CHAN YU YAN v. IMPERIAL SIERRA GROUP HOLDINGS LTD AND ANOTHER

HCA 2048/2019

[2022] HKCFI 2852

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2048 OF 2019

--------------------------

--------------------------

--------------------------

DECISION

--------------------------

THE APPLICATION

1.  Before this Court is a summons taken out by the defendants on 1 March 2022 (“the Summons”), pursuant to which they seek, among other things, an order that the following orders be stayed pending the defendants’ appeal to the Court of Appeal:

(1)  The order of Master Connie Lee dated 3 September 2020 granting summary judgment against the defendants; and

(2)  The order of Recorder Anthony Houghton SC dated 18 January 2021, inter alia, that the defendants pay costs in the amount of $130,000 to the plaintiff[1].

LEGAL PRINCIPLES

2.  The legal principles governing stay of execution are trite.  In Star Play Development Limited v Bess Fashion Management Co. Ltd. [2007] 5 HKC 84, it was held by Ma J (as his Lordship then was) that the starting point is that the successful party is not to be deprived of the fruits of his success, and that it is always relevant to consider the prejudice that would be caused to the successful party in the event a stay is granted.

3.  The existence of an arguable appeal (that is, one with reasonable prospect of success) is the minimum requirement before a court would even consider granting a stay.  However exceptional the circumstances may be otherwise justifying a stay of execution, if there exist no arguable grounds of appeal, no stay will be granted.

4.  In the event the Court is satisfied that there is a strong likelihood that the appeal would succeed, that in itself would enable a stay to be granted because this would constitute a good reason for a stay.

5.  If there is just an arguable appeal instead of a strong one, the appellant has to provide additional reasons as to why a stay is justified.  The demonstration of an appeal being rendered nugatory in the absence of a stay is a common example.

6.  It would be impractical and even undesirable for the Court to go deeply into the merits or strengths of the appeal, although the Court must still form a preliminary view of these aspects.[2]

THE ISSUE

7.  As Counsel for the defendants did not argue that the appeal would be rendered nugatory without a stay of execution, the question which this Court has to consider in the determination of the Summons is whether the defendants can demonstrate that there is a strong likelihood that the appeal would succeed.  A mere arguable appeal is not enough.  In this regard, I agree with the defendants’ argument that it would be sufficient if the defendants can show that there is a strong likelihood that the Court of Appeal would set aside the orders of the learned Recorder and the learned Master and grant conditional leave to defend (as opposed to unconditional leave to defend).

THE PARTIES’ RESPECTIVE CASES

The plaintiff’s case

8.  The plaintiff’s claim is straight-forward.  He is suing the defendants on a Subscription Agreement dated 3 February 2017 (“the Subscription Agreement”) entered into among himself, the 1^st defendant and the 2^nd defendant.   Under the Subscription Agreement:

(1)  The plaintiff agreed to acquire convertible bonds for the principal amount of $5 million (“the Bonds”) issued by the 1^st defendant in the form of the bond instruments attached to the Subscription Agreement;

(2)  In consideration of the plaintiff’s entering into the Subscription Agreement, the 2^nd defendant (i) guaranteed to the plaintiff the full, due and punctual performance of all the obligations of the 1^st defendant under the Subscription Agreement, and (ii) undertook that he would, as primary obligor, perform such obligations on the 1^st defendant’s behalf in case of its failure.

9.  By an instrument dated 8 February 2017 executed by the 1^st and 2^nd defendants (“the Instrument”):

(1)  the 1^st defendant agreed to issue the Bonds upon the terms and conditions contained in the Instrument; and

(2)  the 2^nd defendant agreed to guarantee the due and punctual fulfilment by the 1^st defendant of its obligations under the Instrument, and to pay all sums in respect of which default has been made by the 1^st defendant.

10.  In reliance on the terms and conditions of the Subscription Agreement as well as the Instrument, the plaintiff subscribed the Bonds (in the principal amount of $5 million) which carried interest at the rate of 15% per annum with the maturity date of 8 February 2018.

11.  The maturity date of the Bonds was subsequently extended to 31 March 2018 by an agreement dated 23 March 2017. Pursuant to the aforesaid agreement, the 1^st defendant served a notice prior to 31 March 2018 to the plaintiff, and by virtue of which the maturity date was further extended to 30 September 2018. 

12.  The 1^st defendant defaulted in repaying the principal sum of $5 million and the accrued interest thereon by the extended maturity date on 30 September 2018.  Despite demands made by the plaintiff, the 1^st and 2^nd defendants still failed to repay the outstanding amount or any part thereof.

The defendants’ case

13.  At the material time, the 2^nd defendant was minded to conduct initial public offering (“IPO”) for the 1^st defendant and to list it on the Hong Kong Stock Exchange.

14.  For this purpose, the 2^nd defendant invited different Pre-IPO investors to join the 1^st defendant.

15.  In order to get listed, the 1^st defendant sought the advice of Mr Fabian Shin (“Mr Shin”), the Chief Executive Officer of Zhaobangji International Capital Limited (“ZIC”).  ZIC then became the Sole Sponsor for the 1^st defendant.  It was further agreed by the 1^st defendant and ZIC that, for the purpose of the IPO, two arrangements would be made:

(1)  An engagement agreement for professional services between the 1^st defendant and ZIC (“the Engagement Agreement”) would be entered into, pursuant to which the 1^st defendant shall pay $5 million to ZIC as professional fee which would be payable at different stages of the IPO process;

(2)  The 1^st defendant shall enter into a subscription agreement of convertible bonds with a person nominated by ZIC, for the purpose of providing more incentive to ZIC in assisting the 1^st defendant to get listed successfully.  This nominee shall be “investing” $5 million as subscription fees for convertible bonds, which would allow the nominee to subscribe for 33,333,333 shares of the 1^st defendant.  If the IPO project is successful, ZIC would be entitled to hold the shares through the nominee and earn the difference between the subscription price and the market price of the shares.  However, if at the end of the day the IPO project is unsuccessful, ZIC and/or the nominee would not be able to get a “refund” of and/or the “interest” of the subscription fees under the Subscription Agreement.[3]

16.  Mr Shin informed the 2^nd defendant that the plaintiff was the nominee of ZIC and would be a Pre-IPO investor. 

17.  As a result, the Subscription Agreement and the Instrument were signed. 

18.  To date, no hearing on the listing of the 1^st defendant had been held, and therefore only $2.5 million had been paid by the 1^st defendant to ZIC pursuant to the payment schedule stipulated in the Engagement Agreement.

19.  In around late March and early April 2018, Mr Shin told the 2^nd defendant that he had left ZIC, and ZIC was no longer licenced to advise on corporate finance matters pursuant to the Securities and Futures Ordinance.  As a result, the IPO project was halted because ZIC could no longer assist the 1^st defendant.

20.  As the 1^st defendant was unable to get listed on the Hong Kong Stock Exchange:

(1)  ZIC would not be entitled to the remaining unpaid professional fees in the sum of $2.5 million;

(2)  ZIC would not be entitled to the “bonus” pursuant to the convertible bonds arrangement; and

(3)  The plaintiff is not entitled to any remedies in this action because (i) he had no stake in the arrangements between ZIC and the 1^st defendant; and (ii) he was only a nominee of ZIC which had “breached the arrangements”[4] with the 1^st defendant.

PROCEDURAL HISTORY

21.  This is in fact not the first court action brought by the plaintiff against the defendants.

22.  On 24 December 2018, the plaintiff commenced HCA2972/2018 (“the 2972 Action”) against the defendants for the sum due under the Bonds.

23.  The defendants filed their Defence in the 2972 Action on 22 March 2019.  The only defence pleaded therein was that by virtue of an alleged oral agreement made on 20 December 2018, the maturity date of the Bonds had been extended to 31 December 2018, and accordingly no cause of action had been accrued yet by the time the Writ in the 2972 Action was issued.

24.  As in the present case, the plaintiff also brought an application for summary judgment in the 2972 Action.  In opposition, the defendants filed the 2^nd defendant’s Affirmation on 8 October 2019 (“the 2972 Affirmation”)

25.  The plaintiff subsequently decided to discontinue the 2972 Action and commenced the present action on 7 November 2019.

26.  On 3 September 2020, Master Connie Lee acceded to the plaintiff’s application for summary judgment against the defendants.

27.  The defendants then brought an appeal against the learned Master’s decision to a Judge in Chambers.  The appeal was dismissed by Recorder Houghton SC on 18 January 2021.  The Reasons for Decision was handed down on 26 February 2021 (“the Reasons for Decision”), in which the learned Recorder held that:

“11. The central issue in the defence therefore is whether the role of the plaintiff was as principal or as nominee for others and, if the latter, whether having taken on the role precludes him from bringing a claim under the Subscription Agreement.

12. In terms of the Subscription Agreement there is no question about the plaintiff’s entitlement. Moreover, that subscription agreement contains an entire agreement clause, constituting a contractual agreement between the parties to that Subscription Agreement to the effect that the full contractual terms are to be found in that document. The defendants contend that an oral collateral agreement may constitute an exception to the entire agreement clause, and for present purposes I accept that in appropriate circumstances that may be the case.

13. However, in order to merit such an issue going forward to trial, it would be necessary in my view for sufficient evidence to be made available as to the existence of that oral collateral contract, and in particular as to its effect and impact on the plaintiff’s title to sue in the present circumstances. This is especially important if there is a lack of clarity as to who the plaintiff may have been a nominee for. No such evidence has been adduced. There is no written evidence supportive of the oral agreement and, as submitted by the plaintiff, it was not raised at any earlier point in the litigation. No particulars are given as to when the agreement is said to have been made, nor indeed how the plaintiff was bound by it. It is contradicted by the plaintiff’s evidence.

14. Moreover, and again as pointed out by the plaintiff, the 2^nd defendant is not alleged to be a party to the oral agreement and, therefore, he would not be either bound by it or entitled to benefit from it.

15. It is clear law that a defendant bears an evidential burden to show a triable issue or a bona fide prospective defence. In my judgment, in the present case, the defendants have failed to rise above the level of mere assertion as to the proposed defence.In my judgment this is of particular significance given that the Subscription Agreement contains an entire agreement clause, and the collateral agreement alleged was such as to negate entirely the plaintiff’s express entitlements under the Subscription Agreement.

16. For completeness, I record that I was far from persuaded that any issue of waiver or estoppel such as was proposed by counsel for the defendants arose in this case.  This was not clearly enunciated and the central elements, such as a representation made by the plaintiff, or detriment on the part of the defendants were absent.”

28.  The defendants filed a Notice of Appeal to appeal against the learned Recorder’s decision on 16 February 2021.  They further filed a Supplementary Notice of Appeal on 13 May 2022 (“the Supplementary Notice of Appeal”).

THE GROUNDS OF APPEAL

29.  The defendants have put forward the following grounds of appeal in the Supplementary Notice of Appeal:

(1)  The learned Recorder ought to have found that there are triable issues on:

(a)  Whether the plaintiff was a mere nominee and/or trustee of ZIC, and therefore any agreements made by ZIC would also bind the plaintiff as its nominee and/or trustee;

(b)  Whether there was any collateral contract between ZIC and the defendants, that ZIC as the Sponsor to the 1^st defendant, ZIC would not enforce the Subscription Agreement if ZIC failed to complete the listing for the 1^st defendant; and

(c)  Alternatively, whether ZIC had waived or is estopped from enforcing the Subscription Agreement if ZIC failed to complete the listing for the 1^st defendant.

(2)  The learned Recorder had failed to give reasons.

DISCUSSION

30.  As aforesaid, this Court has to form a preliminary view on whether there is a strong likelihood that the defendants’ appeal will succeed.  I will consider the defendants’ grounds in turn below accordingly.

Ground 1(a) – the plaintiff as ZIC’s nominee

31.  Mr Tam for the defendants recognised that the learned Recorder had rejected the defendants’ case that the plaintiff was the nominee and/or trustee of ZIC on the basis that there is a lack of clarity as to for whom the plaintiff was a nominee; and the conclusion on “lack of clarity” was based on the learned Recorder’s view that there was an apparent contradiction between (i) the 2^nd defendant’s evidence in the 2972 Affirmation that the plaintiff was the nominee of other investors, and (ii) the 2^nd defendant’s current evidence that the plaintiff was the nominee of ZIC.

32.  However, Mr Tam submitted that the learned Recorder had a misapprehension of material fact and that there was in fact no contradiction between the evidence given in the 2972 Affirmation and that given in this action.

33.  In the 2972 Affirmation, the 2^nd defendant stated that:

“8. In fact, the Subscription Agreement dated 3 February 2017 in this case was one of the agreements that was signed by the Plaintiff through the arrangement of Mr.Shin, and I only met Mr. Chan Yu Yan once when I was required by the law firm […] for signing the Subscription Agreement. As per Mr Shin, Mr Chan Yu Yan was merely a nominee of some investors and the fund to be provided for subscribing the Convertible Bonds was not from Mr Chan Yu Yan […]” (emphasis added)

34.  Mr Tam submitted that the content in the 2972 Affirmation should be understood in context, in that the only defence relied on at that time was that the plaintiff had sued the defendants pre-maturely (before the extended maturity date).  In such circumstances, it was said that the precise legal identity of the person for whom the plaintiff acted a nominee was not crucial in the 2972 Action at all.

35.  It was further submitted that even if the 2^nd defendant’s evidence was open to criticism on the basis of such alleged discrepancy, the learned Recorder was in fact and in substance (i) conducting a mini-trial on affidavits and (ii) focussing solely on what the 2^nd defendant said without consideration of the basic premise of the plaintiff’s claim or its inherent strength or weakness, and this would amount to an error in law.

36.  Furthermore, Mr Tam seems to be suggesting the plaintiff’s evidence on one hand that he had no knowledge about the two arrangements between the 1^st defendant and ZIC and on the other hand that he admitted he was approached by ZIC to invest in the 1^st defendant are contradictory.

37.  I do not agree that these arguments have any reasonable prospect of success, not to mention a strong likelihood of success:

(1)  I do not think there is any misapprehension of material fact on the part of the learned Recorder as alleged.  In my view, there is plainly an important contradiction in the 2^nd defendant’s own evidence as to the capacity of the plaintiff.  In the current defence case, only ZIC was the alleged party for whom the plaintiff acted as a nominee, whereas in the 2972 Affirmation, he clearly stated that the plaintiff was a nominee of some investors;

(2)  The crux of the matter is not whether the precise legal identity of the person for whom the plaintiff acted as a nominee is or is not crucial to the defendants’ defence as pleaded in the 2972 Action. The point is that the 2^nd defendant had given inconsistent evidence;

(3)  I find it difficult to accept that the defendants would have decided to keep totally silent on the “ZIC’s nominee” point in the Defence filed in the 2972 Action and in the 2972 Affirmation if the plaintiff was indeed ZIC’s nominee as alleged;

(4)  Holding that the defendants’ case is not credible by referring to the internal inconsistencies of the 2^nd defendant’s evidence (albeit filed in two different civil actions) does not amount to “mini-trial on affidavits”;

(5)  Since the plaintiff has plainly demonstrated by referring to the Subscription Agreement that it is, prima facie, entitled to judgment, the burden is on the defendants to show that they have a credible defence.  Hence, there is nothing wrong for the learned Recorder to focus on the defendant’s evidence and it is also incorrect for Mr Tam to submit that the learned Recorder did not “consider the basic premise of the plaintiff’s claim”;

(6)  I do not agree that the plaintiff’s evidence that he had no knowledge about the two arrangements between the 1^st defendant and ZIC is inconsistent with his admission that he was approached by ZIC to invest in the 1^st defendant.

Ground 1(b) – Collateral contract between ZIC and the defendants

38.  Mr Tam submitted that when the learned Recorder rejected the defendants’ case that there was a collateral contract between ZIC and the defendants, his Lordship had failed to take into account the recordings of two contemporaneous messages sent by Mr Shin which, it was said, support the defendants’ case.

39.  Firstly, I am of the view that it would be very difficult to persuade the Court of Appeal that the learned Recorder did not take into account the two contemporaneous messages at all (even though he did not refer to them in the Reasons for Decision), given the fact that his Lordship had given his decision right away on the same day after he had heard arguments from both sides, and that he reduced his reasons into writing within 6 weeks thereafter.  Such messages must have been in his Lordship’s mind when he considered the matter.

40.  Secondly, in any event, those contemporaneous messages cannot assist the defendants. 

41.  The first of those two messages reads:

“因為呢，佢哋即係潮州幫呢，啲friend全部都係國內人，佢都費殺思量先搵到個香港人出嚟，咁所以就耐左少少。即係我哋搵香港人啲friend就容易呀，咁佢潮州人，咁佢深圳潮州人呢，佢…佢啲fan屎全部都係深圳啲人多，佢都幾經佢即係費殺思量啦叫做終於搵到個香港人出嚟，因為Anthony成日叫我搵個人，所以比較麻煩啲”

42.  Mr Tam submitted that this message shows that ZIC wanted to look for a Hong Kong resident to act as a nominee. With respect, I really cannot see how it could be so said. 

43.  In fact, this message is also consistent with the plaintiff’s case, as it was his evidence that he was approached by ZIC which introduced him to this opportunity to invest in the 1^st defendant[5].

44.  The second message reads:

“早晨早晨又講返啲比較有意義啲嘅嘢你聽，琴日講啲嘢即係又唔知點好，又同你『呻』下嫁啫，唔好意思呀。啦我同佢哋講呢話叫佢哋不如叫佢地withdraw個writ，如果你亦都可以同佢哋deal with concern， confirm到就係話，er…immediately 一withdraw左個writ，你果個新嘅fundings就ready ，可以幾日內ready左之後就即刻可以呢度去replace左呢5 mil 咁樣，咁我同佢make左呢個suggestion，佢未覆我嘅。咁我覺得呢個係is the way to do it 啦 rather than 係度糾纏搞嚟搞去呀，咁我睇下佢點覆，咁我update你這啫呢件事，唔該晒唔該晒唔該晒，我盡量嚟緊呀兄弟盡量我都唔講名啊唔講咩呀，盡量都make thing simples，因為我唔知有無人錄音架嘛你知係咪呀，唔該晒唔該晒”

45.  It was said that, judging from the timing of this message (it was sent by Mr Shin on 5 January 2019) and the date of issuance of the Writ in the 2972 Action (24 December 2018), it could be inferred that Mr Shin was referring to the plaintiff’s writ in the 2972 Action in this message and that this would support the defendants’ case that the plaintiff was acting as ZIC’s nominee.

46.  With respect, even if Mr Shin was referring to the plaintiff’s Writ filed in the 2972 Action, I do not understand how it could be said that this would support the defendants’ case that the plaintiff was ZIC’s nominee.

47.  Taking the defendants’ case to the highest, this message could only show that Mr Shin was trying to resolve the differences between the plaintiff and the defendants.

48.  Mr Tam submitted that Mr Shin was suggesting by this message that the 2^nd defendant should find another Pre-IPO investor to replace ZIC’s nominee, i.e. the plaintiff.  As far as this part of the second message is concerned, Mr Shin, by the word “replace”, seems to me to be suggesting that the new funding of $5 million to be raised would be paid to the plaintiff.  This actually contradicts the defendants’ case that the plaintiff was not entitled to redeem the Bonds at all.

49.  Mr Tam also argued that:

“The fact that Mr Shin would tell P to withdraw his writ under HCA 2972/2018 corroborates Ds’ case that P is precluded from obtaining a refund of the Subscription Fees under the Subscription Agreement.”

50.  With greatest respect to Mr Tam, this is a desperate attempt to twist the plain meaning of the message. 

51.  Further, if the plaintiff was ZIC’s nominee as alleged to the extent that he would be bound by any instruction to be given by ZIC, Mr Shin did not have to make any suggestion (“不如叫佢地”) but could give the instruction without consultation with the 2^nd defendant.  Moreover, Mr Shin did not have to wait for the plaintiff’s reply (“咁我睇下佢點覆”), and there should have been no room for “struggling” if the plaintiff was just a nominee (“rather than 係度糾纏搞嚟搞去呀”), because the plaintiff should have no say on how the 2972 Action should be dealt with.

52.  Mr Tam further criticised the learned Recorder’s views as expressed in paragraphs 9 and 13 of the Reasons for Decision[6]. Those criticisms are totally without merit:

(1)  It is entirely proper for the learned Recorder to take into account the defendants’ failure to plead and rely on the alleged collateral agreement in the 2972 Action.  I reject Mr Tam’s argument that since the defence pleaded in the 2972 Action was that the action was commenced pre-maturely, the oral agreement was irrelevant therein.  On my part, it is difficult to imagine that a defendant would decide to omit deliberately a line of defence;

(2)  Mr Tam commented that even though the learned Recorder took the view that the alleged oral agreement is contradicted by the plaintiff’s evidence, that in itself is insufficient in dismissing the defendants’ appeal.  That is true.  However, it is clear that the learned Recorder did not rely on that factor alone in coming to his conclusion in the appeal.

Ground 1(c) – Waiver and estoppel

53.  Mr Tam submitted that the learned Recorder was under a misapprehension of the material facts that the relevant common assumption was shared between the defendants and the plaintiff, when it was in fact shared with ZIC.

54.  In my view, the learned Recorder did not make any mistake as alleged.  What he was saying was simply that since the central elements, such as a representation made by the plaintiff, or detriment on the part of the defendants were absent, his Lordship was far from persuaded that any issue of waiver or estoppel arose in the present case.  Mr Tam’s acceptance that the common assumption was only shared between the defendants and ZIC, rather than between the plaintiff and the defendants, only reinforced this point. 

55.  Furthermore, once the Court has come to the view that it is not arguable that the plaintiff was a nominee of ZIC, the argument on waiver or estoppel is a non-starter in the circumstances of the present case.

Ground 2 – Failure to give reasons

56.  Mr Tam complained that the learned Recorder did not give any reason as to why he accepted the plaintiff’s case, despite the fact that:

(1)  The plaintiff did not produce any evidence that the $5 million were his own monies;

(2)  The plaintiff admitted that he had had contact with a representative of ZIC;

(3)  The plaintiff was the only one of the Pre-IPO investors who had no personal and/or business relationship with the 2^nd defendant or the CEO of the 1^st defendant.

57.  To support his argument, he relied heavily on what Cheung JA held in Ju Yan Di Embroidery Genesisy v Yau Wai Han [2015] 1 HKLRD 822, in which his Lordship stated in paragraph 14 thereof that:

“14. It is well-established that the burden on the defendant in a summary judgment application is to show that he has a credible defence and he must condescend to give particulars of his defence. However, this does not mean that once the plaintiff invokes the application and irrespective of the strength of his case, the defendant bears all the burden of showing that there are triable issues in the case. This is because the starting point in a summary judgment application is that it should only be invoked when there is no defence to the claim. This means that the plaintiff must in the first place demonstrate that the defendant has indeed no defence. This requirement is further recognised in the procedural rules which mandate the plaintiff to state his belief in the verifying affidavit that there is no defence to the claim. This requirement must be kept in proper perspective when assessment is made of the strength of the application, otherwise there is a danger that the attention will be focused solely on what the defendant has said without consideration at the same time of the basic premise of the plaintiff’s claim or its inherent strength and weakness…” (Mr Tam’s emphasis)

58.  With greatest respect to Mr Tam, this Ground is totally without merit.

59.  Firstly, by referring to the Subscription Agreement, the plaintiff has plainly demonstrated that the defendants have indeed no defence.  The burden is on the defendants to show that they have a credible defence.

60.  Secondly, the learned Recorder had, in my view, adequately explained why he considered that the defendants had failed to raise any bone fide defence or any issue which merited a trial of the action. 

CONCLUSION

61.  To conclude, I am not satisfied that the defendants have demonstrated that there is any strong likelihood that they would be able to persuade the Court of Appeal that the learned Recorder was wrong in not even granting them conditional leave to defend. 

ORDER

62.  By reasons of the aforesaid, I dismiss the defendants’ Summons.

COSTS

63.  I make a costs order nisi that the defendants shall bear the plaintiff’s costs of the Summons.

64.  The above order nisi shall become absolute in the absence of application to vary (which, if any, shall be made by letter, and will be disposed of on paper) within 14 days hereof.

65.  The plaintiff’s costs of the Summons shall be summarily assessed in lieu of taxation.  Unless any application for variation of the aforesaid costs order nisi is made within time, the defendants shall lodge and serve their statement of objection within 7 days after the expiry of the said 14-day period[7]. Summary assessment of the plaintiff’s costs of the Summons will be conducted on paper (no matter whether any statement of objection is lodged by the defendants within time) thereafter.  The costs assessed shall be payable by the defendants within 14 days after assessment.