CATHERWOOD LTD v. FENG JIN LIANG

HCA 1651/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1651 OF 2011

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J U D G M E N T

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1. This is the plaintiff’s application for summary judgment under Order 14 of the Rules of High Court. The claim is for repayment of a loan of HK$57,000,000 advanced by the plaintiff to the defendant pursuant to a loan agreement dated 17 February 2010 (“the Loan Agreement”).

Background

2. The background to this claim is the plaintiff’s acquisition of the shares of a BVI company which indirectly owned some interests in a wholly owned foreign enterprise in the mainland. 

3. The mainland enterprise is called Shanxi Lanbao Energy Company Limited (“Shanxi Landcome”).  It is a coal mining company wholly owned by a BVI company called Landcome Group Limited (“BVI Landcome”).  BVI Landcome has issued 9,600,000 shares.  In 2009, there were two groups of shareholders of the company.  One shareholder Celadon Rock Limited (“Celadon”) owned 6,960,000 or 72.5% of the shares.  The defendant together with his son Fung Kin Keung (“Ken Fung”) and one Li Yim together owned the remaining 2,640,000 or 27.5%. 

4. According to the defendant, the mainland government proclaimed in 2009 some changes in the policy for regulating coal mining business.  One of the changes required the amalgamation of small mines with large mines to improve the management and enhance the safety and efficiency.  Shanxi Landcome was directed by the Shanxi Provincial Government to combine with other mines to form 2 large mining sectors.  The implementation of the directed amalgamation required substantial capital for acquisition of other mines and machinery.  Celadon was not keen to provide the necessary capital and wanted to sell its shares in together with its loans to BVI Landcome.  The defendant’s camp however did not have sufficient funds to buy out Celadon.  But the defendant wanted to continue with the mining business.  The defendant then looked for an investor to take up Celadon’s shares in and loans to BVI Landcome and to inject additional capital for the amalgamation and acquisition of machinery.  

5. Through the introduction of one Anthony Tang, the defendant came to know one Or Wai Sheun (“Or”).  Or is the chairman of a Hong Kong listed company Polytec Asset Holdings Limited.  The defendant then negotiated with Or for Or’s company to acquire the Celadon shares in and loans to BVI Landcome.  Or later acquired the plaintiff as the instrument for the acquisition. 

6. The defendant later used another BVI company China Group Oriental Limited (“CGOL”) to enter into a deed with Celadon on 22 January 2010 to purchase the shares held by Celadon in and the loans it advanced to BVI Landcome at HK$1,000,000,000.  The purchase was to be completed by three stages on 26 January, 22 February and 22 March 2010.  After the purchase, the loans world became due from BVI Landcome to CGOL.  (Arrangement was later made for CGOL to be indebted to the defendant for the same sum by way of shareholder’s loan from the defendant to CGOL.  These loans were then assigned by the defendant to the plaintiff when the plaintiff acquired the shares of CGOL.)

Heads of Agreement

7. The plaintiff and the defendant then signed a Heads of Agreement on 23 January 2010 (for date of signing, see pp 358 and 360).  By this agreement (p 2), the defendant granted the plaintiff a pre-emption right to purchase from the defendant all the shares of CGOL and loans to BVI Landcome at HK$1,000,000,000.

Loan Agreement

8. The plaintiff and defendant then entered into the Loan Agreement on 17 February 2010 which provided:

“1. The Lender (the plaintiff) shall lend a loan to the Borrower (the defendant) in the amount of HK$57,000,000 (the ‘Loan Amount’) at an interest rate of 6% per annum and the Borrower shall repay to the Lender the same amount together with interest accrued thereon upon demand on or before 16^th May 2010 (the ‘Repayment Date’).

2. The Borrower shall use the Loan Amount for on-lending to Landcome Group Limited (‘BVI Landcome’) (the ‘Company’) for its funding requirement for general business operation in particular for coal mine consolidation in Shanxi Province, the PRC.

3. The Repayment Date may be prolonged under a written agreement of both Parties.

…

5. The Borrower hereby agrees to assign to the Lender absolutely with effect from the date hereof all its rights, title and interest in the loan made by the Borrower to the Company and the full benefit and advantage thereof to hold the same unto this Lender absolutely.

…”

The plaintiff duly deposited HK$57,000,000 into the bank account of the defendant on 18 February 2010.

Spent Loan Agreement

9. The plaintiff and defendant entered into a further loan agreement dated 22 February 2010 whereby the plaintiff agreed to lend the defendant another HK$200,000,000 for him to lend the same to CGOL for use as payment to Celadon under the deed of sale and purchase dated 22 January 2010.  Clauses 1 and 3 of this loan agreement together provided that if the plaintiff should exercise the right of purchase under the Heads of Agreement, the HK$200,000,000 lent under this agreement would be treated as part payment by the plaintiff to the defendant of the purchase price and this loan would be deemed to be repaid upon completion of the purchase. Otherwise, the loan would be repayable on demand on or before 22 May 2010. This agreement is hereinafter referred to as the Spent Loan Agreement as the loan was duly applied for the plaintiff’s purchase under the Heads of Agreement and nothing developed from it. 

Agreement of Sale and Purchase, Deed of Guarantee and Completion

10. On 22 March 2010, the plaintiff and defendant executed an agreement for the sale and purchase of the shares of CGOL (p 121) together with an assignment to the plaintiff of the loans advanced to BVI Landcome (p 199).  The defendant also executed a Deed of Guarantee dated 22 March 2010 in favour of the plaintiff guaranteeing, among other things, the net profit of the mining operation in the amounts stated in schedule 1 of the guarantee for the years of 2010, 2011 and 2012 (p 166).  

11. The defendant, Ken Fung and Li Yim also transferred their 27.5% shares of BVI Landcome to one China Win Capital Limited (“China Win”) on 22 March 2010.  China Win on the same day executed a charge over these shares in favour of the plaintiff as security for the due and punctual discharge of the defendant’s obligations in the sale and purchase agreement of the shares of CGOL and his Deed of Guarantee (p 177). 

12. The plaintiff also completed the purchase by paying the defendant HK$1,000,000,000 which included the HK$200,000,000 advanced in the Spent Loan Agreement.

The dispute

13. The HK$57,000,000 lent under the Loan Agreement was repayable on 16 May 2010 under clause 1 of the agreement.  But the defendant made no repayment on that date or thereafter.  The plaintiff’s solicitors issued a demand letter on the defendant on 19 September 2011.  The defendant did not repay and the plaintiff started this action on 27 September 2011.

The defence and counterclaim by the alleged Or’s 1st and 2nd agreements

14. The defendant filed a defence and counterclaim on 25 November 2011 and the plaintiff filed a reply and defence to counterclaim on 12 January 2012.  The plaintiff then applied for summary judgment on 16 July 2012.

15. The defendant alleged two oral agreements made between him and Or as grounds of his defence.  He pleaded the 1st oral agreement in para 3(f) of his defence:

“(f) … after oral negotiations between Feng (the defendant) and Or sometime in the latter half of 2009, Feng orally agreed with Or to give Or or his company an option to acquire Celadon interest at a price of HK$1,000,000,000 on condition and/or based on the oral representation and warranty given by Or that in consideration of Feng using his connection in PRC to acquire the interest in the coal mines (‘the said coal mines’) for consolidation of them into 2 sectors (with such consolidation being required as a result of the policy promulgated by the Shanxi provincial government) and be responsible for dealing with the PRC governmental bodies, Or would be responsible for all the payments and outstanding payments required for acquiring the coal mines for the aforesaid consolidation process as well as those costs required for the setting up the said coal mines for operation (‘the setting up costs’) including acquisition of necessary machinery and equipment (‘the said machinery and equipment’) essential for obtaining permits for the exploration of the said coal mines and the actual exploration of the same (respectively ‘Or’s 1st agreement’, ‘Or’s 1st representation’ and ‘Or’s warranty’).”

The defendant further pleaded in para 3(j) that on the basis of Or’s 1st agreement, he signed the Heads of Agreement with the plaintiff on 23 January 2010.

16. The defendant then pleaded in paras 3(l) to (n) the 2nd oral agreement and how he had signed the Loan Agreement:

“(l) As Feng (the defendant) required money to acquire interest and/or to complete the acquisition of interest in the said coal mines and to pay the setting up costs (‘the said purpose’) which was estimated to be HK$1,000,000,000.00, based on Or’s 1st agreement and/or Or’s 1st representation and/or Or’s warranty, before and after the making of the Heads of Agreement, Feng had orally chased after Or for make (sic.) the advancement as promised.

(m) Sometime in about February 2010, Or had on behalf of Catherwood orally agreed with Feng or made the oral representation to Feng that Or or Catherwood could have made partial advancement to Feng for the said purpose for which Feng could in turn advance to BVI Landcome subject to the condition that the same would be regarded as loan from Catherwood in case Catherwood decided not to exercise the option to acquire Celadon’s interest and if Catherwood did exercise the option then the advancement would not be repayable by Feng but be regarded as Catherwood’s investment in BVI Landcome (‘Or’s 2nd agreement’ and ‘Or’s 2 representation’ respectively.

(n)  Based on Or’s 2nd agreement or by relying on Or’s 2nd representation but not otherwise, on the oral request (sic.) Yeung Kwok Kwong acting for Or and/or Catherwood, Feng signed a purported Loan agreement dated 17th February 2010 with Catherwood by which Catherwood advanced a sum of HK$57,000,000 to Feng for onward lending to BVI Landcome (‘the purported 17/2/2010 Loan Agreement’).”

17. It is the defendant’s case that the HK$57,000,000 loan was advanced pursuant to Or’s 2nd agreement and that clause 1 of the Loan Agreement, which is inconsistent with Or’s 2nd agreement, is subject to it.  Since the plaintiff did exercise the option to purchase under the Heads of Agreement, the defendant therefore said that the HK$57,000,000 loan had pursuant to Or’s 2nd Agreement to be regarded as the plaintiff’s investment in BVI Landcome and not repayable by the defendant. 

The plaintiff’s reply and defence to counterclaim

18. The plaintiff disputes the two alleged oral agreements.  It referred to the written documents executed by the parties and pleaded that the alleged oral agreements were inconsistent with the written terms and hence, unbelievable.

19. The first document is the Heads of Agreement which was executed on 23 January 2010.  The plaintiff pleaded that the Or’s 1st agreement allegedly made in the latter half of 2009 is inconsistent with clause 7.2 of the Heads of Agreement (p 11) as follows:

“7.2 Working Capital

The [defendant] and the [plaintiff] hereby covenant that after completion of the sale and purchase of the BVI Interests, the Parties agree to use their best endeavour to fund and contribute operating working capital (‘Working Capital’) to [Shanxi Landcome] calculated on the basis proportion to their respective shareholdings in [Shanxi Landcome] subject to the shareholders’ approval. The [plaintiff] shall use its best endeavour to enable [BVI Landcome] to raise funding or Working Capital through 2 means of financing including the First Working Capital of RMB500,000,000 shall be raised by bank financing or asset based lending and Second Working Capital of RMB500,000,000 shall be funded by equity financing Provided Always That the [plaintiff] is satisfied with the following and the [defendant] shall undertake to procure [BVI Landcome] or [Shanxi Landcome] to have satisfied the following conditions:

(i) an adequate account including but not limited to an adequate profit track records;

(ii) bankable assets and documents;

(iii) sound earning capacity; and

(iv) sound earning potential.”

20. The plaintiff further referred to clause 1 of the Loan Agreement dated 17 February 2010 which required repayment to be on or before 16 May 2010.  The plaintiff submitted that this is contradictory to Or’s 2nd agreement which was allegedly the basis of the Loan Agreement. 

21. The plaintiff then referred to clause 7 of the Agreement of Sale and Purchase made between the plaintiff and the defendant and dated 22 March 2010.  This clause is the same as clause 7.2 of the Heads of Agreement. This again contradicts the two alleged Or’s agreements.  This clause 7 further provided as follows (p 134):

“In the event that if the [defendant] is failing to contribute his portion in relation to the approved operating working capital and required financial assistance from the [plaintiff] (subject to the agreement of the [plaintiff]), the [defendant] undertakes and covenants to repay such financial assistance or loan within the agreed period to the [plaintiff] together with interests thereon accrued.”

22. The plaintiff further referred to the Deed of Guarantee executed by the defendant in favour of the plaintiff and also dated 22 March 2010.  Clause 1.4 of this deed is also contradictory to the two alleged Or’s agreements.  Clause 1.4 provides (p 170):

“1.4 [The defendant] undertakes to use his best endeavour to fund and contribute operating working capital to the Group calculated on the basis proportion to their respective shareholdings in the Group subject to the shareholders’ approval. In the event that if [the defendant] is failing to contribute his portion in relation to the approved operating working capital and required financial assistance from [the plaintiff], [the defendant] undertakes and covenants to repay such financial assistance or loan within the agreed period to [the plaintiff] together with interests thereon accrued.”

23. Apart from citing clauses in the executed documents which are contradictory to the two alleged Or’s agreements, the plaintiff further referred to the full agreement clause in clause 11 of the Agreement of Sale and Purchase as follows:

“Full Agreement

11. (A) This Agreement (together with the Schedules) sets forth the entire agreement between the parties hereto in connection with the sale and purchase of the Sale Shares.

(B)   This Agreement supersedes all and any previous heads of agreement, contracts or arrangements between the parties hereto concerning or relating to the subject matter of this Agreement, and any such heads of agreements, contract, agreements or arrangements (if any) are hereby terminated.”

The defendant’s evidence

24. The defendant in his affirmation in opposition to summary judgment repeated the making of the alleged Or’s 1st agreement.  He then deposed to how he had entered into the Heads of Agreement on 23 January 2010 as follows:

“22. Following the making of Celadon’s Deed, I was asked by Or to attend his office at … (‘the Pioneer Centre address’) to sign what he described to be a letter of intent. I duly attended and was then given a document in English by Mr Ronald Chu who had been introduced to me by Or as his lawyer to sign. Mr Ronald Chu was an in-house lawyer working for Or. I told Or who was present that I did not understand English but Or told (sic.) that the document was a standard one and it recorded that (sic.) the agreement I had made with him. Relying on Or’s oral assurance and representation, I signed it after Or had signed it. Anthony Tang, the introducer also signed it for witnessing my signature. I believe that the document I signed was the Heads of Agreement … with Catherwood, granting Catherwood an option to acquire Celadon’s interest by acquiring the shares of China Group at a consideration of HK$1,000,000,000 with such option to be exercised on or before 22 March 2010 by Catherwood serving a written notice on me (‘the option’).

23.      In relation to the Heads of Agreement and the Application here, I have been told by TAYY that there was provision in the Heads of Agreement to the effect that I and Catherwood would use our best endeavour to fund and contribute to the working capital of BVI Landcome to the tune of RMB¥1,000M according to our shareholdings in BVI Landcome after completion of sale of shares in BVI Landcome to Catherwood.  I confirm that I was not aware of such provision.  The provision was inconsistent with Or’s 1st agreement.”

25. In a nut-shell, he said he signed the Heads of Agreement thinking that it was a letter of intent and on Ronald Chu’s assurance that it was a standard document that had recorded the Or’s 1st agreement.  He was not aware that the document had a clause 7.2 that was inconsistent with Or’s 1st agreement.  He did not understand English and only signed the document on Chu’s assurance.

26. The clear implication of this evidence is that the terms of the Heads of Agreement (or at least the term that both he and the plaintiff had to contribute working capital in proportion to their shareholding) had not negotiated and discussed by the parties before he signed the document.

27. He then referred to the making of Or’s 2nd agreement.  After that, he described how he signed the Loan Agreement as follows:

“26. I was then asked by Yeung, who acted as Or’s assistant to sign a document on the advancement which turned out to be the purported 17/2/2010 Loan Agreement before the advancement would be released. I attended the Pioneer Centre address and was given an English document to sign by Yeung. I told Yeung that I did not understand English and Yeung assured me that the same was drafted based on my agreement made with Or. Following the assurance, I signed it and Anthony Tang came to witness my signature. ...”

28. Hence, he said he signed the Loan Agreement on the assurance of Rodney Yeung that it was based on Or’s 2nd agreement.  There is again the implication that the terms of the Loan Agreement had not been discussed between the parties before he signed it.  The Loan Agreement has a specific repayment date but no provision for the loan to be converted to be the plaintiff’s investment and is not in accordance with the alleged Or’s 2nd agreement.

29. Finally, the defendant referred to the making of the Agreement of Sale and Purchase and the Deed of Guarantee that are dated 22 March 2010 and the completion as follows:

“Catherwood completing the purchase and the aftermath

30.    Catherwood did exercise the option.  Celadon’s interest was therefore first sold to China Group by Celadon, and the shares of China Group were then on-sold to Catherwood.  For the purpose of completing the purchase of Celadon’s interest with the last completion date being 22^nd March 2010, Or asked me to attend the Pioneer Centre address for signing the necessary documents.  I was accompanied by my son, …Ken Fung.. who was also a director of BVI Landcome and involved in the said coal mining business, Matthew Chun, my accountant and one Mak Yiu Tong Jackson (‘Jackson Mak’), a legal executive whom Ken Fung enlisted to study the draft of the documents which had been sent to me a few days before.  According to Ken Fung, there was problem with the draft documents especially in that there was no commitment of Or to inject the necessary working capital of HK$1000M.  I told Ken Fung to take care of the matter and that was why Ken Fung and Jackson Mak came along.  I was extremely worried that the deal with Or would falter as I had already committed to complete the purchase with Celadon on that date and I did not have the time to look for other investor to inject the necessary funding for the said coal mining business.”

31.    I remember that when we arrived at the Pioneer Centre address, we were received by Ronald Chu and Yeung.  ... There was then some heated debate between Ken Fung and Yeung on the clauses in the draft agreement especially about the injection of working capital by Or.  I was then anxious as there was little time left for me to complete the purchase with Celadon which was scheduled on that date.  I remember that at one time Yeung showed us the cashier order and said that the money was ready but we had to accept the terms as drafted by Or’s side.  There was some stalemate.  Then Or appeared and he talked to Ken Fung and me to the effect that as the investment was one by his family trust, he could not on papers committed (sic.) to make the substantial injection as promised under Or’s 1st Agreement as there would be query and objections by other members of family trust.  Or orally assured us that the provision as now contained in the draft document was just a means as stated on papers on how to achieve the injection and as to my share of such contribution he said that while the draft stated that I had such obligation and in case I could not fulfil that Catherwood could give me the assistance he would make the injection and he would not ask for repayment from me so long as his total injection did not exceed the agreed sum of HK$1000M.  As time was running out, I did not have much choice and had to rely on Or’s assurance.  I told Or that I would sign the pile of documents as presented to me.  I then took the cashier order and rushed off to complete the purchase from Celadon without signing the documents because of insufficient time.  I remembered that that I came to sign the documents the next day with Anthony Tang again acting as witness to my signature.”  (Emphasis supplied)

30. The defendant’s son Ken Fung also made a short affirmation to oppose the plaintiff’s application for summary judgment.  He was also a director of BVI Landcome.  He said he had personal knowledge of what the defendant had deposed to in the defendant’s affirmation and he confirmed and verified the contents of that affirmation.

The plaintiff’s evidence

31. The plaintiff disputes all the defendant’s allegations that he had signed the said documents all on the basis of verbal assurances.  Rodney Yeung, the plaintiff’s director produced in his 2nd affirmation bundles of contemporaneous e-mail exchanges to show that all these documents had been subjected to negotiation and discussion between the parties before their terms were finalized.  Hence, the defendant did not sign these documents on the basis of any oral assurance from anyone of the plaintiff, but on the basis of the terms having been ironed out and agreed between the parties beforehand.

The first e-mail exchange and Heads of Agreement

32. The first bundle of e-mails produced by Mr Yeung was exchanged between the parties from 16 December 2009 to 25 January 2010 wherein the parties negotiated the terms of the Heads of Agreement (pp. 228 to 360).  The persons connected by these e-mails include the defendant’s son Ken Fung, his accountant Matthew Chun, one Jackson Mak, a legal executive of C K Mok & Co who worked for the defendant, the plaintiff’s director Rodney Yeung and the plaintiff’s in-house legal counsel Ronald Chu.  Other names featured in this e-mail chain are Wendy Tse, Aileen Wong, Tommy Lam, Carmen Chen and Tommy Wang.  I do not for know for whom did they work or what role did they play in the negotiation of the terms.

33. Rodney Yeung said that some 16 drafts had been exchanged between the two sides before the terms were finalized.  The e-mails show that the 1st draft was sent out by Ronald Chu to the defendant on 16 December 2009.

34. Ken Fung returned the draft with proposed amendments on 17 December.  He also said in his reply e-mail (p 229):

“Please find the amended draft heads of agreement for your comments. We note that there is no clause to mention the working capital in respect of the further development of the Group. However, Mr Feng need to give Personal Guarantee of the New Profit. How to resolve?”

35. There is then a 5th draft of the Heads of Agreement in the bundle.  It has a draft clause 7.2 in red which only states: [WORKING CAPITAL-DISCUSS].  It was an invitation by one party to the other to discuss this issue.  There was not yet any provision setting out the parties’ obligations to contribute working capital to BVI Landcome.

36. The e-mails show that there were further discussions on this issue.  Ronald Chu of the plaintiff e-mailed the revised 10th draft of the agreement to Matthew Chun on 4 January 2010 which Chun acknowledged receipt on 5 January.  This draft has not been produced.

37. There was then produced a 12th draft which has a draft amended clause 7.2 providing for the obligations of the parties to contribute working capital.  The original of this clause, which was deleted in the proposed amendment, had provided (pp 315 to 316) that the defendant should, within 3 working days prior to the completion of the sale and purchase, deliver to the plaintiff his estimate of the working capital required.  The parties would then agree on the amount of estimated capital required and use their best endeavours to raise funds to contribute their respective portion according to their shareholding ratio.  The amended clause was later adopted in the final version.

38. There was then a 15th draft which contained the same amended clause 7.2 as in the 12th draft (pp 337-338). This clause, shorn of the deletions, was adopted in the final version for execution.

39. Ronald Chu by an e-mail dated 21 January 2010 sent the 16th draft to Ken Fung and Matthew Chun.  He then sent them the final version later on the same day.  Finally, there was an e-mail from Rodney Yeung of the plaintiff to Ken Fung on 24 January (p 358) referring to the making of the Heads of Agreement by the plaintiff and the defendant on 23 January.

40. These e-mails and drafts of the Heads of Agreement militate against the existence of Or’s 1st agreement.  If there were the alleged Or’s 1st agreement, which required Or to provide all working capital (see also para 19 of defendant’s affirmation), there would not have been any need to discuss the parties’ obligations to contribute working capital to BVI Landcome in the negotiation for the terms of the Heads of Agreement. 

41. From the documents produced in the affirmations of Ronald Yeung, it can be seen that the Heads of Agreement has been referred to repeatedly in subsequent documents executed by the parties up to the completion of the transaction on 22 March 2010.  It was also referred to in subsequent e-mails exchanged between the parties in the course of the negotiation of terms of these other documents.  Hence, the parties had from time to time revisited the terms of the Heads of Agreement after its execution on 23 January 2010.

The second e-mail exchange and Loan Agreement

42. Regarding the Loan Agreement dated 17 February, Rodney Yeung had on 16 February e-mailed a draft of it to Ken Fung and Matthew Chun (p 621).  Matthew Chun replied on 17 February and suggested the removal of provisions governing the usage of the loan by the defendant (p 632).  Chun’s suggestion was not accepted by the plaintiff.  The Loan Agreement was then executed by the defendant with a clause 2 providing that the defendant should on-lend the HK$57,000,000 loan to BVI Landcome for its general business operation and in particular in coalmine consolidation in Shanxi province. 

43. This exchange of e-mails again shows that the Loan Agreement was not thrust upon the defendant with an assurance by Rodney Yeung that it was based on the Or’s agreements or Or’s 2nd agreement.  This e-mail exchange again militates against the existence of Or’s 2^nd agreement.  It shows that the terms of the agreement had been discussed and agreed between the parties before the defendant executed it.  Clause 1 of the agreement provided for repayment of the loan by 16 May 2010.  It is contrary to Or’s 2^nd agreement which allegedly provided that if the plaintiff should complete the purchase of the Celadon shares, this loan would not be repayable but would become the plaintiff’s investment in BVI Landcome.  If there were Or’s 2^nd agreement, the plaintiff would not have come up with clause 1.  The defendant would also not have accepted it.

44. The defendant also alleged that he had lost his copy of the Loan Agreement.  However, the e-mail exchange shows that the final version had been e-mailed to Ken Fung and Matthew Chun on 17 February.

The 3^rd e-mail exchange and completion

45. The last exchange of e-mails showed the final stage of negotiation before the transaction was completed.  The first e-mail was by Ronald Chu of the plaintiff dated 21 March which referred to a meeting of the parties on 20 March.  A revised draft Agreement of Sale and Purchase of 100% of the shares of CGOL was attached to the e-mail (p 516).  Matthew Chun then proposed to Ronald Chu and Rodney Yeung on the same day to add a force majeure clause in the Agreement of Sale and Purchase.  Jackson Mak also proposed to Chu and Yeung on the same day to include a termination clause for the defendant’s Deed of Guarantee.

46. Jackson Mak then at 12:19 am on 22 March sent Chu and copied to Yeung and Ken Fung the deed of assignment of loans and instrument of transfer of the shares of CGOL for them to peruse. 

47. Several hours later at 3:13 am, Ronald Chu replied to the proposals of Chun and Mak with copy to Ken Fung, Rodney Yeung and others.  He accepted the force majeure clause for the Agreement of Sale and Purchase but rejected the termination clause for the Deed of Guarantee and he gave reasons for so doing in the mail.  He also attached to the mail the revised draft Agreement of Sale and Purchase and Deed of Guarantee for perusal by the addressees. 

48. Rodney Yeung then responded at 3:56 am and proposed a correction to the draft Agreement of Sale and Purchase on the completion accounts.  It seems that the parties were really burning their mid-night oil to prepare for the completion on that day.

49. Later on the same day at 9:35 am, Mak sent out the draft board minutes and resolution and resignation letters for comment by the others.  These documents were to be signed upon completion of the transaction later on that date.

50. Regarding the mode and venue of completion, Rodney Yeung’s case is entirely different from that of the defendant.  The defendant said on affirmation that he had brought along Ken Fung, Matthew Chun and Jackson Mak to the plaintiff’s office for completion.  He had to bring his team there because Or’s commitment to inject HK$1 billion (or HK$1,000 million) had not been provided in the draft documents.  He further alleged that there was a heated debate between Ken Fung and Rodney Yeung on the draft agreement particularly on this point.  Then Or told him and Ken Fung that the plaintiff’s investment was made by Or’s family trust and Or could not commit on paper to inject the HK$1 billion without arousing query and objection from his family.  Or then assured the defendant and Ken Fung that if the defendant could not contribute his share of working capital as per the agreement, the plaintiff could contribute for him up to the total amount of injection by both sides at HK$1 billion.  The defendant then agreed to sign the on the next day documents.  But he did not sign them there and then.  He instead took the casher order of HK$700 million and left to complete his purchase with Celadon.  He only returned on the next day to sign the documents.  I must say that the defendant’s story is not reflected in the contemporaneous e-mails at all.

51. Rodney Yeung’s case of completion in his 2nd affirmation is instead a smooth one.  He said there was no debate on the defendant’s obligation to contribute working capital.  The obligations of the parties to contribute working capital had already been agreed and provided in clause 7.2 of the Heads of Agreement.  Clause 7 of the Agreement of Sale and Purchase and clause 1.4 of the Deed of Guarantee were based on clause 7.2 of the Heads of Agreement and the parties did not argue about these clauses in the e-mails.

52. Yeung further said that execution of the completion documents and the act of completion in fact took place on 22 March 2010 in Macau.  It was for tax reasons that the parties had chosen to complete the transaction in Macau.  The cashier order of HK$700,000,000 was not taken away by the defendant, but was given to Jackson Mak after the defendant had confirmed that he had no question about the completion documents.  After Mak had taken the cashier order away, Yeung, the defendant and Anthony Tang took the 6:30 pm helicopter flight to Macau to execute the completion documents.  After completion had taken place, they came back by the 7:30 pm turbo jet and celebrated the completion at the defendant’s restaurant. 

53. Yeung also produced a copy of the cashier order containing the signature of Jackson Mak and the date of 22 March 2010 (p 619).  He also produced 3 copy tickets issued by Sky Shuttle for the 6:30 pm helicopter flight from Hong Kong to Macau on 22 March 2010.  The tickets had the names of Yeung, the defendant and Anthony Tang printed on thereon respectively (P 617).  He also produced 3 turbo jet tickets for the 7:30 pm ferry from Macau to Hong Kong on the same day.  These tickets do not have the names of passengers on them (P 618).

54. I would also mention that there were a few more e-mails exchanged from 24 March to 30 March touching on some of the documents involved in the completion.  I take that they were to deal with the aftermath of completion.

The plaintiff’s delay

55. Though the Loan Agreement provided for repayment on 16 May 2010, the plaintiff’s solicitors only issued a demand letter on 19 September 2011 and started this action on 27 September 2011.  Prior to this, the plaintiff had on 20 June 2011 started HCA 1021/2011 (“HCA 1021”) against the defendant in relation to the Agreement of Sale and Purchase of the CGOL shares. 

56. The defendant suggested that the plaintiff started this action only to add pressure on him and for the purpose of obtaining his shares in BVI Landcome.  The plaintiff disputes this.  Yeung in his 2nd affirmation explained the delay in starting this action.  He said under the Agreement of Sale and Purchase, the defendant had guaranteed that the plaintiff’s entitlement to the profits of BVI Landcome for the years of 2010, 2011 and 2012 would be no less than RMB1,716,727,500.  The plaintiff’s entitlement for 2010 alone was guaranteed to be no less than RMB300,896,750.  That sum was far greater than the loan of HK$57,000,000. The plaintiff was therefore desirous of maintaining a good relationship with the defendant hoping that the defendant would deliver his promise in the agreement.  That was why the plaintiff did not sue the defendant under the Loan Agreement till September 2011.  There is no dispute that the coalmine was managed by the defendant until late July 2011 before he handed it over to the plaintiff (see para 41 of defendant’s affirmation and para. 4.12(b) of defence counsel’s submissions).

The legal principles

57. The issue in dispute is a factual one.  It is on the existence or otherwise of the alleged Or’s 1st and 2nd agreements.  The alleged agreements have also been termed representations and warranties.  Mr Li, leading counsel for the defendant accepts that the burden is on the defendant to show that there are triable issues.  Counsel also correctly reminded me the following statement by Bokhary JA (as he then was) in Re Safe Rich Industries Ltd, CACV 81/1994 at p 5:

“The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable. But it must be recognised - because failure to recognise it would create a debt-dodgers’ charter - that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.”

I also refer to the following:

Hong Kong Civil Procedure 2013 (“HKCP”) Vol 1 paras 14/4/2, 14/4/4, 14/4/8, 14/4/9, 14/4/10, 14/4/11, 14/4/12, 14/4/19B; Re Safe Rich Industries Ltd, CACV No 81 of 1994 at paras 11, 12 and 13; Mass International Ltd v Hillis Industries Ltd [1996] 1 HKC 434 at 439 B-E; and Paul Y Management Ltd v Eternal Unity Development Ltd & Ors, CACV 16/2008 at para 19.

Analyses of the defendant’s submissions and decisions

58. Mr Li submitted that it made commercial sense for the defendant to look for an investor who was able to buy out Celadon and willing to provide the necessary working capital for the consolidation.  He further submitted that the defendant already had established connections in the lucrative coalmining industry and such connections were an indispensable asset of the business. Therefore, it is believable for Or to have agreed with the defendant for Or to be responsible for all further investments required by the business.  Mr Li further submitted that the defendant had also assumed the onerous burden of guaranteeing the net profits of BVI Landcome.  Hence, he said it made commercial sense for the plaintiff to be responsible for all further working capital of the business of BVI Landcome.

59. I do not think that the crucial question is whether the background and surrounding circumstances could or could not have justified commercially the making of the alleged Or’s 1st agreement i.e. for Or or the plaintiff to be responsible for all further working capital required by BVI Landcome.  The question is whether the allegation that there was this oral agreement is believable.  This question is to be decided by reference to the contemporaneous communication between the parties.  If the contemporaneous communication of the parties is to make the allegation unbelievable, then the mere existence of the background and surrounding circumstances making the allegation commercially justifiable cannot make it believable.  My role is to decide whether the allegation is factually believable, not whether it is commercially sound.

60. Mr Li asserted that Or, Yeung and Chu of the plaintiff had only made bare denials of the 2 oral agreements.  But that is not a fair criticism.  The denials are well supported by numerous contemporaneous e-mails and drafts of agreements and documents.

61. Mr Li then submitted that the e-mails containing the negotiation history of the Heads of Agreement and Agreement of Sale and Purchase could not conclusively rule out the existence of Or’s 1st agreement. He said that the defendant and Or were the ultimate decision makers but were not featured in the e-mails.

62. He further submitted that the negotiation history as shown in the e-mails in fact supported the presence of some pre-existing discussion and agreement between the defendant and Or on provision of working capital.  He relied on Ken Fung’s e-mail dated 17 December 2009 by which Ken Fung pointed out to the plaintiff’s side the absence of any clause on working capital (p 229).

63. I find it difficult to follow this argument.  If there should have been a pre-existing agreement that Or or the plaintiff should provide all further working capital, Ken Fung would not have said that there was no clause on working capital.  He would have instead asked for the alleged Or’s 1st agreement to be incorporated into the Heads of Agreement and Agreement of Sale and Purchase.  None of the defendant, Ken Fung, Chun or Mak had suggested that the defendant had kept the alleged Or’s 1st and 2nd agreements from Ken Fung, Chun or Mak so that they were ignorant about these oral agreements and hence unable to raise the same in the negotiation.  The defendant also had no reason to have kept these alleged agreements a secret from them.  However, not only did Ken Fung not ask for Or’s 1st agreement to be incorporated into the documents, his pointing out the absence of provision on working capital did result in discussion, formulation and amendment of an agreement in the form of clause 7.2 of the Heads of Agreement which was repeated in clause 7 of the Agreement of Sale and Purchase. The terms of this agreement also contradict the existence of Or’s 1st agreement.

64. Mr Li further submitted that despite the negotiation history in the e-mails, there are still disputes on the defendant’s knowledge and understanding of the terms of the documents that he signed and the representations allegedly made to him that caused him to sign these English documents.

65. If the e-mails are to be given weight, as they should be, then the logical conclusion must be that the defendant was behind Ken Fung, Matthew Chun and Jackson Mak in the negotiation and he was fully briefed by them on the terms of these agreements.  I would not contemplate that Ken Fung, Chun and Mak were carrying on the negotiation without fully involving the defendant.  The defendant was after all the ultimate decision maker on his side as Mr Li had put it.  I cannot imagine how the negotiation could have proceeded to conclusion without input and decision making by the defendant. Contribution of working capital was also one of the most important issues in the negotiation.  I cannot imagine how Ken Fung, Chun and Mak could have wrought out the present clause 7.2 of the Heads of Agreement without the input and agreement of the defendant.

66. Furthermore, the defendant and Ken Fung have never suggested in their affirmations that the defendant had not been consulted, informed and involved in negotiating the terms of the various documents at different times and that he was ignorant of the same.  This submission is thus without factual support from the defendant and I reject it. 

67. Furthermore, if the contemporaneous e-mails have excluded the existence of Or’s 1st and 2nd agreements, then there is no basis for the existence of the representations alleged by the defendant because the representations presupposed and depended upon the existence of the oral agreements.

68. If there were indeed Or’s 1st agreement and assuming that the Heads of Agreement was made in ignorance of it, then the parties would have subsequently amended the Heads of Agreement to make it tally with Or’s 1st agreement.  In any case, they would not have allowed clause 7 of the Agreement of Sale and Purchase, which is the same as clause 7.2 of the Heads of Agreement, to go into the Agreement of Sale and Purchase without argument.  If Or should have committed to invest working capital of HK$1 billion into BVI Landcome, there was no reason why this was not raised and discussed in the e-mails and provided for on the drafts well before completion.  If there should have been any debate on the provision of capital contribution, it should have been in the e-mails exchanged.  Its absence militates against the existence of Or’s 1st agreement and the alleged hot-debate at the plaintiff’s premises on 22 March 2010.

69. Mr Li also argued that even if Or’s 1st agreement is inconsistent with clause 7.2 of the Heads of Agreement, the defendant can still rely on extrinsic evidence to prove the existence of Or’s 1st agreement.  But I think the question here is not whether extrinsic evidence is admissible to prove the existence of collateral terms.  The question is whether the alleged oral agreements are inconsistent with the written agreements, which had been negotiated by the defendant through his aides, accountant and legal executive, and thence the oral agreements are unbelievable.  From the discussion above, I find that the existence of Or’s 1st agreement is unbelievable as a matter of fact.

70. Mr Li also submitted that the plaintiff had invested working capital into BVI Landcome and Shanxi Landcome not in accordance with clause 7 of the Agreement of Sale and Purchase and the plaintiff’s conduct actually supported the existence of Or’s 1st agreement. The point being made seems to be that the defendant had not conducted himself in accordance with clause 7 of the Agreement of Sale and Purchase as he had not made any advancement of working capital.  I think Mr Li, in making this submission, is attempting to use the defendant’s breach of his obligation in clause 7 of the agreement to provide working capital to support his allegation that he did not have to provide for such capital.  Looking at the matter as a whole, I disagree with this submission.

71. Mr Li also attached the plaintiff’s reliance on the entire agreement clause.  I also would not place much reliance on this clause in this application.  My task is not to decide the legal effect of the entire agreement clause, but the factual issue of whether it is believable that there were Or’s 1st and 2nd agreements.

72. Regarding the defendant’s failure to mention the Or’s 1st agreement in his letters to the plaintiff, Mr Li adopted the defendant’s explanation that he did not do so as he did not find it constructive to do so. In other words, he did not do so for the purpose of maintaining a good relationship with the plaintiff.  I agree that one may want to maintain a good relationship and thus not to make demand on the other side.  It is however a different thing from not even raising an obligation owed by the other side which is crucial to the co-operation of the parties.

73. Mr Li then argued that the Loan Agreement was consistent with Or’s 2nd agreement as it provided for that part of Or’s 2nd agreement providing that if the plaintiff did not buy the Celadon shares and loans, the money advanced under the Loan Agreement would be treated as a repayable loan and not the plaintiff’s investment to BVI Landcome.  If that were the case, Mr. Li did not explain and I cannot understand why the Loan Agreement should fail to express the other part of Or’s 2^nd agreement which allegedly provided that if the plaintiff should proceed with the purchase, the loan would become the plaintiff’s investment into BVI Landcome.  I however consider that the Loan Agreement, which required the defendant to repay the loan, is inconsistent with the alleged Or’s 2^nd agreement, which provided that the loan would not be repayable upon the happening of a contingent event.  This is so even if the defendant should assign to the plaintiff the loan that he should advance to BVI Landcome (see below).  His personal obligation to repay is not thereby extinguished.

74. Clause 2 of the Loan Agreement required the defendant to lend the HK$57,000,000 to BVI Landcome.  Clause 5 required him to assign it to the plaintiff his loan to BVI Landcome.  Mr Li also suggests that there is a triable issue on whether the defendant had lent the HK$57,000,000 he borrowed under the Loan Agreement as a loan to BVI Landcome.  Be that as it may, this action is not on whether the defendant has breached the Loan Agreement in not applying the money for the prescribed purpose, but on whether he has to repay the loan to the plaintiff on 16 May 2010.

75. Regarding the assignment of the loan, Rodney Yeung in his 2nd affirmation said that the defendant had in breach of clause 5 in failing to execute the assignment in favour of the plaintiff.  Mr Li accepted that the defendant had not executed the assignment, but guessed that the non-execution might be because the assignment was not meant to be executed.  This submission is again unsupported.  The e-mail exchange shows that the final versions of the Loan Agreement and the assignment were sent by Ronald Chu to Matthew Chun on 17 February for further action.  The non-execution of the assignment is admitted.  The defendant himself however did not suggest that he did not execute the assignment because it was not meant to be executed. 

76. Nevertheless, this issue is one of a few red herrings let loose by the plaintiff and not a question that needs resolution in this action.  Mr Li nevertheless tried to develop an argument from this red herring by saying that the cause of this action is not debt recovery, but the defendant’s failure to execute the assignment of debt.  He then submitted that this is an obscurity in the plaintiff’s cause of action and an unexplained feature of the plaintiff’s claim.

77. He then jumped to the view that this claim bears the appearance of falsity and disreputable business dealing and questionable conduct for which unconditional leave to defend should be given. 

78. I think this is an attempt to create an argument out of a red herring.  I would not lose sight of the question before me, namely whether it is believable as a matter of fact that Or and the defendant had made Or’s 1st and 2nd agreements orally.  To test the believability or otherwise, I only need to look at the contemporaneous exchange of e-mails between the parties at the material times.  I do not accept Mr Li’s argument, which is not even supported by a word of the defendant, that the assignment was not executed as it was not meant to be executed.

79. Mr Li then referred to the Spent Loan Agreement under which HK$200 million was lent to the defendant for him to lend to CGOL for completing the purchase of the Celadon shares and loans.  He submitted that the Spent Loan Agreement is strong corroborative evidence of Or’s 2nd agreement and showed that the plaintiff was accustomed to using a loan agreement as a mechanism for advancing funds to the defendant which was then turned into an assignment of loan to the plaintiff.  I do not agree with this argument.  The use of assignment of loan in situations like that of the Loan Agreement and Spent Loan Agreement is a common commercial practice in Hong Kong.  There is nothing peculiar in the plaintiff’s adoption of such practice. 

80. Furthermore, the terms of the Loan Agreement and Spent Loan Agreement are different.  The Spent Loan Agreement expressly provided that if the plaintiff should exercise the right of purchase under the Heads of Agreement, the loan of HK$200,000,000 would become a part payment by the plaintiff to the defendant of the purchase price.  There is no similar provision in the Loan Agreement which could support the existence of Or’s 2nd agreement.  In other words, the terms of the Loan Agreement when considered in conjunction with the Spent Loan Agreement, militate against the existence of Or’s 2nd agreement.

81. Mr Li further argued that the HK$57,000,000 was advanced under the Loan Agreement on 17 February which was before completion on 22 March and clause 7.2 of the Heads of Agreement only refers to the obligations of the parties to contribute working capital after completion.  This submission, however, is contrary to the terms of the alleged Or’s 1st agreement which covered all further working capital to be contributed by the plaintiff. 

82. This submission is also contrary to the defence and counterclaim pleaded by Mr Li himself.  Mr Li pleaded Or’s 1st agreement in para 3(f) as set out above.  He then pleaded in para 3(j) that it was based on Or’s 1st agreement that the defendant signed the Heads of Agreement.  But clause 7.2 of the Heads of Agreement contradicts Or’s 1st agreement.  I have also considered the e-mail exchange leading to the making of the Heads of Agreement which does not leave any room for Or’s 1st agreement to exist.

83. Mr Li then submitted that even including the HK$57,000,000 advanced under the Loan Agreement to the defendant as part of the plaintiff’s contribution of working capital to BVI Landcome, the total amount of working capital contributed by the plaintiff to BVI Landcome still did not reach 72.5% of the required RMB1 billion.  But this argument is a red herring. It has nothing to do with whether it is believable that there were as a matter of fact Or’s 1st and 2nd agreements.

84. Mr Li then submitted that there are some other reasons for trial.  He said the affidavit evidence before the court cries out for an inquiry into the factual circumstances in which the Loan Agreement was entered into.  He also referred to the plaintiff’s commencement of HCA 1021 in just 3 months before commencing this action.  He said the factual and legal issues in the 2 actions are interwoven and this action should not be resolved in isolation and summarily.  I am of the view that this submission is not backed by reasoning.  No attempt has been made to show how the 2 actions are interwoven.  Save the suggestion that both actions involve the existence or otherwise of Or’s 1st and 2nd agreements, I have not been told anything more about HCA 1021.  Having gone through the pleadings and evidence in this case, I also do not think it necessary for me to go into the disputes in HCA 1021.

85. The final point raised by Mr Li is that the plaintiff has failed to provide Or’s evidence on the circumstances of the negotiation between him and the defendant and that the evidence of the negotiation as disclosed is incomplete.  Mr Li further submitted that the plaintiff had failed to produce all 16 drafts of the Heads of Agreement but just a few versions and there is an absence of any mention in the e-mails of any problem with clause 7 of the Agreement of Sale and Purchase.

86. Taking the last point first, the defendant in opposing an application for summary judgment has the duty to condescend upon particulars (see para. 14/4/4 of HKCP 2003).  Bearing in mind that the drafts and e-mails were exchanged between both sides, if there should be inadequate discovery, the defendant has himself to blame.  I would not withhold summary judgment on account of the defendant’s own failure to raise triable issues. 

87. Regarding clause 7 of the Agreement of Sale and Purchase, it is the same as clause 7.2 of the Heads of Agreement.  I have already dealt with the alleged heated debate at the plaintiff’s premises on 22 March 2010 and ruled it out.  There is no other evidence in the affirmations of the defendant and Ken Fung to suggest that there was any problem about clause 7 in the negotiation.  This is again a submission based on a guess but not a fact.

88. I also hold that if there is clear evidence showing that it is unbelievable that there were Or’s 1st and 2nd agreements, then it is not necessary to consider the circumstance of negotiation between Or and the defendant. 

89. Despite the elaborate and lengthy arguments advanced for the defendant, this case remains a simple one.  It is simply a question of whether it is believable that Or and the defendant had entered into Or’s 1st and 2nd agreements.  Having reviewed the contemporaneous documentary evidence, my answer to this question is no. 

90. I also accept the plaintiff’s explanation for not instituting this action promptly.  I accept that it had matters of greater importance to consider and had preferred to maintain a good relationship with the defendant till June/July 2011.

Judgment and costs order nisi

91. I therefore give final judgment to the plaintiff for the sum of HK$57,000,000.  Regarding interest, the debt was due on 16 May 2010.  I think this action could have been started on 16 August 2010.  I therefore give interest at the judgment rate from 16 May to 16 August 2010 and then from the institution of the action on 27 September 2011 to today.  Post-judgment interest is per section 49 of the High Court Ordinance, Cap 4.  I also make a costs order nisi that the defendant do pay the plaintiff the costs of this action.