TSANG YAN KWONG v. 360 HK LTD (incorporated in Belize)

HCA 548/2017

[2018] HKCFI 1886

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 548 OF 2017

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JUDGMENT

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THE APPLICATIONS

1.   I have before me the following three summonses:

(1)  the Plaintiff’s summons dated 29 January 2018 for an interlocutory mandatory injunction under Order 29, rule 6 of the Rules of the High Court (“RHC”) (“1^st Summons”);

(2)  the Plaintiff’s summons dated 26 June 2018 for the same interlocutory mandatory injunction but under Order 29, rule 1 of the RHC (“2^nd Summons”); and

(3)  the 2^nd Defendant’s summons dated 17 July 2018 for amending its Defence and adding a Counterclaim (“Amendment Summons”).

2.   The Plaintiff does not oppose the Amendment Summons.  An order in terms of the Amendment Summons was granted at the start of the hearing, subject to certain minor modifications.  The contents of the Amended Defence and Counterclaim of the 2^nd Defendant (“Amended Defence and Counterclaim”) have therefore been confirmed.

3.   The 1^stSummons has been overtaken by the 2^ndSummons and will not be pursued further by the Plaintiff.  The only outstanding issue is on costs.

4.   Therefore, the 2^nd Summons is the only substantive summons for the Court’s determination.

5.   The following orders are sought in the 2^nd Summons:

(1)  Upon the Plaintiff paying into Court the sum of US$526,108 as security for the Plaintiff’s potential outstanding indebtedness towards the 2^nd Defendant (if any) under the Loan Agreement dated 26 January 2017 between the Plaintiff and the 2^ndDefendant (“Loan Agreement”), the 2^ndDefendant shall forthwith return, transfer or otherwise vest 147,280,000 shares in National Arts Entertainment and Culture Group Limited (a company listed on the Hong Kong Stock Exchange with stock code 8228) (“Listco”) in favour of the Plaintiff (or its designated nominee) (the order being “Return Injunction”);

(2)  There be leave to serve any order made herein on the 2^ndDefendant out of jurisdiction at Blake Building, Suite 302,Belize City, Belize, in addition to service on the 2^ndDefendant’ssolicitors, Messrs DLA Piper Hong Kong;

(3)  Any order made herein be endorsed with a penal notice;

(4)  There be liberty to apply; and

(5)  Costs of this application be to the Plaintiff in any event.

6.   As set out in the Plaintiff’s written submissions, if this Court is not persuaded that the shares referred to in paragraph 5(1) above should be returned to the Plaintiff pending trial,the Plaintiff’s fallback position is for them to be transferred to an independent collateral agent jointly instructed by the Plaintiff and the 2^ndDefendant, in the place of China Times Securities Limited (“China Times”) (the order being “Fallback Injunction”). 

BACKGROUND

7.   This case concerns a loan transaction secured by a share pledge.

The loan transaction

8.   By the Loan Agreement, the Plaintiff obtained a loan for a maximum sum of US$1,600,000 (“Loan”) from the 2^ndDefendant, a company incorporated in Belize.

9.   In return, the Plaintiff pledged to the 2^ndDefendant his 147,280,000 shares in Listco (“Pledged Shares”), as collateral and securityfor the Loan pursuant to the Loan Agreement and a pledge agreement also dated 26 January 2017 (“Pledge Agreement”).

10.   The Loan was further secured by a promissory note also dated 26 January 2017 with a face amount of US$1,600,000 executed by the Plaintiff in favour of the 2^ndDefendant (“Promissory Note”).

11.   By a collateral agency agreement also dated 26 January 2017 (“Collateral Agency Agreement”), China Times was appointed by the 2^ndDefendant as the collateral agent to hold the Pledged Shares on behalf of the 2^ndDefendant.

12.   On 25 January 2017, the Plaintiff opened a securities accountwith China Times (account number M810227) (“China Times Account”) and deposited the Pledged Shares in the China Times Account pursuant to,and apparently in advance of the execution of, the Loan Agreement, the Pledge Agreement,the Promissory Note and the Collateral Agency Agreement.

13.   By Clause 3 of the Collateral Agency Agreement, the Plaintiff has granted to the 2^ndDefendant a security interest in the China Times Account (including the Pledged Shares).

14.   By Clause 3(b) of the Loan Agreement, despite the CollateralAgency Agreement, the Plaintiff shall remain as the beneficial owner of the China Times Account.

15.   The matters set out in paragraphs 8 to 14 above have been admitted by the 2^ndDefendant in its Amended Defence and Counterclaim (“Admissions”).[1]

16.   The Plaintiff disputes the validity of the Loan Agreement, the Pledge Agreement, the Promissory Note and the Collateral Agency Agreement on the ground that the 2^ndDefendant is an unlicensed money lender in contravention of section 7 of the Money Lenders Ordinance (Cap 163) (“MLO”).[2]

17.   By Clause 3(d) of the Loan Agreement, unless an Event of Default[3] (“Event of Default”) has occurred, the 2^ndDefendant shall not “Transfer” any of the Pledged Shares (“No Transfer Clause”).  The term “Transfer” is defined in Clause 1(gg) as “to sell, trade, transfer, assign, convey, or otherwise dispose of title to securities” but excludes “Portfolio Protection Arrangements” (“Portfolio Protection Arrangements”).

18.   Portfolio Protection Arrangements is defined in the Loan Agreement to mean “any arrangements or transactions effectuated to mitigate the risk of loss of principal, assets or securities values, including without limitation effecting a pledge, encumbrances, hypothecation and/or loan of or on securities”.

19.   By Clause 2 of the Promissory Note, the Loan could only be repaid and discharged one year from 26 January 2017, the date of the Promissory Note (“No Prepayment Clause”).

Dealings with the Pledged Shares by the 2^ndDefendant after the loan transaction

20.   On 1 February 2017, the Plaintiff received a funding notice from the 2^nd Defendant, stating that a sum of US$526,108 was to be advanced to the Plaintiff.  After deducting certain interest and charges, the net advance of US$486,650 was transferred to the Plaintiff via the China Times Account on 1 February 2017.

21.   It is the Plaintiff’s case that soon after the execution of the above loan documents on 26 January 2017, in early February 2017, in the absence of an Event of Default and thus in breach of the No Transfer Clause, the 2^nd Defendant wrongfully disposed of all the Pledged Shares, causing the share price of Listco to slump.[4]

22.   The Plaintiff avers that on 1 February 2017, the 2^ndDefendant caused, procured or permitted China Times to transfer all the Pledged Shares from the China Times Account to Standard Chartered Bank (Hong Kong) Ltd (“SCB”, with the transfer being “SCB Transfer”),[5] and that on 6 February 2017, the 2^ndDefendant caused, procured or permitted China Times and/or SCB to transfer all the Pledged Shares to UBS Securities Hong Kong Ltd (“UBS”, with the transfer being “UBS Transfer”).[6]

23.   The 2^ndDefendant admits the SCB Transfer and the UBS Transfer. However, the 2^nd Defendant avers that such transfers were not inbreach of the No Transfer Clause because the 2^ndDefendant is only obliged to return to the Plaintiff equivalent but not identical shares by Clause 3(g) of the Loan Agreement (“Return of Equivalent Shares Clause”), and that at all material times and as at the date of the Amended Defence and Counterclaim, there had been no change in the number of Listco shares standing to the credit of the Plaintiff in the China Times Account.[7]

24.   By seeking a return of “147,280,000 shares in Listco” instead of a return of the “Pledged Shares” in the 2^ndSummons, apparently the Return of Equivalent Shares Clause is not disputed by the Plaintiff.

25.   By an email of 17 February 2017, the Plaintiff, through his former solicitors, sought to repay in full the outstanding principal and interest under the Loan Agreement on 20 February 2017.  By an email of 20 February 2017, the 2^ndDefendant referred the Plaintiff to the No Prepayment Clause and rejected repayment before the first anniversary of the Promissory Note.  As a result of further discussions between the Plaintiff and the 2^ndDefendant, on 21 February 2017, the 2^ndDefendant confirmed that (i) the Plaintiff may make repayment on 26 January 2018 (being the first anniversary of the Promissory Note); and (ii) the amount repayable on that date would be US$526,108.

26.   The Plaintiff further avers that from 8 February 2017 to 8 March 2017, the 2^ndDefendant caused, procured or permitted UBS to sell and/or transfer away all of the Pledged Shares to various third parties unknown to the Plaintiff in breach of the No Transfer Clause.[8]

27.   The 2^ndDefendant, however, avers that it had never caused, procured or permitted UBS to sell and/or transfer away any of the Pledged Shares and that during the period between 8 February 2017 and 8 March 2017, the 2^nd Defendant had only taken steps to effect Portfolio Protection Arrangements in respect of the Pledged Shares permitted under Clause 3(d) of the Loan Agreement.[9]

28.   The 2^ndDefendant therefore denies that it is in breach of the No Transfer Clause.

29.   The 2^ndDefendant avers that on 17 February 2017 (unbeknown to the Plaintiff), the 2^ndDefendant hypothecated and re-pledged the Pledged Shares to one Eden Investments, Ltd (“Eden”, with the transactions being “Eden Transactions”).[10]

30.   The 2^ndDefendant also avers that the Eden Transactions fall squarely within the ambit of Portfolio Protection Arrangements under the Loan Agreement.[11]

The present action and the Injunction Order

31.   On 8 March 2017, the Plaintiff commenced the present action and was granted an interlocutory injunction on the same day by G Lam J restraining disposal of the Pledged Shares.

32.   On 10 March 2017, upon discovery of a subtle difference between the name of the 2^ndDefendant (which does not have a space between “360” and “HK”) and the name of the 1^stDefendant, the action against the 1^stDefendant (a company incorporated in Hong Kong) was discontinued and the 2^ndDefendant (a company incorporated in Belize) was joined in the action.  The injunction order was amended accordingly (the amended order being “Injunction Order”). 

33.   By the Injunction Order, the 2^ndDefendant, whether by itself,or by whomsoever acting for it or otherwise howsoever, “including but not limited to through China Times”, is restrained from selling, trading, transferring, assigning, conveying, or otherwise disposing of any of the Pledged Shares.

34.   On 17 March 2017, the Injunction Order was continued by Au-Yeung J. On 31 March 2017 it was further continued by L Chan J.  The Injunction Order currently remains in force.

35.   On 8 May 2017, the Plaintiff filed its Statement of Claim.  On 30 August 2017, the 2^ndDefendant filed its Defence containing an admission that there had been no Event of Default.

Events leading to issue of the three summonses

36.   On 7 December 2017, when the first anniversary of the Promissory Note drew near, the Plaintiff by letter from his solicitors (“TKT”) to the 2^ndDefendant’s solicitors (“DLA”) offered to repay the sum of US$526,108, by way of a payment into court, for a return of the Pledged Shares to the Plaintiff or to an independent third party as stakeholder pending the resolution of this action.  It appears from the evidence that TKT did not receive any reply to the above letter.

37.   On 25 January 2018 (one day before 26 January 2018, the first anniversary of the Promissory Note), TKT sent DLA for its agreement a draft consent summons (in terms almost identical to the 1^st Summons) together with a copy of a cashier’s order for US$526,108 drawn in favour of the Registrar of the High Court, in order to procure the return of the Pledged Shares to the Plaintiff by consent.  It appears from the evidence that TKT did not receive any reply to this letter either. 

38.   The 2^ndDefendant claims that on 25 January 2018 (unbeknown to the Plaintiff), by letter from Eden to the 2^ndDefendant, Eden declared that three Events of Default had occurred.  Eden asserted that it thereby had full and exclusive control and ownership of the Pledged Shares and directed the 2^ndDefendant to transfer the Pledged Shares to its specified account (“Eden Demand Letter”).[12]

39.   On 25 January 2018, the 2^ndDefendant in turn sent the Plaintiff a letter declaring that three Events of Default had occurred.  The 2^ndDefendant asserted that it thereby became the sole and absolute owner of the Pledged Shares and directed China Times to transfer the Pledged Shares to its specified account (“2^nd Defendant Demand Letter”).[13]

40.   The 2^ndDefendant claims that despite the Eden Demand Letter and the 2^ndDefendant Demand Letter, “there is no transfer, disposal or other movement of the Pledged Shares as yet and they remain in the China Times Account”.[14]

41.   The Plaintiff claims that he did not receive and had no knowledge of the 2^ndDefendant Demand Letter until it was disclosed in theAffidavit of Cheng Ting Lun (of the 2^ndDefendant) dated 14 February 2018.  

42.   On 29 January 2018 (being the next business day after the first anniversary of the Promissory Note), the Plaintiff issued the 1^stSummons.

43.   On 14 February 2018, the 2^ndDefendant in its affirmation in opposition[15] to the 1^stSummons asserted that:

(1)  three Events of Default had occurred; and

(2)  in order to mitigate the potential risk of loss of value of the Pledged Shares, the 2^ndDefendant had effected the Portfolio Protection Arrangements by entering into various transactions in respect of the Pledged Shares with a counterparty (“Counterparty”).

44.   By asserting the occurrence of three Events of Default, the 2^ndDefendant disputed the Plaintiff’s title to the Pledged Shares.  The 1^stSummons was taken out under Order 29, rule 6 of the RHC, and the rule only applies where there is no dispute as to the Plaintiff’s title to the Pledged Shares.

45.   On 8 May 2018, the 2^ndDefendant disclosed the identity of theCounterparty to be Eden[16], and further disclosed that Eden has subsequently assigned its rights to Everton Associates Limited (“Everton”).[17]

46.   On 26 June 2018, the Plaintiff took out the 2^ndSummons basically for the same relief as the 1^stSummons but under Order 29, rule 1 of the RHC.

47.   On 17 July 2018, by the Amendment Summons, the 2^ndDefendant applied to amend its Defence, effectively withdrawing its admission that no Event of Default had occurred. It now asserts that there were three Events of Default.

APPLICABLE PRINCIPLES

48.   The applicable principles upon which an interlocutory mandatory injunction is granted are succinctly set out in the judgment of Ma J (as he then was) in Music Advance Ltd v Incorporated Owners of Argyle Centre Phase I [2010] 2 HKLRD 1041:

“ 12.   … Where, as in the present case, the plaintiffs seek an interlocutory mandatory injunction (that is, an order requiring the defendant to do something, in contrast to a prohibitory injunction which restrains the defendant from doing something),the following matters should be borne in mind as being the Court’s approach:

(a)  In the case of interlocutory mandatory injunctions, it is oftensaid or assumed that a court will not grant one unless it feels a high degree of assurance that at the trial of the action, it will be shown that the injunction was rightly granted: see Shepherd Homes Ltd v Sandham [1971] Ch 340, 351. This has been explained and sometimes understood as meaning that in the case of an interlocutory mandatory injunction, theapplicant’s case on the merits has to be made out to a higher standard of proof than in the case of prohibitory injunction: see the Court of Appeal’s observations in TKI Limited v New Happy Ltd [1995] 1 HKC 551, 554B–D.

(b)  Broad statements such as the above must, however, be properly put in context.

…

(d) At the interlocutory injunction stage, the principal concern of the court is that it might make a wrong decision in the sense that after trial, the party to whom an interlocutory injunctionhas been granted may lose or the party who has been refused one, may win.  The court will therefore take whichever course appears to carry the lower risk of injustice if it should turn out that it is wrong. …

(e)  Two common guidelines are of course the consideration of the merits of the plaintiffs’ claim and the balance of convenience. …

(f)  In the case of interlocutory mandatory injunctions, the risk of injustice (being wrong in the sense referred to above) can be quite acute. …

(g)  … However, I emphasise that this is only generally the court’s approach.  Where it is shown, as an exception to this general approach, that the case is one in which the withholding of [a]n interlocutory mandatory injunction ‘would in fact carry a greater risk of injustice than granting it even though the court does not feel the high degree of assurance’ as aforesaid, it would be right to grant an interlocutory mandatory injunction: see Films Rover International Ltd v Cannon Film Sales Ltd, p.681A–B.

(h)  This of course brings into focus the balance of convenience.  Thus, if a plaintiff in seeking an interlocutory mandatory injunction cannot demonstrate more than a serious question tobe tried, it will have to show that the balance of convenience tilts so much in its favour that justice requires such an injunction to be granted, even taking into account those aspects of an interlocutory mandatory injunction expressed by Hoffmann J in Films Rover International Ltd v Cannon Film Sales Ltd.

(i)  At no stage, however, in the consideration of the matter does the court lose sight of the practical realities of the situation to which the injunction will apply: see NWL Ltd v Woods [1979] 1 WLR 1294, 1306C per Lord Diplock.”

49.   Hence, the two main considerations are the merits of the plaintiff’s claim and the balance of convenience.

50.   The court would not grant an interlocutory mandatory injunction unless it feels a high degree of assurance that the applicant will succeed at trial.  That is the general approach.

51.   However, as an exception to this general approach, where it is shown that the withholding of the injunction would carry a greater risk of injustice than granting it, it would be right to grant the injunction even though the court does not feel the high degree of assurance.

52.   The above principles are not in dispute.

MERITS OF THE PLAINTIFF’S CLAIM

53.   The 2^ndDefendant disputes the Plaintiff’s title to the Pledged Shares on the ground that upon the occurrence of an Event of Default, the 2^ndDefendant has become the sole and absolute owner of the Pledged Shares. 

54.   The 2^ndDefendant relies on three Events of Default[18]:

(1)  Under Clause 6(a)(8) of the Loan Agreement, an Event of Default occurs where the “Trading 60-Day Volume” as of any date is less than 85% of the “Trading 60-Day Volume” as of the date of the Loan Agreement (“1^st EOD”);

(2)  Under Clause 6(a)(15) of the Loan Agreement, an Event of Default occurs where the Plaintiff, without the consent of the 2^ndDefendant, incurs any indebtedness which is secured by any Listco shares, or sells, transfers, pledges, grants a security interest in, hypothecates, lends or otherwise grants any other rights in or to the Pledged Shares or other Listco shares, or enters into any agreement or attempts to effect any of the foregoing (“2^nd EOD”); and

(3)  Under Clause 6(a)(16) of the Loan Agreement, an Event of Default occurs where the Pledged Shares are at any time not freely tradable or otherwise subject to any restrictions whatsoever, including without limitation pursuant to any applicable law, any contract or any equitable remedy (“3^rd EOD”).

55.   Briefly, in relation to the 1^stEOD, “Trading 60-day Volume” refers to the total volume in dollar amount of the Listco shares publicly sold on the Hong Kong Stock Exchange for the preceding 60 trading days. It is an Event of Default if the “Trading 60-day Volume” is not maintained at a particular level.  That level is 85% of the “Trading 60-Day Volume” as of 26 January 2017, which is HK$132,063,822.  Accordingly, if the “Trading 60-day Volume” of the Listco shares as of any given date after 26 January 2017 is less than HK$112,254,248.70, ie 85% of HK$132,063,822[19], there will be an Event of Default.

56.   Presumably, the rationale behind the 1^stEOD is to ensure that the Listco shares has a minimum level of liquidity. 

57.   The 1^stEOD is admitted by the Plaintiff.[20]

58.   However, the Plaintiff submitted that the 2^ndEOD is not supported by evidence.  The 2^ndDefendant merely “believes”[21] that the Plaintiff attempted to borrow a loan from another lender.  There is no indication that such “attempted borrowing” involved the Pledged Shares or Listco shares (so Clause 6(a)(15) is not engaged).  The 2^ndDefendant also provided no particulars of the timing of such attempt or the identity of the intended lender.

59.   I accept that the 2^nd EOD appears not to be supported by evidence.

60.   As to the 3^rdEOD, the 2^ndDefendant contends that the Injunction Order rendered the Pledged Shares not freely tradable and/or subject to restrictions. 

61.   I accept the Plaintiff’s submissions that the 2^ndDefendant’s contention effectively ousts the court’s jurisdiction over the enforcement of the Loan Agreement.  Such contractual provisions are generally void for they are against public policy: R A Buckley, Illegality and Public Policy (4^thedition, 2017), paragraph 8‑02.

62.   However, the 1^stEOD alone is sufficient to entitle the 2^ndDefendant to invoke the contractual right under the following provisionsof the Loan Agreement to contend that the Plaintiff has ceased to have any interest in the Pledged Shares (collectively “Contractual Right upon an Event of Default”):

(1)  Under Clause 6(b)(2), following the occurrence of any event of default, the 2^ndDefendant shall have the right to exercise all rights with respect to the Pledged Shares as if it were the sole and absolute owner thereof;

(2)  Under Clause 6(b)(3), following the occurrence of any event of default, the 2^ndDefendant shall have the right to assign, sell, lease, transfer or otherwise dispose of and deliver any and all of the Pledged Shares without right of redemption of the Plaintiff which is expressly waived;

(3)  Under Clause 6(b)(5), following the occurrence of any event of default, the 2^ndDefendant may transfer title to the Pledged Shares into the name of the 2^ndDefendant and/or effect transfer of title upon sale of all or part of the Pledged Shares;

(4)  Under Clause 6(d), after an event of default, to the extent that the 2^ndDefendant has sold any Pledged Shares, the 2^ndDefendant shall have the right to retain any proceeds received in excess of the amounts due without any obligation to remit any proceeds whatsoever to the Plaintiff; and

(5)  Under Clause 6(g), upon the occurrence of an event of default,the Plaintiff’s right to vote and other consensual rights shall cease upon the 2^ndDefendant giving notice to the Plaintiff, and the Plaintiff's right to receive dividends and interest payments shall automatically cease, such rights being fully vested in the 2^ndDefendant.

63.   The 2^ndDefendant contends that in view of the Contractual Right upon an Event of Default, there is a genuine dispute over the title of the Pledged Shares.

64.   The Plaintiff however submitted that the outcome of this action,and hence the assessment of substantive merits, do not depend on whether there was an Event of Default or the number of such Event(s) of Default.  The real question is, assuming there was an Event of Default, whether the 2^ndDefendant may invoke its power under the contractual regime to take the Pledged Shares as it now seeks to.  The Plaintiff relies on the following three grounds in submitting that the 2nd Defendant may not do so:

(1)  The 2^ndDefendant is a “money lender” within the meaning of the MLO, and since the 2^ndDefendant is not licensed (which is not disputed[22]), the Loan Agreement is unenforceable pursuant to section 23 of the MLO (“MLO Ground”);

(2)  The contractual provisions entitling the 2^ndDefendant to forfeit the Pledged Shares constitute an unlawful clog on the Plaintiff’s equity of redemption, and in any event the 2^ndDefendant’s purported exercise of its rights to forfeit the Pledged Shares is an improper exercise of power of a security holder (“Clog on Equity of Redemption and Improper Purpose Ground”); and

(3)  In any event, the Plaintiff is entitled to relief against forfeitureof the Pledged Shares (“Relief against Forfeiture Ground”).

65.   It is apparently not in dispute, and I accept, that the Plaintiff will succeed at trial if any of the above three grounds is accepted by the court at trial.

66.   I accept the Plaintiff’s submissions that at this interlocutory stage, it is not the function of the Court to try to resolve conflicts of evidence or to decide difficult questions of law.  They are all matters for trial.[23]

MLO Ground

67.   The term “money lender” is defined in section 2 of the MLO to mean “every person whose business (whether or not he carries on any other business) is that of making loans”.

68.   If the 2^nd Defendant is found to be a “money lender”,[24] under section 23 of the MLO, the loan advanced under the Loan Agreement shall be irrecoverable and any security taken (ie the Pledged Shares) shall be unenforceable, subject to the court’s discretion to allow such recovery or enforcement as it considers equitable.

69.   It is common ground that whether the 2^ndDefendant is a “money lender” within the meaning of the MLO is a question of fact.  Each case depends on its own facts and there is no fixed formula for the determination of the issue: Xiao Zhiyong v Asia Equity Value Ltd (unreported, HCSD 46/2016, 14 July 2017), paragraph 31.

70.   The 2^ndDefendant pleaded that it is not a money lender as its ordinary business is not of making loans[25] but the provision of “business consultancy services to customers across various sectors, including providing business solutions to assist customers to turn innovative ideas into profitable investments and developments”.[26]

71.   However, in the Affidavit of Micic Nebojsa, the sole shareholder and director of the 2^ndDefendant, he deposed that “[the 2^ndDefendant] is not carrying on a business of ‘making loans’ as [the 2^ndDefendant] operates primarily as an investment fund for the purposes of acquiring, holding and disposing of securities in markets worldwide”.[27]  Such account is different from the pleaded case of the 2^ndDefendant.

72.   Further, the following matters which apparently are not in dispute do tend to show that the 2^ndDefendant is a “money lender” (they are similar to those matters considered and accepted in Xiao Zhiyong at paragraph 33 as constituting a good arguable case):

(1)  the Plaintiff and the 2^ndDefendant had no pre-existing relationship;

(2)  the loan was substantial with a maximum sum of US$1,600,000; and

(3)  the loan and security documentations are sophisticated.

73.   Even an isolated case of lending may be sufficient to show that the lender is a “money lender”: Xiao Zhiyong, paragraph 31. 

74.   It is not in dispute that the 2^ndDefendant was involved in another loan transaction in the case of Wong Man Hon Frederick v China Times Securities Ltd (unreported, HCA 2715/2016, 15 February 2017).  Hence, the Loan is not an isolated case of lending by the 2^ndDefendant.

75.   The 2^ndDefendant reminded the Court of the proviso to section 23 of the MLO (“Proviso”).  By such Proviso, the court may permit recovery of any loan advanced and enforcement of any security taken by an unlicensed money lender if the court considers equitable.

76.   However, the Plaintiff submitted, and the Court accepts, that neither the Proviso nor any facts in support of the application of the Proviso are pleaded in the Amended Defence and Counterclaim.

77.   Accordingly, I accept that the Plaintiff has shown a strong prima facie case under the MLO Ground.

Clog on Equity of Redemption and Improper Purpose Ground

78.   The 2^ndDefendant submitted that in view of the Contractual Right upon an Event of Default, there is simply no contractual basis for the Plaintiff to seek the return of the 147,280,000 shares in Listco.

79.   The Plaintiff submitted that the Contractual Right upon an Event of Default, insofar as it purports to take away the Plaintiff’s equity of redemption and renders the 2^ndDefendant the sole and absolute owner of the Pledged Shares, is a clog on the Plaintiff’s equity of redemption and is void.

80.   It is well settled that a mortgagor’s equity of redemption cannot be contracted out. 

81.   In Common Luck Investment Ltd v Cheung Kam Chuen (1999) 2 HKCFAR 229, the Court of Final Appeal held (at 235D–F) that: 

“   A right to redeem is an inseparable incident of a mortgage.  It cannot be taken away by an express agreement of the parties.  Although originally at common law the mortgagor forfeited his estate when he defaulted, and it became the absolute property of the mortgagee, from earliest times the courts of equity have intervened and held that until foreclosure by order of the court, or sale by the mortgagee in realising his security, the mortgagor has an equitable right to redeem: By offering to pay the principal,interest and costs he can have his property re-assigned to him.  The mortgagor’s equitable right to redeem is, in the eyes of the law, an equitable estate.”

82.   The Court of Final Appeal endorsed (at 235A–C) the proposition in Noakes v Rice [1902] AC 24 at 28 that:

“ … Any provision inserted [in a mortgage] to prevent redemption on payment on performance of the debt or obligation for which the security was given is what is meant by a clog or fetter on the equity of redemption, and is therefore void.”

83.   Thus, a provision or stipulation in a mortgage which has the effect of clogging or fettering the equity of redemption is void: see Chung Yuen Chu v Cosimo Borrelli [2018] HKCFI 849, HCMP 2093/2017, 24 April 2018, paragraph 22.

84.   Moreover, the equity of redemption remains exercisable even after default and after the mortgagee has possession of the mortgaged assets: Hengshi International Investments Limited v Bayspring International Limited and Another (unreported, HCMP 1916/2015, 18 December 2015), paragraphs 26 and 62.

85.   Further, the Plaintiff submitted that, in any event, the 2^ndDefendant’s exercise of the Contractual Right upon an Event of Default (assuming it is valid) to forfeit the Pledged Shares is for an improper purpose.  

86.   It is well settled that a mortgagee has a limited title which is available only to secure satisfaction of the debt, and the security is enforceable for that purpose and no other. Any act of enforcement of the security for a collateral purpose will be ineffective: see Cukurova FinanceInternational Ltd v Alfa Telecom Turkey Ltd [2013] UKPC 2, paragraph 73. 

87.   It is not in dispute that the 2^ndDefendant knew, back in February 2017, of the Plaintiff’s intention to repay the loan and redeem thePledged Shares on 20 February 2017, and, upon further discussions, on the earliest possible date of 26 January 2018 in view of the No Prepayment Clause.

88.   Briefly, the Plaintiff submitted that since he is ready, willing and able to make repayment, and as the market value of the Pledged Shares (in excess of HK$61 million[28]) far exceeds the amount due under the Loan Agreement (“Amount Due”), the 2^ndDefendant is fully secured and there is no reason for the 2^ndDefendant to resort to the Pledged Shares except for a collateral purpose.

89.   The 2^ndDefendant however submitted that “the proper characterization of the Loan Agreement and the Pledge Agreement is not a security arrangement”.  Put simply, it contends that the Plaintiff’s submissions, which are based on his equity of redemption as a mortgagor, are totally misplaced.

90.   The 2^ndDefendant relied on Clause 3(g) of the Loan Agreement, which provides that the 2^ndDefendant is not obliged to return identical shares but only equivalent shares,[29] in support of its submissions: 

“ Return of Collateral … [the 2^ndDefendant’s] obligation to return the Pledged Shares herein is understood to mean the delivery to [the Plaintiff] of such number of shares of Common Stock as is equal to the total number of Pledged Shares required to be delivered to [the 2^ndDefendant] hereunder.”

91.   In support of its submissions, the 2^ndDefendant then referred the Court to Goode and Gullifer on Legal Problems of Credit and Security (6^th Ed, 2017) at paragraph 3-07, citing Beconwood Securities Pty v ANZ Banking Group [2008] FCA 594; (2008) 246 ALR 361 at paragraphs 50 and 56 – 57, to support the following observation:

“ Such title transfer transactions have a number of features which are not consistent with security …, the redelivery obligation of the buyer or transferee is to deliver ‘equivalent’ securities and not identical securities, so that the transferor has no equity of redemption.”

92.   It appears to the Court that whether a transaction is a title transfer or a security arrangement is very much a matter of construction of the terms of the relevant documents.

93.   Here, the above Clause 3(g) may support the 2^ndDefendant’s contention that there is a title transfer of the Pledged Shares from the Plaintiffto the 2^ndDefendant under the Loan Agreement and the Pledge Agreement. 

94.   However, the Court should not lose sight of the following provisions of the Loan Agreement, which point to the direction that the Pledged Shares are the subject of a security arrangement:

(1)  “ … [the Plaintiff] has agreed to execute and deliver to [the 2^ndDefendant] this Agreement, including without limitation (a) the pledge contained herein to [the 2^nd Defendant] of [the Pledged Shares] owned by [the Plaintiff] to secure the prompt payment, performance, and discharge in full of all of [the Plaintiff’s] Obligations …”  (Recitals);

(2)  “ Whereas, [the 2^ndDefendant] is willing [sic] make the Loan contemplated herein secured by the Collateral [meaning the Pledged Shares] in accordance with the terms hereof” (Recitals);

(3)  “ As collateral security for all of the Obligations, [the Plaintiff] hereby grants, transfers, assigns and conveys to [the 2^ndDefendant] a continuing security interest in, and pledges and grants a chargeon [the Pledged Shares] to secure prompt repayment of any and all Obligations and to secure prompt performance by [the Plaintiff]of each of their respective covenants and duties under the [Promissory Note] and this Agreement …” (Clause 3(a));

(4)  “ … [the Plaintiff] shall remain the beneficial owner of their respective accounts [where the Pledged Shares are kept], provided that following an Event of Default the Lender may sell or otherwise dispose of the securities and assets therein in accordance with the terms herein …”  (Clause 3(b));

(5)  “ … Prior to an occurrence of an Event of Default, [the Plaintiff] shall be entitled to exercise all voting or other such consensual rights and powers appurtenant to the [Pledged Shares] …” (Clause 3(f)); and

(6)  “ … Security Interest.  [The Loan Agreement], together with the Collateral Agency Agreement, creates in favor of [the 2^nd Defendant] a valid first priority security interest in the Pledged Shares …”  (Clause 4(8)).    (emphasis added)

95.   Similarly, the following provisions in the Pledge Agreement points to the creation of a security arrangement:

(1)  “ … (b) ‘Collateral’ means all the [Pledged Shares] which [the Plaintiff] has pledged and/or granted a security interest in to [the 2^ndDefendant] to secure the Plaintiff’s [obligations]…”  (Section 1(b)); and

(2)  “ Grant.  As Collateral for the [obligations], [the Plaintiff] hereby grants, transfers, assigns and conveys to [the 2^ndDefendant] a continuing security interest in and pledge of and charge on the Pledged Shares …”  (Section 2.1).  (emphasis added)

96.   The Admissions also support the Plaintiff’s contention that the Pledged Shares are the subject of a security arrangement.

97.   Moreover, in Beconwood, that the relevant securities lending agreement (“SLA”) was not characterized as a mortgage is not merely because the lender was only obliged to return equivalent but not identical shares.  More importantly, it was because the express terms of the SLA contemplated unencumbered title in the securities and collateral passing on delivery (see paragraphs 25 and 50):

“ [25]  Clause 3.4 provides: ‘Notwithstanding the use of expressions such as ‘borrow’, ‘lend’, ‘Collateral’, ‘Margin’, ‘redeliver’, etc.,which are used to reflect terminology used in the market for transactions of the kind provided for in this Agreement, all right title and interest in and to Securities ‘borrowed’ or ‘lent’ and ‘Collateral’ which one Party transfers to the other in accordance with this Agreement will pass absolutely from one Party to the other free and clear of any liens, claims, charges or encumbrances ….’

…

[50]  In light of the foregoing, the argument that the SLA can be characterised as a mortgage is simply unsustainable.  It breaks down at many points.  First of all, by the express terms of the SLA, unencumbered title in both lent securities and collateral passes on delivery. …”

98.   In view of the above, I accept that the Plaintiff has also shown a strong prima facie case under the Clog on Equity of Redemption and Improper Purpose Ground.

Relief against Forfeiture Ground

99.   As the Court is with the Plaintiff on the earlier two grounds and the 2^ndDefendant does not appear to be entitled to forfeit the Pledged Shares, it is not strictly necessary for the Court to deal with this third ground.

100.   In any event, the Court also accepts that the Plaintiff has shown a strong prima facie case under this ground for the following reasons:

(1)  only the 1^st EOD is established at this stage;

(2)  there is no evidence to show that the 1^stEOD was committed wilfully or deliberately;

(3)  no more default on or after 10 November 2017 is shown in the evidence, so to a large extent the default may be seen as “remedied”, at least at the time when it was first (apparently) declared on 25 January 2018;

(4)  the 2^ndDefendant has not identified any loss caused by the 1^stEOD; and

(5)  there is apparently a huge disparity between the value of the Pledged Shares and the Amount Due.

Conclusion on merits of the Plaintiff’s claim

101.   The Court feels a high degree of assurance that the Plaintiff will succeed at trial.  I say no more than that at this interlocutory stage.

BALANCE OF CONVENIENCE

Risk in granting or refusing to grant an injunction

102.   The balance of convenience test is in reality a balance of the risk of doing an injustice in case the court has made a wrong decision in granting or refusing to grant an injunction: see Wu Wei v Liu Yi Ping (unreported, HCA 1452/2004, 30 January 2009), paragraph 80.

103.   The question is whether the Court should take the risk of ordering a return of the Pledged Shares to the Plaintiff at this interlocutory stage.  The risk is that the Plaintiff may not be able to return 147,280,000 shares in Listco to the 2^ndDefendant (or Eden or Everton) if it is subsequently ruled at trial that an Event of Default under the Loan Agreement had occurred and the 2^ndDefendant (or Eden or Everton) is entitled to exercise its rights as sole and absolute owner of the Pledged Shares as a result thereof.

104.   On the other hand, in case the Court refuses to grant the Return Injunction (or the Fallback Injunction), it is not entirely certain if the 2^ndDefendant may be able to return 147,280,000 shares in Listco to the Plaintiff should the Plaintiff subsequently succeed at trial. 

105.   The following matters are relevant in considering the test.

Necessity

106.   The 2^nd Defendant submitted that the Plaintiff’s position has already been secured by the Injunction Order, and that the Return Injunction (or the Fallback Injunction) is unnecessary and futile.[30]

107.   The following matters tend to show that the Return Injunction (or the Fallback Injunction) is unnecessary and futile:

(1)  As set out in paragraph 33 above, by the Injunction Order, the 2^nd Defendant, whether by itself, or by whomsoever acting for it or otherwise howsoever, “including but not limited to through China Times”, has already been restrained from selling, trading, transferring, assigning, conveying, or otherwise disposing of any of the Pledged Shares;

(2)  The Injunction Order was served on China Times; [31]

(3)  The monthly statements issued by China Times to the Plaintiff have all along confirmed that the Pledged Shares remain in the China Times Account.[32]  In Wong Man Hon Frederick, it was held at paragraph 33 thereof that such monthly statements are credible evidence to prove that the shares are held by a collateral agent;

(4)  By Clause 7.1 of the client agreement between China Times andthe Plaintiff dated 25 January 2017 (“Client Agreement”),[33] China Times is entitled to deposit the Pledged Shares in safe custody in a designated account with any authorized financial institution or custodian recognized by the Securities and Futures Commission (“SFC”) or any intermediary holding a securities dealing licence issued by the SFC;

(5)  In view of the above Clause 7.1, transfer out of the Pledged Shares from China Times to another third party may not necessarily mean that the Pledged Shares have been sold by China Times.  It may simply mean that the Pledged Shares are now placed in the safe custody of sub-custodian(s) of China Times as permitted by Clause 7.1;

(6)  China Times is a securities brokerage firm holding a Type 1 licence issued by the SFC, carrying on in Hong Kong the business of securities dealing as regulated under the Securitiesand Futures Ordinance (Cap 571).[34]  It is unlikely and there isno evidence to suggest that China Times is in collusion with the 2^ndDefendant in misrepresenting the position to the Plaintiff;

(7)  For the purpose of complying with a disclosure order made by L Chan J dated 31 March 2017, the sole shareholder and director of the 2^ndDefendant, Micic Nebojsa, confirmed by affidavit on 8 May 2018[35] that “other than the Eden Transactions, [the 2^ndDefendant] has not carried out any sale,trade, transfer, assignment, conveyance or disposal otherwise of the Pledged Shares into and/or out of the [China Times Account] from 25^thJanuary 2017 up to the date [of that affidavit]”, and that the Eden Transactions fall squarely within the ambit of Portfolio Protection Arrangements; and

(8)  Damages apparently would be an adequate remedy since the Pledged Shares are shares of Listco which are capable of being acquired in the open market.

108.   On the other hand, the following matters tend to show that the Return Injunction (or the Fallback Injunction) is necessary and not futile:

(1)  China Times is not an independent collateral agent.  It is the agent of the 2^ndDefendant under the Collateral Agency Agreement;

(2)  The monthly statements issued by China Times to the Plaintiff are self-serving.  Wong Man Hon may be distinguished since in that case the monthly statements issued by the collateral agent (also happened to be China Times) were corroborated by statements from another independent custodian, Beaufort Securities Limited (“Beaufort”),[36] which had a custodian arrangement with China Times.  The statements from Beaufort showed that the relevant shares were indeed held by Beaufort for the account of China Times.  There is no such corroboration in the present case;

(3)  Despite the Injunction Order, Eden has still asserted full and exclusive control and ownership of the Pledged Shares and directed the 2^ndDefendant to transfer the Pledged Shares to its specified account by the Eden Demand Letter.  It is also unclear if such assertion sits well with the Portfolio Protection Arrangements;

(4)  Despite the Injunction Order, the 2^ndDefendant has still asserted full and exclusive control and ownership of the Pledged Shares and directed China Times to transfer the Pledged Shares to its specified account by the 2^ndDefendant Demand Letter.  It is again unclear if such assertion sits well with the Portfolio Protection Arrangements;

(5)  On the 2^ndDefendant’s case, Everton has become the ultimate sole and absolute owner of the Pledged Shares since 20 February 2018.  Presumably, Everton is also seeking to take the Pledged Shares;

(6)  TKT wrote to China Times on 13 June 2018 seeking information as to the whereabouts of the Pledged Shares, and China Times’ solicitors gave a holding reply on 19 June 2018 stating that a substantive reply would be available within 7 days.  However, none has been forthcoming up to the date of the hearing on 27 July 2018.  In other words, China Times has taken more than a month and is still unable to provide the particulars of the whereabouts of the Pledged Shares; and

(7)  The 2^ndDefendant was incorporated in Belize and its sole shareholder and director is an individual residing in Serbia.  They have no real connections to Hong Kong.  It is therefore questionable whether the 2^ndDefendant is in a financial position to pay damages to the Plaintiff.  Damages may prove to be an illusory remedy if there is any doubt about the 2^ndDefendant’s ability to pay.[37]

109.   I accept the Plaintiff’s submissions that the failure of China Times to reply (“Failure to Reply”) is surprising and indeed alarming.  It probably only requires a simple search through its records to retrieve the information to reply to TKT.

110.   The current legal proceedings should not be a cause of the Failure to Reply.  First, China Times is not a party to the current legal proceedings.  Second, the Plaintiff has not threatened to sue China Times.  Third, it is not a reason given by China Times to explain the Failure to Reply in any event.  On the evidence, there is apparently no good reason for the Failure to Reply. 

111.   On the evidence,[38] the 2^ndDefendant has a good working relationship with China Times through its executive director Mr Frank Yu. The 2^ndDefendant should be able to seek assistance from Mr Yu to deal with matters arising out of the Collateral Agency Agreement.  It is natural that the 2^nd Defendant would be interested in urging China Times to reply to thePlaintiff to clear the suspicion on the whereabouts of the Pledged Shares inorder to resist the 2^ndSummons.  Nonetheless, the Failure to Reply persists.  

112.   On balance, the Plaintiff’s loss of confidence in China Times is well-founded.  The risk of a transfer or disposal of the Pledged Shares by China Times despite the Injunction Order is not fanciful but real.  There is a necessity to change the collateral agent from China Times to another appropriate entity.

Whether damages would be an adequate remedy

113.   In the present case, the Listco shares are liquid assets that may easily be bought in the market.  At first glance, damages would therefore be an adequate remedy.

114.   However, the Plaintiff’s pleaded claim against the 2^ndDefendant is non-monetary and is for the return of the Pledged Shares. 

115.   Moreover, one should not lose sight of the fact that the Listco shares are not blue-chip stocks.  They are second or third-liners. 

116.   As shown in the evidence,[39] which is apparently not in dispute,the market price of the Listco shares is very volatile and their trading volume may sometimes be rather thin.

117.   As mentioned above,[40] it is an Event of Default if the “Trading60-day Volume” is not maintained at a particular level.  The obvious reasonis that there is a close relationship between the trading volume and the market price of the Listco shares.

118.   I therefore accept the Plaintiff’s submission that the acquisition from the open market of 147,280,000 shares in Listco (apparently about 3.68%[41] of the issued share capital of Listco) will inevitably result in a significant boost in the market price of the Listco shares.

119.   I also accept the Plaintiff’s submission that it is accordingly difficult to determine the cost of acquiring 147,280,000 shares in Listco, and quantify damages,[42] if the 2^ndDefendant or China Times is unable to return the Pledged Shares.  Such submission is also well supported by authorities: see Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349 at 380C.  See also Spry, The Principles of Equitable Remedies (9^thed), pp 66 – 67 and footnote 21 in the context of specific performance.

120.   Paradoxically, the Plaintiff’s above submissions cut both ways. On the one hand, they support a change in the collateral agent from China Times to another appropriate entity.  On the other, they are against the Plaintiff’s primary position of having 147,280,000 shares in Listco returnedto the Plaintiff.  The reason is that it would equally be difficult to determinethe cost of acquiring the relevant shares and quantify damages if the Plaintiff is unable to return them in case the 2^nd Defendant subsequently succeeds at trial.  Indeed, this scenario is also relevant in the discussions below.

121.   In short, damages is probably not an adequate remedy.

Difficulty in complying with the Return Injunction (or the Fallback Injunction)

122.   It is also not difficult or expensive to comply with the Return Injunction (or the Fallback Injunction).[43]

The Fallback Injunction?

123.   Thus, the Return Injunction (or the Fallback Injunction) is necessary and is not futile.  It is also not difficult or expensive to comply with. 

124.   The next issue is whether the Return Injunction, or the Fallback Injunction, is more appropriate.

125.   Apparently third party interests are now involved.  It is the 2^ndDefendant’s case[44] that by virtue of the Eden Transactions, upon the occurrence of an Event of Default, the 2^ndDefendant is under an obligationto transfer the Pledged Shares to Eden.  Further, the 2^ndDefendant asserted[45] that Eden had assigned all its rights to Everton on 20 February 2018 and therefore an extra dimension of third party interests is now involved.  The 2^ndDefendant submitted that it would be unable to perform its obligations to transfer 147,280,000 shares in Listco to Everton in the event of a disposal of the same by the Plaintiff.

126.   In addition, the Court has to take into account the financial strength of the Plaintiff.

127.   Although the Plaintiff is a Hong Kong resident, there is no evidence on his financial standing apart from the fact that he is the registered shareholder of the Pledged Shares.  Given the volatility in the price of such shares, the Plaintiff’s financial capability would be a cause of concern.

128.   Moreover, as concluded in paragraph 121 above, damages is probably not an adequate remedy in any event.

129.   In the premises, the Fallback Injunction is more appropriate than the Return Injunction. 

130.   First, it preserves third party interests better than the Return Injunction as it provides an assurance that 147,280,000 shares in Listco will certainly and immediatelybe available to whoever that succeeds at trial.  It is beneficial to anyone who wishes to claim title to the Pledged Shares.  Second, unlike the Return Injunction, the Fallback Injunction is virtually risk-free.  The financial capability of the Plaintiff would therefore no longer be a cause of concern. It does not matter that damages is probably not an adequate remedy. Of course, the Fallback Injunction also would not pre-empt the trial as in essence it simply allows the preservation of the status quo by an independent collateral agent. 

131.   The Fallback Injunction carries a lower risk of injustice than the other two options, namely, the Return Injunction and the option of refusing to grant an injunction.

DISPOSITION OF THE 2^ND SUMMONS AND THE AMENDMENT SUMMONS

132.   For the foregoing reasons, I make the following orders in respect of the 2^ndSummons:

(1)   Upon the Plaintiff paying into Court the sum of US$526,108 as security for the Plaintiff’s potential outstanding indebtedness towards the 2^ndDefendant (if any) under the Loan Agreement,the 2^ndDefendant shall forthwith transfer or cause to be transferred, or otherwise vest, 147,280,000 shares in Listco in favour of an independent collateral agent jointly instructed by the Plaintiff and the 2^nd Defendant, in the place of China Times; and

(2)   Order in terms of paragraphs 2, 3 and 4 of the 2^ndSummons.

133.   I also make an order nisi that the costs of the 2^ndSummons be the Plaintiff’s costs in the cause, to be taxed if not agreed, with certificate for two Counsel.

COSTS OF THE 1^ST SUMMONS AND ITS DISPOSITION

134.   At the time when the 1^stSummons was taken out on 29 January 2018, the 2^nd Defendant specifically admitted in its Defence that no Event of Default had occurred.  On such pleaded case, there was at that stage no dispute as to the Plaintiff’s title to the Pledged Shares.

135.   On the one hand, there was evidence to suggest that the Plaintiff should have notice of the occurrence of an Event of Default as early as 25 January 2018 and therefore should not have taken out the 1^stSummons. On the other hand, the 2^ndDefendant did not take steps to amend its Defence until the Amendment Summons of 17 July 2018.

136.   On balance, I consider the fair order is that there be no order as to costs in respect of the 1^stSummons. Save as aforesaid, no order is made on the 1^stSummons.

137.   Lastly, it remains for me to thank Counsel for their able and helpful assistance rendered to the Court.