.  The proposed amendments are annexed to the Amended Summons (the “Re-Amended Writ” and “Amended Statement of Claim”).

2.  On 3 November 2022, HG brought this action against the 1^st and 2^nd defendants (“Shareholders”) for alleged breach of the Sale and Purchase Agreement dated 22 September 2022 (in respect of shares of the 3^rd defendant and related sale loan) (“HG SPA”).  It was not until 20 January 2023 that HG amended the Writ to include the 3^rd defendant (“Smart Edge”), which is however not a party to the HG SPA.

3.  Without the amendment, the Statement of Claim comprises a claim against the Shareholders on the alleged breach of the HG SPA and a claim of alleged equitable lien over the Property.

4.  By the Amended Summons, HG seeks leave to amend the Writ and the Statement of Claim to introduce, for the first time, a claim that the Sale and Purchase Agreement dated 25 November 2022 between Smart Edge and Goldstone (in respect of the Property) (“Goldstone SPA”) was executed by Smart Edge with intent to defraud its creditors and thus voidable and liable to be set aside under section 60 of the Conveyancing and Property Ordinance, Cap 219 (“CPO”): Amended Statement of Claim §§63A-63B.  The defendants and Goldstone submit that HG has no reasonable cause of action on this, and there is no basis for joinder of Goldstone.

5.  Originally, the plaintiff submitted that there were two questions to be tried between HG and Goldstone which warrants the joining of Goldstone as a party to the present proceedings.  This includes the issue on HG’s claim under section 60 of the CPO (the “S60 CPO Claim”), and the fact that any judgment in favour of HG’s claim for specific performance of the HG SPA would affect Goldstone’s rights in the Property.  At the hearing before this court, counsel for HG expressly abandoned the reliance on the second question as the basis for seeking the joinder of Goldstone.  The only remaining question relates to the S60 CPO Claim.

B.  RELEVANT FACTUAL BACKGROUND

6.  The relevant factual background has been helpfully set out in the Skeleton Submissions of Goldstone, as follows.

7.  By a Security Agreement dated 10 April 2019 (“Security Agreement”), the property known as Goldin Financial Global Centre, No 17 Kai Cheung Road, Kowloon, Hong Kong (“Property”) was mortgaged by Smart Edge in favour of DB Trustees (Hong Kong) Limited as security agent on behalf of the secured creditors (“Secured Creditors”) under a HK$6.8 billion floating rate senior secured notes (“$6.8 Billion Notes”).

8.  On 13 July 2020, following Smart Edge’s default under the $6.8 Billion Notes, the Receivers were appointed as receivers of the Property and the receivers of the Shareholders by a Deed of Appointment of Receivers and Managers.

9.  During December 2020 to November 2021, the Shareholders entered into successive agreements to sell all shares of Smart Edge (“Sale Shares”) and related loan owing by Smart Edge (“Sale Loan”) to one Hundred Gain International Holding Limited (“HGIL”), but all these agreements were terminated on the ground that HGIL was unable to comply with the conditions therein.

10.  On 25 February 2022, after a delay of over 1 year, the Shareholders entered into yet another agreement to sell the Sale Shares and the Sale Loan to HGIL (“HGIL SPA”).  However, HGIL again failed to complete and the HGIL SPA was terminated on the ground that HGIL was unable to comply with certain conditions therein.

11.  On 16 May 2022, HGIL filed the writ of summons in HCA 576/2022 against the Shareholders (“Previous Writ”).  The Previous Writ was submitted to the Land Registry for registration against the Property.  On 30 June 2022, Smart Edge commenced proceedings in HCMP 823/2022 to remove the registration.  Eventually, these proceedings were settled and it was ordered by consent on 21 September 2022 that (i) the Previous Writ was not a lis pendens affecting the Property nor an instrument registrable on the Land Register of the Property, (ii) the attempted registration be cancelled and forthwith removed from the Land Register of the Property, and (iii) HGIL be restrained from registering any further instruments in respect of the Previous Writ.  Accordingly, HGIL withdrew the Previous Writ and the registration thereof from the Land Registry.

12.  Meanwhile, the Receivers pursued the prospective sale of the Sale Shares or the Property by tender.  On 21 September 2022, Goldstone’s shareholders were informed that their offer was rejected.  As it transpired, the HG SPA was entered into on 22 September 2022:

(1)  The HG SPA is concerned with the sale and purchase of the Sale Shares and the Sale Loan, not the Property.

(2)  Smart Edge (owner of the Property) is not a party to it.

(3)  HG paid a mere deposit of HK$250 million (“Deposit”).  This constituted only 3.7% of the consideration. Substantial balance (96.3%) remained outstanding.

13.  On 6 October 2022, the parties of the HG SPA mutually agreed to extend the deadline for HG’s financier to provide written confirmation pursuant to Clause 4.1(d) of the HG SPA from 7 October 2022 to 14 October 2022.

14.  By an email dated 14 October 2022 from HG’s financier, it was stated that HG’s financier was unable to obtain internal approval due to commercial/market driven reason, albeit not due to any failure on the part of “Hundred Gain”.  As a result, HG was in breach of Clause 4.1(d).  In any case, HG was plainly unable to pay the balance of 96.3% and complete the transaction.

15.  On 1 November 2022, the Shareholders gave written notice to HG to terminate the HG SPA pursuant to Clause 4.2(d).

16.  On 3 November 2022, HG commenced this action against the Shareholders (“First Writ”) and submitted it to the Land Registry for registration, which was however withdrawn by HG before 25 November 2022.

17.  On 25 November 2022, the Goldstone SPA was executed. At the time of such execution, no writ was registered or pending registration against the Property, nor was there any other instrument pending registration against the Property.  As the Goldstone SPA was submitted for registration within 1 month, it should take priority as from the date of execution on 25 November 2022.

18.  On 28 November 2022, HG submitted the HG SPA and the First Writ to the Land Registry for registration.  Registration of the two aforesaid instruments was withheld by the Land Registry.

19.  On 20 January 2023, HG amended the First Writ to add Smart Edge as the 3^rd defendant.  On 27 January 2023, HG submitted the amended First Writ (“Amended First Writ”)to the Land Registry for registration, registration of which again was withheld by the Land Registry.

20.  On 3 April 2023, HGIL commenced another set of legal proceedings against the Shareholders and Smart Edge in relation to the HGIL SPA in HCA 502/2023 (“Second Writ”).  The Second Writ was submitted to the Land Registry on 4 April 2023 for registration.

21.  On 27 April 2023, Cheng J handed down judgment in HCMP 2146/2022 (“HG Judgment”), declaring that the HG SPA, the First Writ and the Amended First Writ are not registrable on the Land Register of the Property under the Land Registration Ordinance, Cap 128 (“LRO”), together with orders for removal of references to the same from the Land Registry.

22.  On 5 May 2023, HG filed a Notice of Appeal to appeal to the Court of Appeal against the HG Judgment.

23.  On 30 May 2023, Cheng J handed down judgment in HCMP 2146/2022 (“Stay Judgment”) dismissing HG’s application for stay of execution pending appeal.

24.  On 29 June 2023, the Goldstone SPA was completed.  95% of the total consideration was paid.  5% of the total consideration remains unpaid, and Smart Edge retains an equitable lien over the Property.  Goldstone submits there is nothing peculiar or atypical given that (i) Goldstone paid 95% consideration (whereas HG only paid 3.7%) and (ii) the 5% retention serves to protect Goldstone pending HG’s appeal and HGIL’s pending registration.

25.  On the same day, a Legal Charge and Debenture (“UOB Legal Charge”) was executed between Goldstone and United Overseas Bank Limited (“UOB”) to charge and assign the Property as security for term loan facilities of up to HK$3.091 billion.

26.  On 13 July 2023, HG took out the Summons.

27.  On 24 October 2023, Mr Recorder Stewart Wong SC handed down judgment on the Second Writ (“HGIL Judgment”) acceding to Smart Edge’s application and ordering the Second Writ to be removed from the pending section of the Land Registry.

C.  RELEVANT LEGAL PRINCIPLES

28.  The relevant legal principles on joinder and amendment of pleadings are not in dispute.

29.  The law on joinder of parties under Order 15, rule 6 of the Rules of the High Court are trite, see Advanced Connection Ltd v Able Technology (Hong Kong) Ltd [2018] HKCFI 2465, per Ng J at §§16-20.  

(1)  The purpose of joinder is to bring all parties to disputes relating to one subject‑matter before the court at the same time so that the disputes may be determined without the delay, inconvenience and expense of separate actions and trials.  This rule should be construed liberally;

(2)  As to whether a new party should be joined, the test is whether there is a bona fide claim and a proper question to be tried as between the plaintiff and the intended defendant that is necessary or just and convenient for resolution between them as well as between the plaintiff and the defendants in the present proceedings; and

 (3)   At this stage, there is no requirement for an applicant to show merits of his case under this rule.

30.  Although at §§21-23 of Advanced Connection, ibid, Ng J agrees that joinder ought to be disallowed if the parties opposing establish that it is plain and obvious that the plaintiff has no case against the proposed defendant.

31.  Likewise, the law on amendments to pleadings are well-established: see Hsu Ming Chi v Lam Shu Chit, HCCL 8/2013 (unrep, 22/10/2014), per Ng J at §§13-18.  In particular:

(1)  all such amendments ought to be made “for the purpose of determining the real question in controversy between the parties to any proceedings or of correcting any defect or error in any proceedings”;

(2)  the court will grant leave to amend unless it can be shown that the new claim is bound to fail;

(3)  Where prejudice is claimed, the burden is on the party opposing the amendment to show prejudice;

(4)  While the court is entitled to have regard to the merits of the case, it should only do so when the merits are readily apparent, and are so apparent as not to require prolonged investigation: Natamon Protpakorn v Citibank NA [2009] 1 HKLRD 455 at §25 (per Cheung JA); and

(5)  If the proposed amendments are bound to fail, no leave to amend should be granted.  In this regard, the court will take the applicant’s proposed pleaded case to the highest.

D.  THE S60 CPO CLAIM

D1.  Amended Statement of Claim §§63A-63B disclose no reasonable cause of action

32.  The gist of HG’s S60 CPO Claim is neatly contained in paragraphs 63A and 63B of the Amended Statement of Claim, which is worth quoting in full for ease of reference.

“63A. Further, the Goldstone SPA was executed by the 3^rd Defendant with intent to defraud its creditors, which is to be inferred from the fact that the consideration for the sale of the Property in the Goldstone SPA (i.e. HK$5,600,000,000) was at a substantial undervalue, compared with that in the SPA (i.e. HK$6,700,000,000). Besides, by an undated Memorandum of Lien signed between Mr Cosimo Borrelli and Mr Ma Siu Ming Simon and Goldstone, Goldstone confirms that Goldstone has not paid the HK$5,600,000,000 in full and alleged that Smart Edge retains a vendor’s lien over the Property to the extent of HK$280,000,000.

63B. In the premises, the Goldstone SPA is voidable and liable to be set aside under section 60 of the Conveyancing and Property Ordinance (Cap. 219).” (Emphasis supplied)

33.  As submitted by Goldstone, it is trite that, for the purpose of a S60 CPO Claim, fraud or dishonesty must be “distinctly alleged”and“distinctly proved”, and it must be “sufficiently particularised”.  Particulars of facts which are consistent with honesty are not sufficient.  It is not open to the court to infer dishonesty (i) from facts which have not been pleaded or (ii) from facts which have been pleaded but are consistent with honesty: The New China Hong Kong Group Ltd v Ng Kwai Kai Kenneth, HCA 519/2010 (unrep, 11/02/2011), per Fok JA (as he then was) at §65.

34.  In this regard, §63A of the Amended Statement of Claim seeks to plead fraud by relying on the following:

(1)  The consideration for the sale of the Property under the Goldstone SPA (ie HK$5.6 billion) was at a substantial undervalue, compared with that in the HG SPA (ie HK$6.7 billion); and

(2)  By an undated Memorandum of Lien, Goldstone confirms that it has not paid the HK$5.6 billion in full and alleged that Smart Edge retains a vendor’s lien over the Property to the extent of HK$280 million.

35.  I agree with Goldstone’s submissions that the first matter discloses no reasonable cause of action because:

(1)  As the disposition of the Property to Goldstone was made for valuable consideration, the rule in Freeman v Pope (1869-70) LR 5 Ch App 538 did not apply.  An actual intent to defraud creditors must be shown as an inference properly to be drawn on the available evidence before section 60 of the CPO is engaged: Tradepower (Holdings) Ltd v Tradepower (HK) Ltd (2009) 12 HKCFAR 417, §88.

(2)  In §63A of the Amended Statement of Claim, HG’s only pleaded basis of undervalue is a comparison with the consideration under the HG SPA.  Yet, there is a lapse of over 2 months from the date of the HG SPA (22 September 2022) to the date of the Goldstone SPA (25 November 2022).  It is a quantum leap to equate the price drop (16%) with a substantial undervalue given such time difference of over 2 months.

(3)  This is a fortiori the case as HG’s plea takes no account of (i) the stamp duty of HK$238,000,000 paid by Goldstone, which is part of the overall consideration to be paid by a purchaser, and must be taken into account in deciding if the price is at undervalue; and (ii) the increase in interest rate in the course of over 2 months, which is conceded by HG to be “one of many factors that could affect market conditions”.  It is plainly unsustainable to plead substantial undervalue by reference to the price difference per se.

(4)  More importantly, HG’s plea of alleged undervalue is consistent with honesty.  For instance, any alleged undervalue might be the result of the market conditions at the time, the increase in interest rates, the lack of interested buyers, the fact that it was a forced sale to enforce a security, etc.  As a matter of law, it is simply not open to the court to infer dishonesty from such pleaded fact which is consistent with honesty (see paragraph 33 above).

(5)  Indeed, even if there were alleged undervalue, an inference of an intent to defraud will not automatically follow - something more must be shown, namely an intent to defraud the creditors generally.  In the circumstances of the present case, the alleged undervalue is plainly not capable of giving rise to an inference of such an intent.  Here, the Property was sold by Smart Edge (via the Receivers) to Goldstone to generate proceeds of sale to repay the Secured Creditors, to whom Smart Edge owed more than HK$5.6 billion.  This was against the backdrop of a delay of 2 years caused by repeated failures by HGIL and HG to complete successive agreements.  In these circumstances, the disposition of the Property to Goldstone pursuant to the Goldstone SPA was supported by the Secured Creditors of Smart Edge.  In the light of a genuine commercial rationale of this nature, it would require something more to suggest an intent on the part of Smart Edge to defraud its creditors: cf New China Hong Group Ltd, Supra §66(5).

36.  I further agree with Goldstone’s submissions that HG cannot salvage its position by reference to the HGIL Judgment:

(1)  The relevant parties, the relevant contract and the consideration in that case are different.

(2)  Unlike HGIL which has adduced valuation evidence, HG has not adduced such evidence, let alone pleading it.

(3)  The comments on the arguability of HGIL’s S60 CPO claim are obiter and not binding on Goldstone anyway (see HGIL Judgment §109).

37.  The second matter (referred to at paragraph 34(2) above) does not assist HG either:

(1)  Goldstone has already paid HK$5.32 billion of the purchase price (95%), leaving a balance of HK$280 million (5%).

(2)  The retention of 5% serves to protect Goldstone’s interest as purchaser given HG’s pending appeal and HGIL’s attempted registration (which was only ordered to be removed on 24 October 2023).  Goldstone has made good this submission by referring to the clear terms of the 3^rd Supplemental Agreement dated 19 June 2023 made between the Receivers and Goldstone, providing for retention of the “Final Balance” in the sum of HK$280,000,000.

(3)  HG’s contention that an inference of fraud can be drawn from such retention of 5% purchase price is plainly unarguable.

(4)  In any event, such plea is consistent with honesty, namely,to protect Goldstone’s interest as purchaser given HG’s pending appeal and HGIL’s attempted registration.

38.  Further, HG has put forth no basis to argue that Goldstone had notice of Smart Edge’s alleged intent to defraud its creditors:

(1)  HG has put forth no plea or evidence that Goldstone had notice of Smart Edge’s alleged intent to defraud its creditors.

(2)  HG has put forth no plea or evidence that Goldstone had notice that the consideration for the sale of the Property in the Goldstone SPA was at a substantial undervalue.

(3)  HG has put forth no plea or evidence that Goldstone conspired with Smart Edge.  To the contrary, it is not disputed by HG that Goldstone is wholly unrelated to HG, the Shareholders, Smart Edge or the Receivers.

(4)  All that pleaded in the Amended Statement of Claim §§60-61 is Goldstone’s notice of the HG SPA and HG’s alleged equitable lien over the Property.  Whether at execution or completion of the Goldstone SPA, HG has not made any S60 CPO Claim or allegation of undervalue.  There is thus no basis to allege that Goldstone has any relevant notice at all.

39.  Finally, at the time of completion of the Goldstone SPA, Goldstone has executed the UOB Legal Charge to secure term loan facilities of up to HK$3.091 billion.  In particular, by the UOB Legal Charge, Goldstone charged and assigned to UOB all its present or future interest in the Property.  Yet, HG has not sought to join UOB as an additional defendant in this action; nor does HG allege that UOB had notice that Smart Edge executed and completed the Goldstone SPA with intent to defraud its creditors. Therefore, in the absence of an application for joinder of UOB, HG cannot proceed with its claim on section 60 of the CPO anyway.

40.  For the reasons set out above, I agree that the new claim in the Amended Statement of Claim discloses no reasonable cause of action, the court should not grant leave to amend.  It follows that the court should not grant leave to join Goldstone on the basis of the Amended Statement of Claim either.

D2.  Not “just and convenient” to join Goldstone as the 4^th defendant?

41.  Mr Abraham Chan SC, on behalf of the 1^st to 3^rd defendants further submits that the Amended Summons should be dismissed on discretionary grounds relating to “just and convenient”, short of demonstrating that HG’s claim is bound to fail.

42.  I do not agree with this approach.

43.  The fact is that Smart Edge is an existing party in these proceedings.  As against an existing party, the court must allow an amendment to plead a new case unless the new claim is bound to fail, see Hsu Ming Chi v Lam Shu Chit, Supra at §14.

44.  And if HG is allowed to bring the S60 CPO Claim against Smart Edge as a new claim, it would be necessary to add Goldstone as a party whose presence before the court is “necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon”.

E.  CONCLUSION

45.  For the reasons set out in paragraphs 32 to 40 above, HG’s Amended Summons is dismissed.

46.  I order that the costs of and occasioned by the Amended Summons be paid forthwith by HG to the 1^st to 3^rd defendants and Goldstone, such costs are to be taxed if not agreed (with a certificate for 2 counsel to the 1^st to 3^rd defendants).

47.  The above order as to costs is nisi and shall become absolute in the absence of any application within 14 days to vary the same.

48.  Lastly, I express my gratitude to counsel for their helpful assistance in this matter.