LU MING HUI v. HO YU KUEN

HCA472/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.472 OF 2009

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REASONS FOR JUDGMENT

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1. At the hearing on 18 May 2010 there were two matters before me :

(1)    an appeal by the defendant by his notice of appeal dated 6 October 2009 against the decision of Master de Souza given on 22 September 2009 ordering that the defendant’s application for security for costs by summons filed on 29 May 2009 be dismissed with costs; and

(2)    an application by the plaintiff for summary judgment under Order 14, rule 1 of the Rules of the High Court by summons dated 13 May 2009.

2. It was agreed by counsel that I should deal with the application by the plaintiff for summary judgment first.  If judgment were given to the plaintiff then the defendant’s appeal against the decision of the master dismissing the defendant’s application for security for costs would fall away and stand to be dismissed.

3. After hearing arguments on the plaintiff’s application for summary judgment I gave judgment to the plaintiff against the defendant in the sum of HK$5,722,800 with interest on the said sum from 26 July 2007 until judgment at 1% above HSBC’s best lending rate and thereafter at judgment rate until payment.  I also ordered that the costs of the action including the costs of the application be costs in favour of the plaintiff against the defendant such costs to be taxed if not agreed.

4. I also dismissed the defendant’s appeal against the decision of Master de Souza given on 22 September 2009 by way of the defendant’s notice of appeal dated 6 October 2009 with costs to the plaintiff.

5. I indicated at the time that written reasons would be given.  This I now do.

6. The plaintiff’s claim is a claim against the defendant as the maker and issuer of a promissory note.  The promissory note was issued on 25 January 2007 with a maturity date of 25 July 2007 (“the promissory note”).

7. By the promissory note it was provided that for value received the defendant :

“ … hereby promise to repay the [plaintiff] ……… on the Maturity Date July 25, 2007 the whole deferred loan payment amount of HK$5,772,800 (the ‘Loan’) extended by the [plaintiff] to the [defendant] on the Issuance Date January 25, 2007.”

8. The promissory note sets out the nature of the Loan and states that it was extended by the plaintiff to the defendant :

“ … in connection with the sale of the 131,200,000 ordinary shares of Rontex International Ltd by the [plaintiff] to the [defendant] as stipulated in the Sale and Purchase Agreement executed by the [plaintiff] and the [defendant] on January 25, 2007, the Issuance Date.”

9. The promissory note also provided that :

“ The Loan shall be repaid in full in one lump sum on the Maturity Date by the [defendant] to the [plaintiff] whereby upon full repayment of the Loan by the [defendant] the [promissory note] shall be fully redeemed.”

10. The 131,200,000 shares of Rontex International Ltd (“the shares”) were the subject of the sale and purchase agreement between the plaintiff and the defendant made on 25 January 2007 (“the sale and purchase agreement”) the same day as the issuance of the promissory note.  The sale and purchase agreement was signed by the plaintiff as vendor and the defendant as purchaser of the shares in the presence of a solicitor.

11. Section 89(1) of the Bills of Exchange Ordinance, Cap. 19 (“the Ordinance”) provides that :

“ A promissory note is an unconditional promise in writing made by one person to another signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person or to bearer.”

12. There can be no doubt that the promissory note is an unconditional promise in writing signed by the defendant as its maker engaging to pay HK$5,772,800 at a fixed future time namely, 25 July 2007 to a specified person namely, the plaintiff.  There can be no doubt that the promissory note is a promissory note within the definition in section 89(1) of the Ordinance.

13. The defendant has not paid the sum of HK$5,772,800 to the plaintiff on 25 July 2007 or at any other time.  Despite demands by the plaintiff on the defendant, the defendant still failed to pay the said sum or any other sum to the plaintiff.

14. On an Order 14 application for summary judgment the threshold onus is on a defendant to show that there is a triable issue.

15. It is trite that a bill of exchange or a promissory note is to be treated as cash.  As Lord Denning MR said in Fielding and Platt Ltd v Najjar [1969] 2 All ER 150 at 152 :

“ We have repeatedly said in this court that a bill of exchange or a promissory note is to be treated as cash. It is to be honoured unless there is some good reason to the contrary.”

16. What then are said to be the defences to the plaintiff’s claim on the promissory note?

17. Mr Chang, for the defendant, submitted that there were two defences :

(1)    that the parties did not intend the promissory note to carry any legal effect; and

(2)    that there was an agreement whereby the claim was discharged.

18. The defendant’s case is that the plaintiff held the shares as a nominee for Ms Chou Mei (“Chou”), the plaintiff’s sister-in-law.  Chou’s husband was at all material times the Chairman and an executive director of Rontex and Chou was an executive director of Rontex.  The defendant, it is alleged, assisted Rontex to salvage its business operations and Chou offered the shares to the defendant for free as a reward for his past work and an incentive for the defendant’s team to stay on.

19. Paragraph 11 of the defence pleads that the sale and purchase agreement and the promissory note :

“ … were prepared for documentation purpose only, and no further, and were understood and agreed by all parties involved not to be carrying any legal effect that the face of the document might convey. The true and only agreement and intention of all the parties involved was that [the shares] were to be transferred to [the defendant] for free.”

20. The evidence in support of the defence case is the oral evidence of the defendant and his business associate Mr William Chan Ching Kee (“Chan”) in their affirmations.  There is nothing in writing to support the assertions of the defendant.  It seems to me that what the defendant is seeking to do is to contradict by oral evidence the unconditional promise in writing of the defendant to pay HK$5,772,800 on the date fixed for payment namely, 25 July 2007.  The oral evidence relied on is inadmissible as the defendant seeks by parol evidence to contradict the written promissory note (Hennabun Capital Ltd v Wong Chun Hung Vincent, HCA 340/2001, my judgment dated 9 January 2002; S Y Chan Ltd v Choy Wai Bor [2001] 4 HKC 285).

21. The case of Plaza Company and others v. Tso Kar Yin [1959] HKLR 390 relied on by Mr Chang is clearly distinguishable and provides no assistance to the defendant.

22. Not only does the defendant seek to contradict the promissory note by parol evidence he also seeks to contradict the sale and purchase agreement by inadmissible parol evidence.

23. As the evidence is inadmissible the defendant fails to show a triable issue on the first defence which must fail.  That disposes of the first defence.

24. I would observe that in any event the defendant’s assertions are in my view unbelievable.  The defendant asserts at paragraph 17 of his affirmation that Chou and her husband offered to transfer the shares to him free of payment as a reward to his team for all the past work undertaken to help Rontex through its financial problems and as an incentive for him and his team to stay on and that he agreed to their proposal.  However, at paragraph 18 of his affirmation the defendant asserts that Chan suggested to him that there should be some documentation to show the conveyance of the shares to the defendant rather than just to take the same for free and Chan approached a solicitor in Messrs Hastings & Co. (“Hastings”) :

“ … to design the necessary documentation and it was he who prepared the [sale and purchase agreement] between the Plaintiff and I ……… recording a purported sale of [the shares] from the Plaintiff to me at a consideration of HK$5,772,800 payable by way of promissory note.”

25. The defendant went on to say at paragraph 20 of his affirmation that Chan prepared the promissory note “which on its face recorded a purported loan” made by the plaintiff to the defendant.

26. A transaction in which the parties intended not to create those legal rights and obligations that they then give the appearance of creating is a sham transaction (Hong Kong Legal Dictionary, page 908).

27. In my view it is incredible that the defendant, who is a sophisticated businessman involved for many years in corporate restructures, Chan, who for many years was an investment banker, and a solicitor would enter into a sham transaction by the making of the sale and purchase agreement and the promissory note.  There is no plausible reason given as to why the alleged sham transaction was created.

28. I would also observe that there was also a bought and sold note in respect of which stamp duty was paid evidencing the sale of the shares by the defendant from the plaintiff for the total consideration of HK$5,772,800.

29. There was uncontradicted evidence of a shareholding disclosure made disclosing the purchase of the shares by the defendant at the consideration of HK$0.044 per share.  131,200,000 shares at HK$0.044 per share comes to HK$5,772,800.  There was also uncontradicted evidence showing that after the transfer of the shares to the defendant, the defendant disposed of most, if not all, of the shares.

30. Quite apart from the fact that the oral evidence relied on is inadmissible, the defendant’s assertions are unbelievable in my view.

31. As to the second defence of there being a discharge of the liability to pay under the promissory note, paragraph 16(1) of the defence pleads that the defendant agreed to procure warrants for 120 million Rontex shares to be issued to Chou’s two nominees on the understanding, accepted by Chou, that :

“ … after such exercise, Chou (whether by herself or through her nominee, [the plaintiff] would have no claim in respect of [the shares] (whatever any such claim may have been) against [the defendant] in the future.”

32. The pleaded case is that after the procuring of the warrants by the defendant for 120 million shares to Chou’s nominees there would be no claim in respect of the shares.  The plaintiff’s claim is clearly not in respect of the shares.  It is simply a claim for the sum of HK$5,772,800 on the promissory note with interest and costs and nothing else.  As I have said, most, if not all, of the shares have already been disposed of by the defendant.

33. I would also observe that the defendant’s assertion that there was an agreement with Chou that there would be no claim in respect of the shares is inconsistent with and contradicted by the defendant’s inadmissible evidence that the shares were given to him for free.  If the shares had been given to him then I fail to see why there was an agreement that there would be no claim in respect of the shares.  No plausible explanation is given for this.  It seems to me that the defendant’s bare assertion is contradicted by his own inadmissible evidence.

34. Mr Chang, for the defendant, referred to a number of documents and submitted that these showed that the shares belonged to Chou and not to the plaintiff.  I am unable to accept Mr Chang’s submissions.

35. Mr Chang relied on internal emails sent on 22 September 2006 and 25 July 2007 at pages 186 and 193 of the bundle.  I place no reliance on these emails which are purely internal emails on the defendant’s side.  These are not admissions in any way by the plaintiff or Chou.

36. The Primary Engagement Agreement at pages 79 to 85 of the bundle relied on by Mr Chang does not show that the shares were owned by Chou and not the plaintiff.

37. The Joint Venture Preliminary Agreement at pages 189 to 191 of the bundle relied on by Mr Chang does not support the defendant’s bare assertion.  Clause 2 of that agreement clearly states that the shares were “owned” by the plaintiff.  That agreement was also signed by the defendant as a party.  It seems to me that what is contained in clause 2 contradicts the defendant’s bare assertion that the shares were owned by Chou.

38. The defendant’s bare assertion is also contradicted by :

(1)          the Escrow Agreement at pages 68 to 77 of the bundle where the shares are said to be beneficially owned by the plaintiff;

(2)          the power of attorney at page 116 of the bundle appointing Hastings as the plaintiff’s attorney in connection with the sale of the shares by the plaintiff to the defendant where it is clearly stated that the plaintiff was the beneficial owner of the shares;

(3)          the sale and purchase agreement which describes the plaintiff as the beneficial owner of the shares in clause 1.1; and

(4)          the promissory note.

39. No triable issue is shown on the second defence relied on.

40. For the above reasons, I gave judgment to the plaintiff on its claim with costs as set out above at paragraph 3.

41. The appeal by way of the notice of appeal dated 6 October 2009 fell away and was dismissed.  As costs should follow the event I also made the order for costs as set out above at paragraph 4.