KALE ASSETS LTD v. RICHINA PACIFIC LTD

HCA 2048/2014 and
HCA 2049/2014
(Heard Together)

[2020] HKCFI 599

HCA 2048/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2048 OF 2014

____________

BETWEEN

____________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2049 OF 2014

____________

BETWEEN

____________

(Heard Together)

________________________

DECISION

________________________

1.  The plaintiff in these two actions claims as the assignee of the rights and interest under the two master agreements. By the master agreements, the assignors, which are of the same group as the plaintiff, respectively engaged and provided funds to the defendant to acquire, hold and sell the shares of certain target companies in the Mainland through the defendant’s Mainland affiliates. The plaintiff applies for summary judgment in respect of what it claims to be incontrovertible parts of its claims in these actions.

Background

2.  The defendant is incorporated in Bermuda.  Its group (“Richina Group”) has a number of affiliated companies in Mainland China.  Involved in the relevant transactions are Richina Pacific (China) Investment Ltd (“CHC”), a wholly owned subsidiary of the defendant, as well as Shanghai Richina Credit Guaranty Ltd (“Shanghai Richina”), Shanghai Leather Shoe Factory (“SLSF”) and Shanghai Hongguang Tannery Factory (“SHTF”).

3.  The counterpart of Richina Group in the relevant transactions is Pacific Alliance Group (“PA Group”).  Entering into the two relevant master agreements with the defendant were respectively PA No 5 Limited (“PA5”) and Pacific Alliance Asia Opportunity Fund Ltd (“PAAOFL”) of the PA Group.  Also involved are PA Group’s two affiliated companies in the Mainland, Pacific Guarantee (Hangzhou) Co Ltd (“PGHZ”) and Pacific Guarantee (Shanghai) Co Ltd (“PGSH”).

4.  The PA Group identified as primary targets of acquisition the shares of Bank of Communications Joint Stock Ltd (“BOCOM”) and Ping An Insurance (Group) Company (“Ping An”), in anticipation of such shares being listed on the Shanghai Stock Exchange.  The two groups started to discuss possible co-operation in 2006, which eventually led the devising of the investment structure documented by the master agreements and the incidental trust agreements.

5.  By the master agreement dated 17 May 2007, PA5 as the principal agreed to provide funds to the defendant as the paying agent to acquire for PA5 15,000,000 legal person shares of BOCOM[1] (“the BOCOM Master Agreement”).  The responsible onshore affiliate of the defendant is SLSF.

6.  By the master agreement dated 22 January 2007, PAAOFL as the principal agreed to provide funds to the defendant as the paying agent to acquire 2,032,025 legal person shares of Ping An[2] (“the Ping An Master Agreement”).  The responsible onshore affiliate of the defendant is SHTF.

7.  Pursuant to the master agreements, the onshore affiliates of the defendant, SLSF and SHFT, respectively entered into a trust agreement with the principals’ onshore affiliate, PGHZ, in respect of the management and sale of the target shares acquired.

8.  Pursuant to the BOCOM Master Agreement, PA5 has paid and the defendant has received US$18,000,000 (converted to RMB138,187,133).  Of that sum, RMB95,945,000 was applied to acquire the BOCOM shares, leaving a surplus of RMB42,242,133 (“the BOCOM Surplus”).

9.  Pursuant to the Ping An Master Agreement, PAAOFL has paid and the defendant has received US$23,220,000 (converted to RMB175,496,133).  Of that sum, RMB81,864,000 was applied to acquire the Ping An shares, leaving a surplus of RMB93,632,133 (“the Ping An Surplus”).

10.  In 2008, the BOCOM shares were sold, giving rise to net sale proceeds in the sum of RMB126,788,904.19[3] (“the BOCOM Proceeds”).  The Ping An shares were sold, giving rise to net sale proceeds in the sum of RMB113,373,841.29[4] (“the Ping An Proceeds”).

11.  By deeds of assignment dated 14 November 2013, the rights and interests under the BOCOM Master Agreement and the Ping An Master Agreement[5] respectively were assigned to the plaintiff.

12.  The plaintiff demanded the defendant for the payment of the surplus and net sale proceeds.  Seeing that its written demand dated 13 December 2013 and 13 August 2014 were not met, the plaintiff commenced the present action in October 2014.

13.  Pleadings were closed in May 2015.  The summonses for summary judgment in these actions were filed on 12 February 2018.

The pleaded case

14.  The plaintiff has pleaded various causes of action.  For the purpose of the present application, the plaintiff relies on the contractual claim only[6].  Essentially, it contends that the defendant is obliged by the master agreements to pay to it the surplus and the net sale proceeds.

15.  In defence of the contractual claim, the defendant raises the following issues:

(1) The defendant did not receive the notice of assignment.  In any event, the assignments are void and unenforceable.

(2) The defendant never retains the surplus or net sale proceeds.

(3) The defendant has procured its affiliates to pay to the principals’ affiliates a total sum of RMB340,138,000 (“the RMB340m Remittances”) as the net sale proceeds at the instruction of the principals in performance of the master agreements.

(4) The claim for the payment in RMB onshore is time barred.

(5) The defendant has a counterclaim.  It serves as set-off against the claim or alternatively as a lien in respect of the amount payable by the plaintiff against the amount payable by the defendant.

16.  When the defendant came to file its affirmation in opposition of the present applications, its defence has somehow evolved, if not transformed, from its pleaded case.  A major argument has come about in respect of whether the obligation of the defendant to pay the surplus and net sale proceeds to the plaintiff, if any, has arisen pursuant to the terms of the master agreements in the circumstances.

The quantum

17.  A few things to note about the quantum.

18.  First, in HCA 2048/2014, the total pleaded amount of claim is RMB167,947,231.10. When it came to the application for summary judgment, the plaintiff adjusted the alleged amount of the BOCOM Proceeds to RMB126,788,904.19, and thus the total amount claimed to RMB169,031,037.10.

19.  In HCA 2049/2014, the total pleaded amount of claim is RMB204,005,974.  When it came to the application for summary judgment, the plaintiff adjusted the amount of the Ping An Proceeds to RMB113,373,841.29, and thus the total amount claimed to RMB207,005,974.20.

20.  Notwithstanding the upward adjustments of the quantum, the statements of claim have yet to be amended.

21.  Second, the plaintiff acknowledges that the nature of the RMB340m Remittances is in dispute.  Therefore, the plaintiff is seeking summary judgment of its claims net of such sum.  Hence part judgment.  In other words, in HCA 2048/2014, the plaintiff seeks summary judgment in the sum of RMB(169,031,037.10 – 160,000,000) = RMB9,031,037.10; and in HCA 2049/2014, the plaintiff seeks summary judgment in the sum of RMB(207,005,974.20 – 180,138,000) = RMB26,867,974.29.

22.  Third, the defendant claims by way of counterclaim, amongst other things, a sum of US$90,000 additional fees allegedly payable by the plaintiff.  The plaintiff contends that of that sum, an amount of US$70,564 has already been settled. Whilst its liability to pay the balance in the sum of US$19,436 remains disputed, the plaintiff offers to give credit to such sum in the amount of the summary judgment sought in HCA 2048/2014.

The principle

23.  While it is the burden of the plaintiff to establish its entitlement to judgment, it is the defendant’s burden to put forward a credible defence by condescending upon particulars.  The defendant’s burden is discharged if its defence raises triable issues or the dispute ought to go to trial for some other reason: O14, r3 of the Rules of the High Court.  Both Mr Man SC (appearing with Mr Lam) for the plaintiff and Mr Maurellet SC (appearing with Mr Yu) for the defendant have cited authorities on the basic principles, which I believe are trite.

24.  However, Mr Maurellet also raises a couple of points, which I would address as preliminary points of principle.  First, he argues that it makes no case management sense to entertain the plaintiff’s applications for summary judgment for a relatively small part of the claims, when the plaintiff accepts that the dispute as to the bulk part of the claims should go to trial.  He also highlights the risk of inconsistent judgments in these applications and the eventual trial.

25.  It is important to understand the correct emphasis.  The emphasis does not lie in the amount or extent of the summary judgment sought as compared to the entire claim.  Where the claims are monetary, and there is no defence to a quantified part of the claim, summary judgment to such extent should not be refused merely on the ground that it is small relative to the remainder of the claim that will proceed to trial.  In appropriate circumstances, such as where there is a valid counterclaim, it may be suggested that the execution of the part judgment so entered should be stayed pending the determination of the counterclaim.  But that is another question.  Likewise, if there is no defence to part of the claim, the question of inconsistency between the part judgment and the judgment after trial of the remainder of the claim should not arise.  In both actions, the part judgment being sought, albeit small relative to the entire claim, is not a negligible sum by itself.

26.  The correct emphasis is that one does not conclude that there is no defence to part of the claim, if such defence is part of, or inseparable from, the defence in respect of the remainder of the claim that should go to trial.  That, as I read, was the real reason why the court refused the applications for summary judgment in SBE Licensing v Hyde Lyndhurst, HCA 1358/2011 (10 August 2012) and perhaps more clearly in Skillsoft Asia Pacific v Ambow Education [2016] 1 HKLRD 1052, cited by Mr Maurellet.  To be fair, Mr Maurellet does not actually argue otherwise[7].

27.  Second, Mr Maurellet argues that the plaintiff cannot be heard to urge for a prompt part judgment, in view of its own delay in taking out the present applications.  These applications were taken out almost 3 years after the defence has been filed.

28.  In my view, where there is clearly no bona fide or credible defence, the plaintiff should not be denied summary judgment on the mere ground of delay.  It is really when the situation is not that clear, and with unexplained substantial delay in making the application, that the court would view the plaintiff’s case for summary judgment with circumspection.  That was what happened in the cases of Resona Bank Ltd v Lam Sie & Ors [2004] 4 HKC 601 and Bold Shine Investment Limited v Tsui Yee Kwan, HCA 1867/1999 (16 April 2013) cited by Mr Maurellet.  Properly understood in their context, these cases do not stand as authorities for the proposition that delay per se suffice as ground for refusing summary judgment, regardless of the merits of the defence.

29.  Therefore, it still boils down to the question of whether the defendant has a credible defence to the part of the plaintiff’s claims in these applications.  Much of the dispute turns on the construction of the terms of the agreements in connection with the investment structure.

The master agreements

30.  The two master agreements contain essentially the same terms.  BOCOM and Ping An are defined in the master agreements as “the target” and their shares to be acquired are “the target shares”.  PA5 and PAAOFL are “the principals” and the defendant “the paying agent”.  SLSF and SHTF are the defendant’s “onshore affiliates”. The amount paid by the principals and received by the defendant pursuant to the master agreements is “the deposit”.

31.  Pursuant to clause 2.1, the defendant agreed to the appointment as the paying agent and to undertake and perform the duties and obligations on behalf of the principal in accordance with the terms set out therein, specifically:

“(a) to receive the Deposit subject to satisfaction of all conditions set forth herein;

…

(c) subject to satisfaction of the conditions precedent set out herein, to ensure the Onshore Affiliate acquires beneficial or legal title to the Target Shares from the Seller;

(d) … to ensure that the Onshore Affiliate enters into the Trust Agreement …

…

(f) to ensure the Onshore Affiliate holds its interest in the Target Shares in trust in accordance with the Trust Agreement and the instructions of … the protector, and in accordance with published PRC laws and regulations;

…

(h) upon receipt of instructions from the Principal, to procure the sale of the Target Shares upon and in accordance with the terms and conditions set forth by the Principal and published PRC laws and regulations; and

(i) upon the sale of the Target Shares at the sale price instructed by the Principal, to pay all net proceeds from the sale of Target Shares in US Dollars by payment to the Principal’s Designated Account in accordance with Clause 4.2 below.”

32.  Clause 2.2 provides that the defendant shall have the right to delegate the performance of its obligations and the activities described above to the onshore affiliate:

“…provided the [defendant] shall at all times remain liable for the performance of such obligations and activities to the Principal.”

33.  Clause 3.1 provides:

“Upon and subject to the terms and conditions of this Agreement, the Principal agrees to deliver to the Paying Agent, and the Paying Agent agrees to accept from the Principal the aggregate amount of [the Deposit], which is to be applied to purchase the target Shares by the Onshore Affiliate from the Seller in accordance with this Agreement, and any surplus amount is to be held pending the receipt of further instructions from the Principal. The term of the Deposit, or such lesser amount invested, as instructed by the Principal, shall commence on the date of this Agreement and shall expire on the date the Principal receives all net proceeds from the sale of the Target Shares at the price instructed by the Principal, and paid to the Principal’s Designated Account in accordance with Clause 4.2 below…”

34.  The BOCOM Master Agreement recorded that the defendant acknowledged receipt of RMB138,187,133 (equivalent to US$18,000,000) on 22 January 2007[8].  In other words, the defendant received the payment contemplated under the agreement before the parties entered into the agreement.  In the case of the Ping An Master Agreement, the sum of RMB175,496,133 (equivalent to US$23,220,000) was paid on 10 August 2007.

35.  Clause 4.1 set out the steps that the defendant shall procure to be performed strictly in accordance with the principal’s written instructions:

“…provided that the written instructions given by the Principal are in accordance with the laws of PRC or the regulations of or conditions imposed by any governmental, semi or quasi governmental authorities or statutory departments, agencies or bodies of PRC Government…”

Those steps include clause 4.1(j):

“the remittance of the net proceeds of any sale or transfer of the Target Shares to the Principal, or as it may direct, in accordance with Clause 4.2 of this Agreement…”

36.  Clause 4.2 provides:

“In the event of any sale of any or all of the Target Shares as instructed in writing by the Principal, the [defendant] shall pay (i) the RMB sale proceeds of such sale to or for the account of the Principal in the PRC within seven (7) days of receipt, or (ii) the converted US Dollar proceeds of such sale to or for the account of the Principal outside the PRC within fifteen (15) days of receiving approval from the relevant PRC authorities (each, the “Principal’s Designated Account”), in an amount equal to the aggregate of the following with respect to the portion of the Target Shares sold (less all costs and expenses reasonably and properly incurred by the [defendant] and/or the Onshore Affiliate): (i) all net proceeds of the sale for the Target Shares sold in accordance with the sale price instructed by the Principal; and (ii) all dividends, interest and other distributions paid or declared with respect to the Target Shares during the period the Target Shares were held in trust, less all taxes and fees…The [defendant] acknowledges that the failure to pay any amount pursuant to this Clause 4.2 shall constitute a breach of this Agreement.”

37.  Clause 6 provides for the fee payable to the defendant, namely 1.5% of the deposit payable upon the defendant’s receipt of the deposit.  In the event that the onshore affiliate shall still be required to hold the target shares or any part thereof after the first anniversary of receipt of the deposit, the principal would pay to the defendant an additional fee of 0.5% of the deposit for every period of 6 months.  Such additional fee shall be paid until the onshore affiliate ceases to be the owner of the target shares.

38.  Clause 11.1 provides that the master agreements are governed by Hong Kong law.

The trust agreements

39.  Pursuant to clause 2.1(d) of the master agreements, the defendant caused the onshore affiliates, SLSF and SHTF, to enter into the trust agreements on the same dates as their respective master agreements.  The trusts were established for the purpose of holding and managing the trust property.  SLSF and SHTF became the trustees over the BOCOM shares and the Ping An shares respectively. The beneficiary, defined as the “discretionary beneficiary”, will basically be a director or member of the principal.  The principal under the master agreement was defined as the “protector” under the trust agreement.

40.  Article II of the trust agreements explains:

“The Principal shall establish the Trust by the payment of the Initial Sum to the [onshore affiliate] to be held on trust for the Discretionary Beneficiaries. The [onshore affiliate] shall hold the Trust Property on trust for the Discretionary Beneficiaries upon the terms and conditions set out in this Agreement…and shall manage, operate or dispose of such Trust Property in accordance with the terms of this Agreement and written instructions of the Principal.”

41.  Article IV of the trust agreements provides that the principal shall have the power to declare who or which entity shall be the discretionary beneficiary.  The defendant’s onshore affiliate may also do so with the previous consent of the principal.

42.  Article V of the trust agreements defines trust property to include:

(1) The initial sum paid by the principal;

(2) Any interest in or derived from the target shares held by the defendant’s onshore affiliates in trust; and

(3) All money investment or other property placed under the control of and accepted by the onshore affiliate of the defendant as additions to the trust property, including the proceeds of sale of any of the target shares.

43.  Article XI of the trust agreements defines the rights and obligations of the defendant’s onshore affiliate as the trustee:

(1) The onshore affiliate has the right to manage and operate the trust property according to the terms of the trust agreement and the instructions from the principal.  At the same time, it shall handle the trust affairs in the best interest of the discretionary beneficiaries according to the trust agreement, the instruction of the principal and the principles of honesty, good faith, care and efficiency.

(2) The onshore affiliate shall distribute the trust property according to the trust agreement.

(3) In the event of loss incurred by the onshore affiliate in performing the instruction of the principal under the trust, it may deduct the same from the trust property with the consent of the principal, except where the loss is due to the omission or fault of the onshore affiliate.

(4) The onshore affiliate shall have other rights and obligations specified in relevant laws, administrative rules and regulations.

44.  The trust agreements are governed by the PRC law.

45.  I now turn to the issues raised and argued by the parties.

The assignments to the plaintiff

46.  The defendant denies having received any valid notice of the assignments.  In any event, the assignments are said to be void and unenforceable for being champertuous or contrary to public interest.

47.  The written notices of assignment signed by the parties to the assignments were dated 27 November 2013.  The plaintiff acknowledged that notices have failed to reach the defendant at its address as per the master agreements by fax and by courier.  However, the plaintiff has sent the same by attachment to its email to Richard Yan (“Yan”) of the defendant dated 6 December 2013.

48.  Yan is the chief executive officer and the managing director of the defendant, who was personally involved since the conception of the investment structure in question with the PA Group.  He also made the affirmations on behalf of the defendant in the present applications.

49.  Whether or not there was in the circumstances valid notice of assignment is arguable.

50.  As to the validity of the assignments, the principles summarized by Mr Man are not disputed by Mr Maurellet.  It is against public policy to allow the perversion of justice or the trafficking or gambling in the outcome of a litigation by a stranger, who has no commercial interest in the outcome of the litigation: see Trendex Trading Corp v Credit Suisse [1982] AC 679 at 703A-D; Unruh v Seeberger (2007) 10 HKCFAR 31 at §§100-101.

51.  Mr Man submits that the assignments in the present case were between companies of the same group.  They were not those of a bare right to litigate but those of the contractual right to the payments, ie, a debt, from the defendant under the master agreements.  Further, the rights and interests in under the master agreements were assigned to the plaintiff for value.  Whilst the enforcement of the right may, as it now does, entail litigation, maintenance and champerty is never the object.  Such assignments are therefore valid and, so long as they comply with the formalities set out in section 9 of the Law Amendment and Reform (Consolidation) Ordinance, Cap 23, effective.

52.  Considering the evidence, I tend to agree with Mr Man for the present purpose.  At the hearing, Mr Maurellet did not labour on this issue in his submission.

Surplus and net sale proceeds never retained by the defendant

53.  By the master agreements, the defendant expressly acknowledged receipt of the deposits. However, the defendant alleges that it was contemplated by the contracting parties from the outset (and as a matter of implied term of the master agreements) that the deposits would be, and were indeed, brought onshore in RMB to the defendant’s onshore affiliates to enable them to acquire the target shares in performance of the master agreements.  Therefore, the defendant did not hold any part of the deposits or the surplus.  Likewise, when the target shares were sold in 2008, the net sale proceeds were held by the onshore affiliates of the defendant as the trustees pursuant to the trust agreements. No part of the proceeds was or is held by the defendant.

54.  There is evidence that the deposits were brought onshore Mainland and converted into RMB by way of increase of capital of Richina CHC and then to the onshore affiliates of the defendant, and in the case of part of the Deposit under the Ping An Master Agreement, also in the form of trading income paid to the onshore affiliate.  Yan referred to the pre-contractual meetings and communication with Horst Geicke (“Geicke”), Chairman of the PA Group, prior to the remittance of the Deposits onshore, and stated that Geicke knew and consented to such treatment of the deposits.  However, Geicke denied that in his affidavit.

55.  The dispute mentioned in the preceding paragraph is factual.  However, in the case of the 2048 Master Agreement, the deposit was paid and brought onshore by way of increase in capital of Richina CHC in January 2007 even before the two groups caused the agreement to be signed.  One may query whether it is likely that PA5 would enter into the agreement with either no idea or no approval about such treatment of the deposit that PA5 has parted with.  Further, the correspondence since 2008 shows that the two groups were engaged in serious discussion of precisely the logistics of extraction of the surplus and net sale proceeds payable by the defendant from the Mainland.  Had the PA Group been kept in the dark about the defendant’s treatment of the deposits, which partly accounted for the need for such discussion, one would have expected PA Group to have reacted in surprise. The correspondence gives one no such impression.  The correspondence will be discussed further below.

56.  For the present purpose, whether or not as a matter of implied term of the master agreements, the defendant’s case in respect of whether such treatment of the deposit by the Richina Group was known and agreed to by the PA Group is at least credible.  The plaintiff’s contention that such treatment of the deposit as alleged by the defendant was not required by the terms of the master agreements but entirely a matter of the defendant’s own choice, in my view, is not a complete answer.

57.  That said, Mr Man also argues that notwithstanding such treatment of the deposit, even with the knowledge of the principals, that was delegation of the performance of the master agreements to its onshore affiliates, which was allowed.  Such delegation of performance would not absolve the defendant from their contractual liability.  In view of clause 2.2 of the master agreements, there is force in this argument.  However, the fact that the deposits, and subsequently the proceeds of sale of the target shares, are held by the defendant’s onshore affiliates created the very situation in which the surplus and the net sale proceeds would have to be paid to the principals (and now the plaintiff) in performance of the master agreements.  Hence the premise for the defence discussed below.

Whether the obligation to pay the surplus and the proceeds has arisen

58.  Following from the defence premised on the understanding of the parties that the deposit and subsequently the net sale proceeds would be held by the defendant’s onshore affiliates as trustees, the defendant further pleaded that as a matter of implied term of the master agreements, should it be impossible for the defendant to procure its onshore affiliates to perform any obligation under the master agreements or in accordance with the instructions of the principals without disregarding, violating or infringing the rights and obligations of the onshore affiliates under the trust agreements, the defendant shall not be required to do so.  The trust agreements prevail over the master agreements in case of such conflict, the defendant contends.

59.  When it came to Yan’s affirmation and now submission of Mr Maurellet, it became clear that the contention mentioned above related to the alleged difficulty of extraction of the surplus and the net sale proceeds from the defendant’s onshore affiliates in performance of the master agreement, which allegedly arose out of the RMB340m Remittances and the relevant PRC law.  The impact, the defendant argues, is that its obligation to make the payment pursuant to clauses 3.1, 4.1 and 4.2 of the master agreements has yet to arise.

60.  Clauses 4.1(j) of the master agreement provides that the defendant is obliged to pay the net sale proceeds in accordance with principal’s instruction only if the instruction accords with the laws of the PRC, and that any payment must be made in accordance with clause 4.2.  Clause 4.2 provides for the two modes of payment of the net sale proceeds, namely either in RMB within the PRC, in which case within 7 days of the receipt (probably of the net proceeds[9]), or alternatively in US$ out of the PRC, in which case within 15 days of receipt of approval from the relevant Mainland authorities.

61.  Insofar as payment of the surplus is concerned, clause 3.1 provides that upon and subject to the terms and conditions of the master agreement, any surplus should be held pending the receipt of further instruction from the principal.  The term of the deposit shall commence on the date of the master agreement and expire on the date when the principal receives the payment of all the net sale proceeds in accordance with clause 4.2.  It follows that the surplus is returnable to the principal either upon the instruction of the principal or alternatively upon the expiration of the term of the deposit when the principal has received the payment of all the net sale proceeds.

62.  As far as instruction of the principal is concerned, the qualification with reference to the law of the PRC under clause 4.2 does not exist in clause 3.1. However, Mr Maurellet submits that there is no logic or reason for construing the provisions in the way that gives rise to such differential treatment of the extraction of the surplus and the net sale proceeds from the defendant’s onshore affiliates in the Mainland.  He also borrows support from (i) the commencement of clause 3.1, which contains the qualification that what follows in that clause shall be subject to the terms and conditions of the agreement, and (ii) the fact that the clause stipulates its interactive operation with clause 4.2.  Contrary to Mr Man’s argument, and for the present purpose, the construction of clause 3.1 of the master agreement proposed by Mr Maurellet, in my view, is arguable.

63.  On this basis, the question that follows will be whether or not the surplus and the net sale proceeds in the hands of the defendant’s onshore affiliates should be paid in RMB onshore or in US$ offshore.  The plaintiff’s case, be it as pleaded or deposed to its affirmations, is silent as to whether it has given instruction to the defendant to procure the payment in RMB onshore or in US$ offshore pursuant to clauses 3.1 and 4.1.  However, the contemporaneous evidence somehow cast light on this question.  This is also where the RMB340m Remittances become relevant.

Whether the defendant is obliged to procure the payment of the surplus and the net sale proceeds in RMB onshore or in US$ offshore

64.  There is no dispute that on various dates between October 2007 and April 2009, the defendant has caused its Mainland affiliates, Richina CHC and Shanghai Richina, to make the remittances to the designated bank accounts of the principals’ Mainland affiliates, PGHZ and PGSH.  Hence the RMB340m Remittances.  As mentioned, there is dispute as to the nature of the remittances.  The pleaded case of defendant is that the remittances were made pursuant to the instructions of the principals, and RMB160,000,000 and RMB180,138,000 were allocated as the defendant’s payment of the net sale proceeds in performance of clause 4.2(1) of the BOCOM Master Agreement and the Ping An Master Agreement respectively[10].  There is also no dispute that in its letter of demand dated 13 December 2013, the plaintiff did acknowledge the receipt of RMB160,000,000 of net sale proceeds.

65.  The defendant pleaded that by accepting such payments, the plaintiff represented that it would not insist on its legal right under the master agreements in respect such amounts paid.  Relying on such representation, the defendant had acted to its detriment and changed its position.  The defendant contends that it is unconscionable for the plaintiff to deny that the defendant had already paid such sums to the principals in performance of the master agreements.

66.  As such, the stance of the defendant appears to be that the principals have given instruction at least for the payment of the net sale proceeds in RMB onshore. Yet the truth of the matter appears to be quite the contrary.

67.  First, the acknowledgement mentioned above by the plaintiff was in fact corrected as a mistake by its subsequent written demand in August 2014.  It denies that the principals have ever received any part of the net sale proceeds from the defendant.  In its reply, the plaintiff pleaded that the RMB340m Remittances were made pursuant to deposit arrangement letters dated 18 January 2008, 18 March 2008 and 1 April 2009 (“the DAL”) whereby the principals, through their Mainland affiliates, accepted such deposits in RMB from the defendant’s Mainland affiliates as security for the surplus and net sale proceeds payable by the defendant in US$ pursuant to the two master agreements.  This is borne out by the content of the relevant copies of the DAL produced in evidence.  The DAL provided that the principal amount of each deposit in RMB shall be refunded upon the instruction of the principals to its affiliates that the principals have received from the defendant the US$ payments in satisfaction.  The DAL were subsequently extended by supplemental DAL dated 18 June 2010 and 20 March 2013.

68.  Second, when it came to the affirmation in opposition of the present applications, even the defendant no longer contended that the RMB340m Remittances were in fact payments of the net sale proceeds in performance of clause 4.2(i) of the master agreements.  Instead, it alleges the remittances were made at the request of the PA Group to address its interim need.  To ensure the RMB340m Remittances had legitimate background, the two groups, through their respective Mainland affiliates, entered into certain strategic cooperation agreements (“SCA”).  According to the SCA, the relevant PA Group affiliate purported to provide consultancy service to the relevant Richina Group affiliate, and the Richina Group affiliate shall pay a sum of money in RMB as deposit or earnest money which would be refunded in the event of termination of the SCA.

69.  Irrespective of whether the transactions set out in the DAL and the SCA, both of which concerned the RMB340m Remittances, require reconciliation, the possibility of them being façade transactions to legitimize the remittances as an interim arrangement cannot be ruled out.  Regardless of that, the more important thing to note is that whichever scheme the parties rely on, the underlying expectation of the principals, and thus the understanding of the defendant, was that the surplus and the net sale proceeds would ultimately be extracted from the PRC in US$ offshore in the course of the unwinding of the investment structure.  This was also borne out by the available contemporaneous correspondence between the parties since April 2008.  The correspondence is sufficiently summarized by Mr Maurellet in his submissions[11], but will be referred to further below.

70.  The matters discussed above suggest that the principals have always made known their goal and, because of that, the corresponding understanding of the defendant to extract the surplus and the net sale proceeds and to pay the principals in US$ offshore.  There is therefore credible basis for the defendant to contend that whilst seeking to enforce the master agreements against the defendant, first, the plaintiff has never pleaded that the condition under clause 4.2(ii), namely, the approval of the PRC authorities have been obtained; and second, there is no evidence that such approval has in fact been obtained, so as to trigger the running of the time for this mode of payment.

71.  In the absence of such approval as a matter of fact, it would be open to the defendant to contend that the instruction of the principals for payment in US$ offshore has yet to accord with the law of the PRC, and therefore the defendant would not have to act on that pursuant to clause 4.1 of the master agreement.

72.  Mr Man makes the point that the above contention cannot avail the defendant, as one cannot reasonably suggest that the defendant could carry on resisting returning the surplus and paying the net sale proceeds especially after so many years have elapsed.  In my view, if the defence on the basis of the alleged construction of the relevant terms of the master agreements and the alleged understanding of the parties is sustainable, whether the defendant would be under any obligation with respect to ensuring the legality or securing the necessary approval from the Mainland authorities and, if yes, what the obligation would entail and whether the defendant has failed such obligation are matters that do not form part of the present investigation in the absence of pleading and evidence to that effect.

73.  This also brings us to the issue of the PRC law.

The PRC law

74.  As discussed, it is arguable that the defendant is obliged to act in accordance with the instruction of the principal for the payment of the surplus and, expressly so in the master agreements, the net sale proceeds, only if the instruction accords with the law of the PRC.  There is no pleading or evidence in respect of the satisfaction of such pre-requisite and, in the case of the net sale proceeds, the expiry of the time limit stipulated in the master agreements.  In such context, the contention of the defendant is not about the impossibility of performance because of illegality in the Mainland, as Mr Man observes^[12].

75.  The defendant further contends that as a matter of the PRC law, the authorities’ approval is not likely to come.  The defendant produced PRC law expert report of Mr Chen Li Li.  The plaintiff elected not to adduce expert evidence in reply.  Whilst argued, the question is not so much whether or not the court is bound to accept the views of the expert on foreign law.  Where a party relies on the expert evidence whereas the other decides not to, the other party may still be heard to argue that such expert evidence is irrelevant or that it is inherently wrong.  This does appear to be how Mr Man approaches this issue.

76.  The expert, with reference to the governing law, in essence made the following points:

(1) To begin with, the deposits had to be remitted to the onshore affiliates, which were in a position to purchase the target shares.  The onshore affiliates were directly owned by Richina CHC, which was directly owned by foreign shareholder, ie, the defendant.  It is natural that the deposits had to be brought onshore first by capital injection into Richina CHC and then remittance to the onshore affiliates.

(2) The general principle is that any foreign exchange payment and collection should have a genuine and legal transaction basis between the payor and payee which is not in conflict with exchange control regulations.

(3) For the part of the deposits paid into the PRC by way of capital injection^[13], the only lawful basis for extraction of the same offshore are either capital reduction or alternatively dividend distribution by Richina CHC in favour of the defendant as the offshore shareholder.  Both alternatives are subject to approval procedures and satisfaction of conditions prescribed by the authorities.

(4) For the part of the deposits paid into the PRC as trading income^[14], the same may not be extracted by way of trade payment as the relevant transaction has been concluded, and hence the absence of genuine and legitimate basis.

(5) The RMB340m Remittances, which remains out of the pocket and booked as receivables of Richina CHC against the PA Group, has made it all the more impossible for the defendant to perform the payment obligations in accordance with the laws and regulations of the PRC.  Unless the RMB340m Remittances have been returned, Richina CHC would not be in a financial position to seek to reduce its capital or to distribute dividend.  Therefore, it is unlikely that the Richina Group could obtain approval by the PRC authorities.

77.  The defendant has produced audited financial statements of Richina CHC which recorded how the said remittances were booked at the material times, and the auditors also pointed that out in May 2018 their resultant effect on the financial position of the company, which was in line with the observation of the legal expert mentioned in his report.

78.  The correspondence between the two groups cast light on the apparently sticky situation.  The available correspondence since April 2008 shows that the two groups were by then conscious of the difficulty and the time required to arrange payment in US$ offshore in the unwinding of the investment structure. While still working on that, the Richina Group answered the urge of the PA Group then for RMB onshore to meet some of its urgent need.  Hence the RMB340m Remittances, which had to be legitimized by the DAL or SCA put up by the parties as mentioned above.  Notwithstanding that, the parties were not seen detracting from the effort towards the ultimate goal of payment to the PA Group in US$ offshore.  However, the aftermath of the RMB340m Remittances apparently had their impact on such effort.

79.  By January 2010, both Yan and Geicke became anxious because the PRC State Administration of Foreign Exchange (“SAFE”) started to investigate the RMB340m Remittances.  This eventually prompted Yan to suggest that the safest route out would be for the principals to return all the RMB remittances in the Mainland as soon as possible, before the payment to the principals offshore might be settled.  It was contemplated that if the principals could do that, further disclosure to SAFE should only lead to the potential of a fine for infringement. It is clear that the defendant’s proposal did not materialize, and the two groups are seen to have been working on the logistics of unwinding the investment structure and payment to the principals in US$ offshore.  In April 2013, the PA Group came up with a proposal, entailing the return of the RMB340m Remittances, which was said to have been devised with legal advice.  The proposal is convoluted and the details are not important for the present purpose.  The proposal was then subject to discussion, and does not appear to have materialized eventually.

80.  Mr Man questions the relevance of the expert evidence adduced by the defendant. Against the background discussed above, I do not agree that the expert evidence is in lack of proper context and thus irrelevant.  For the present purpose, this is arguable.

81.  Mr Man also questions the validity of the expert opinion, categorizing that as premised on assumption that the funds brought onshore to the PRC have to be extracted by an effectively reverse movement of the funds.  In considering the credibility of the situation as explained by the expert, one would perhaps not lose sight of the aftermath of the RMB340m Remittances mentioned above, including the legally advised and convoluted proposal made by the PA Group in as late as 2013.  One wonders whether the parties, particularly the PA Group, would have acted in such manner, had it taken the view that either the difficulty reported by its counterpart was less than genuine or there existed other obvious and ready alternatives.  Of course, I should not be misunderstood to be suggesting that the validity of the concern about legal compliance in the PRC is to be adjudged by reference to how the parties themselves view it. Indeed, this also highlights an inherently difficult exercise of the plaintiff in seeking to challenge the defendant’s expert evidence in this respect in the absence of contrary expert evidence.

82.  The same may be said about Mr Man’s argument that there is no excuse for the defendant as there are the alternatives of either making the payment in RMB onshore or having the trustee to declare the plaintiff as the discretionary beneficiary of the surplus and net sale proceeds, as trust property, pursuant to the trust agreements.  As the protectors under the trust agreements, the principals would readily consent to such declaration.

83.  Insofar as the contractual claim is concerned, which forms the sole basis of the present application, the question is how the above alternatives suggested by the plaintiff, assuming that they may work, manage to found the basis of claim under clauses 3.1, 4.1 and 4.2 of the master agreements in the absence of actual pleading and evidence to that effect.  Further, the PRC legal expert opinion adduced by the defendant suggests that payment in RMB onshore too is not an answer, with the RMB340m Remittances standing in the way.  It would not be completely fair to criticize the expert for the lack of comprehensiveness in failing to explore the possibility of such alternative proposed only by way of counsel’s submission.

Limitation

84.  As mentioned, there is no pleading or evidence to found the contractual claim on the basis of exercise of the option for payment of the surplus and the net sale proceeds in RMB onshore or in US$ offshore.  Between the two modes, the evidence tends to show the parties to the master agreements have acted on the basis of the latter.  In that case, the time (15 days) for offshore payment of the net sale proceeds in US$ pursuant to clause 4.2(ii) of the master agreements starts to run only after the approval by the PRC authorities. The limitation defence admittedly does not apply.

85.  The limitation defence, as pleaded, applies only if the plaintiff is entitled to, and does, claim for the payment of the net sale proceeds in RMB onshore.  The cause of action for breach accrues upon the expiry of 7 days from the date of receipt.  In the above discussion, I suggest that this should refer to the receipt of the net sale proceeds.  However, for the present purpose, it matters not whether this is so or refers to the receipt of the Principal’s instruction instead.  The plaintiff’s answer to such defence is sections 23 and 24 of the Limitation Ordinance, Cap 347 (“LO”).

86.  Section 23(3) of the LO provides that:

“Where any right of action has accrued to recover any debt or other liquidated pecuniary claim…and the person liable or accountable therefor acknowledges the claim or makes any payment in respect thereof, the right shall be deemed to have accrued on and not before the date of the acknowledgement or the last payment:

Provided that a payment of a part of the rent or interest due at any time shall not extend the period for claiming the remainder then due, but any payment of interest shall be treated as a payment in respect of the principal debt.”

87.  Section 24 of the LO provides that:

“(1) Every such acknowledgement as aforesaid shall be in writing and signed by the person making the acknowledgment.

(2)   Any such acknowledgement or payment as aforesaid may be made by the agent of the person by whom it is required to be made under section 23, and shall be made to the person, or to an agent of the person, whose title or claim is being acknowledged or, as the case may be, in respect of whose claim the payment is being made.”

88.  Whether or not a document suffices as an acknowledgement of debt is a question of construction: see New World Development v Sun Hung Kai Securities (2006) 9 HKCFAR 403 at §§87-93.  It has to be an acknowledgement of the liability in question: see Re Flynn (No.2) [1969] 2 Ch 403 at 412C.

89.  The DAL, which were signed by the parties to the master agreements, in 2009, 2010 and 2013 contained the express term of acknowledgement by the parties that the RMB340 Remittances were paid as security against the US$ payments that are payable by the defendant pursuant to the master agreements.  Mr Maurellet argues that whilst they were no doubt acknowledgement by the defendant of its liability to make the US$ payment offshore pursuant to clause 4.2(ii), it is arguable whether this was acknowledgement of liability to make the RMB payment onshore pursuant to clause 4.2(i).

90.  The accrual of liability to make the payment under clause 4.2 may differ, depending on the mode and thus currency.  However, it was the same debt that the defendant acknowledged by the DAL.  In my view, the proposed construction of the DAL as an acknowledgement with the effect of barring the claim for payment of RMB onshore but not that for payment of US$ offshore, albeit of the same debt, may not align with the object of purposive construction explained in New World Development Co Ltd.  I therefore do not agree with Mr Maurellet on this.

Set-off by counterclaim

91.  In HCA 2048/2014, the counterclaim consists of two items: (i) the additional fee pursuant the BOCOM Master Agreement for the period between 23 January 2008 to 23 August 2008 in the sum of US$90,000 and (ii) the additional costs incurred by the defendant for the continuation of the agreement, the particulars of which are yet to be provided.  In HCA 2049/2014, only the second item above features in the counterclaim.

92.  The plaintiff denies liability in respect of the alleged additional fee of US$90,000 in HCA 2048/2014.  According to the BOCOM Master Agreement, the additional fee would be payable every 6 months, and PA5 has already paid a sum of US$70,564 being the additional establishment fees for the 6 months between January and July 2008 billed by the defendant.  The relevant documentary evidence does show that.  It is unclear how the plaintiff says that it is not liable for the additional fees since August 2008, albeit payable every 6 months, accrued by the time of commencement of the action.  That said, as to the balance of US$19,436, which is in dispute, the plaintiff offers to deduct the amount from the amount of judgment being sought in HCA 2048/2014.

93.  In both actions, the defendant counterclaims for additional legal, audit, administrative and accounting costs arising out of the continuation of the master agreements pursuant to clause 6.1 of the master agreements as well as costs and time spent on regulatory issues in the PRC.  No particular or evidence is tendered in support.

94.   However, it is also argued that the plaintiff is not entitled to its claim in any event, as the RMB340 Remittances plus the costs and expenses[15] as well as the tax[16] to be incurred for such payment would exceed the amounts claimed in these actions.  This contention does not feature in the defendant’s pleading in the form of defence of set off by a counterclaim that would serve to extinguish the claim or at all.

The amount claimed

95.  The pleaded amounts of the net sale proceeds under the 2 master agreements are adjusted upward in the present applications.  Short of by way of consent, the plaintiff strictly is only entitled to seek judgment in terms of the claims as pleaded.  At least, any summary judgment would have been granted upon terms such as the plaintiff’s undertaking to amend the statement of claim accordingly.  However, as it should be clear by now that I am not ready to enter judgment summarily, I need say no more.

Conclusion and order

96.  In my view, the defence to the part of the claims in respect of which the plaintiff is now seeking summary judgment is inseparable from the defence to the entire claim.  Indeed, the formulation of the defence in opposition has somehow evolved from the defendant’s pleading, and the defence with reference to the PRC law came to light only in the affirmation in opposition and made clear by counsel’s able submissions.  The question is whether that renders the defence less than bona fide and credible or at least shadowy.  All matters and submissions considered, I would not say that does.  I am satisfied that the defence raises issues that ought to be tried.  In the circumstances, I refuse the applications for summary judgment of the part of the claim in both actions.

97.  Whilst the applications for summary judgment were taken out after the close of pleadings, the formulation of the defence in opposition came about in the manner described in the preceding paragraph.  In the circumstances, I would refrain from exercising discretion to dismiss the plaintiff’s summonses with costs, as if the application ought not to have been taken out.  Instead, I simply refuse the applications and let the defence proceed (with leave, insofar as this is necessary).  It is apparent that the plaintiff and, even more so, the defendant will have to sort out their pleaded cases in the way forward.

98.  As to costs, I think it is appropriate in the circumstances to order the costs of the applications be in the cause, save that the costs of the hearing shall be to the defendant in any event.  I therefore make a nisi costs order in such terms, with costs to be taxed, if not agreed, with certificate for two counsel.  In the absence of application in 14 days to vary, the nisi costs order shall become absolute without further order of the court.

HCA 2048/2014 and HCA 2049/2014: