CHINA MINSHENG BANKING CORP. LTD v. DICHAIN HOLDINGS LTD

HCCT34/2007
& HCA2401/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 34 OF 2007

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

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

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

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

REASONS FOR JUDGMENT

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

1. On 15 April 2008, I have heard the submissions of the plaintiffs, Pearl Oriental and Orient Day, and the China Minsheng Banking Corp. Ltd (Shenzhen Branch) (“the Bank”).  I have made the following orders, namely :

(1)     the charging order nisi shouldbe made absolute in favour of the Bank with costs to the Bank to be taxed if not agreed on party and party basis; and

(2)     the appeal of the Bank as an intervener in HCA2401/2006 in the Order 14 appeal is allowed with costs on indemnity basis to be taxed, if not agreed and the summary judgment should be set aside.  

2. The following is my reasons therefor. 

3. On 12 December 2005, “the Bank” and DiChain Software entered into a loan agreement whereby the Bank agreed to lend RMB 16 million to DiChain Software (“the Loan”). 

4. On 31 December 2005 the Bank and DiChain Holdings entered into a guarantee agreement whereby DiChain Holdings guaranteed the repayment of the aforesaid Loan (“the Guarantee”).  Both DiChain Software and DiChain Holdings failed to repay the Loan.  Consequently on 30 April 2007, pursuant to the terms of the Guarantee, the Bank obtained a Mainland arbitration award against DiChain Holdings in respect of the Guarantee (“the Mainland Award”).  On 18 May 2007, the Bank obtained an order from Mr Justice A. Cheung to enforce the Mainland Award provided that DiChain Holdings would not apply to set aside that said order within 14 days (“the Enforcement Order”) under HCCT34/2007. 

5. By a summons dated 1 June 2007, DiChain Holdings applied to set aside the Enforcement Order.  This summon was heard and dismissed with costs by Mr Justice A. Cheung on 28 June 2007. 

6. In the meantime on 25 May 2007 the Bank applied for a charging order.  The subject matter of the charging order is a lot of 20 million shares in one Pearl Oriental Innovation Ltd. (“Pearl Oriental”).  This is a public listed company trading under the Stock Code of “632”.  In fact 19,647,377 shares are held by DiChain Holdings whilst the balance of 352,622 shares are held by its holding company, one Farsight Holdings Ltd. (“the Shares”).  The Shares are believed to be the only substantial asset of DiChain Holdings held in Hong Kong. 

Correspondences between the Bank’s solicitors and Pearl Oriental’s solicitors

7. The Bank’s solicitors Messrs Christine M. Koo & Ip (“CMKI”) informed Pearl Oriental that the charging order nisi has been obtained by a letter dated 7 June 2007.  

8. Pearl Oriental’s solicitors Messrs Lau, Kwong & Hung (“LKH”) requested from CMKI for copies of the relevant court papers filed in relation to the charging order application on 8 June 2007.  The papers were then delivered to LKH by CMKI on 14 June 2007.  By a letter dated 20 June 2007, LKH informed CMKI that the Shares are “under contract to be pledged” to Pearl Oriental which has issued proceedings in HCA2401/2006 to assert its claims against DiChain Holdings.  LKH also said in the letter that :

“We are instructed to inform you that our client would only refrain from disputing your client imposing the Charging Order if and only if your client agrees to give priority to our clients’ claims over its own claims.  If this is not agreeable, we are under firm and standing instructions to dispute your Charging Order being imposed on the [Shares]”. 

9. By a letter dated 21 June 2007, CMKI denied the existence of the pledge over the Shares and pointed out that the issue as to whether the Shares have been pledged to Pearl Oriental under the said agreement is subject to litigation and strict proof by Pearl Oriental in HCA2401/2006 and HCMP2128/2006. 

10. HCMP2128/2006 was issued on 18 October 2006.  HCA2401/2006 was issued on 31 October 2006.  

11. HCMP2128/2006 is concerned with an originating summons taken out by DiChain Holdings as plaintiff against Orient Day Development Ltd (Orient Day“), Pearl Oriental and Farsight as 1^st, 2^nd and 3^rd defendants.  DiChain Holdings asked for the construction of one clause 6 of the Subscription Agreement dated 22 February 2006 entered into among Orient Day as the subscriber, Pearl Oriental as the issuer of the Shares to be subscribed and DiChain Holdings as the warrantor, which will be explained hereinbelow. 

12. On 22 June 2007, LKH informed CMKI that their client will have to issue intervener proceedings to be heard at the same time as the show cause hearing of the charging order on 4 July 2007.  On 24 June 2007, Pearl Oriental and Orient Day then took out the said intervener summons returnable on the 4 July hearing.  

The 4 July hearing

13. On 4 July 2007 counsel for the Bank as instructed by CMKI, LKH for Pearl Oriental and Orient Day, and LCK for DiChain Holdings attended before Mr Registrar Chan.  LCK informed the court that they would file a notice to cease to act for DiChain Holdings as soon as practicable.  (Thereafter DiChain Holdings has remained unrepresented with no order for anyone to represent DiChain Holdings at all.) 

14. By consent the parties agreed beforehand on the directions and Mr Registrar Chan ordered in terms of the consent directions :

(1)     basically, Pearl Oriental and Orient Day would be joined as the 1^st and 2^nd applicants in the charging order proceedings; and

(2)     the pleadings and evidence filed by the parties in HCMP2128/2006 and HCA2401/2006 would be made available to the Bank within 14 days thereof. 

(3)     The Bank should, within 21 days, set down the following issue to be tried :

“… whether DiChain Holdings has created any security interest over the shares refered to in clause 6(b) of the Subscription Agreement dated 22 February 2006 in favour of Pearl Oriental/Orient Day pursuant to clause 6 thereof; and if so, whether Bank should take subject to the said interest of Pearl Oriental/Orient Day (‘the Issue’); … ”

The Bank’s application for the said charging order nisi to be made absolute be adjourned sine die with liberty to restore until and after the Issue be adjudicated. 

Post-4 July hearing

15. By a letter dated 28 August 2007, i.e. after CMKI invited LKH to fix a hearing date for adjudicating the Issue pursuant to Mr Registrar Chan’s order, LKH suddenly changed its previous stance and said that it is inappropriate to fix a hearing date for that purpose.  It suggested that either the Bank should withdraw the request to fix the hearing date or alternatively make arrangement with LKH to schedule a hearing date after the hearing of the said proceedings under HCA2401/2006.  CMKI objected to this proposal the next day. 

16. On 4 September 2007, Madam Registrar Au-Yeung ordered that Pearl Oriental/Orient Day do provide the estimate time for hearing the Issue, failing which the parties are to attend a hearing before her on 13 September 2007. 

17. By an affirmation filed on 10 September 2007, Pearl Oriental/Orient Day said that they were seeking the following directions :

(a)      the Bank is to set down the issue whether the Bank should take subject to the interest of Pearl Oriental/Orient Day only if the trial in HCA2401/2006 concludes that Pearl Oriental/Orient Day have security interest over the subject shares; and

(b)     the Bank’s application for charging order nisi to be made absolute be adjourned sine die with liberty to apply until and after the said issue be adjudicated in HCA2401/2006 and HCMP2128/2006. 

18. On 13 September 2007, CMKI and LKH attended before Madam Registrar Au-Yeung.  On 14 September 2007, after hearing submissions made by the parties, Madam Registrar Au-Yeung ordered that Pearl Oriental/Orient Day’s request be dismissed and the matter be set down as directed by Mr Registrar Chan on 4 July 2007 as aforesaid.  

19. Further on 24 September 2007, a costs order was made against Pearl Oriental/Orient Day and assessed on gross sum assessment at $12,000 to be paid forthwith to the Bank. 

20. Subsequently, the hearing of the Issue as defined by Mr Registrar Chan’s order was fixed to be heard before Master A. Ho on 18 January 2008 with one day reserved. 

Summary judgment in HCA2401/2006

21. Without any notice to CMKI or the Bank, Pearl Oriental/Orient Day proceeded to apply for and obtained a summary judgment against DiChain Holdings on 13 December 2007 from Master Lung in the absence of DiChain Holdings.  Master Lung was not informed of the previous history of the charging order proceedings and the directions and orders of Mr Registrar Chan on 4 July 2007 and the subsequent orders of Madam Registrar Au-Yeung on 14 and 24 September 2007.  In other words, summary judgment was just given to Pearl Oriental/Orient Day in the absence of DiChain Holdings.

22. Consequently by a summons dated 7 January 2008, the Bank applied to be joined as an intervener in HCA2401/2006.  Master J. Wong granted leave to the Bank to be joined as an intervener in HCA2401/2006 together with an interim stay of execution of the summary judgment and adjourned the other part of the summons to 18 January 2008 to be heard by Master A. Ho after the determination of the Issue as defined by Mr Registrar Chan’s order.

Hearing before Master A. Ho on 18 January 2008

23. After hearing submissions by the parties, Master A. Ho expressed the view that it would be “highly inappropriate and undesirable” for the master to determine the Issue when summary judgment had already be granted by Master Lung in HCA2401/2006.  The learned master took the view that it might be more appropriate for the Bank to appeal against the order of Master Lung.

24. The Bank then undertook to expeditiously prosecute the appeal and applied to set aside the summary judgment and Master Ho ordered a further interim stay of execution of the summary judgment until the hearing of the appeal on 18 April 2008.  In relation to the charging order proceedings in HCCT34/2007, Master Ho also adjourned the show cause hearing to 18 April 2008 for call-over.  (Eventually I heard these two matters on 15 April 2008.)

25. Master Ho also awarded costs to the Bank on an indemnity basis in respect of both proceedings.

Order 14 proceedings

26. In view of the aforesaid history of events leading to the summary judgment obtained by Pearl Oriental and Orient Day, Mr Samuel Chan, counsel for the Bank, submitted that the solicitors for these two plaintiffs were guilty of sharp practice in obtaining the summary judgment.  I agree with him.

27. First of all in the 4 July hearing the two plaintiffs have already agreed that the Issue would be determined prior to the show cause hearing in respect of the charging order nisi.  In an attempt to retrieve from this position they tried to request the other side that the Issue should be resolved pending the determination of HCA2401/2006 and HCMP2128/2006.  That was refused by solicitors for the Bank.  That was also the judicial determination of Madam Registrar Au-Yeung on 14 September 2007.  In fact the two plaintiffs were ordered to pay costs to the Bank. 

28. Having learned that DiChain Holdings would not be represented by any solicitors and presumably would not appear at the Order 14 proceedings without the leave of the court, the two plaintiffs obtained the summary judgment in the absence of DiChain Holdings.  At that hearing they had in fact misled Master Lung by not informing the court of the existence of Mr Registrar Chan’s order or Madam Registrar Au-Yeung’s order.  In my view it cannot be said, as put forward by the solicitor for these two plaintiffs, that they had no duty to make disclosure to the court or the Bank.

29. Mr Registrar Chan’s order has already directed that all pleadings and evidence in HCA2401/2006 and HCMP2128/2006 should be made available to the Bank and the Order 14 summons together with the supporting affidavit would be those documents.  Solicitors for these two plaintiffs did not inform Master Lung the forthcoming hearing of the Issue scheduled to be heard on 18 January 2008 either.

The charging order application and the Issue

30. In deciding whether I should make the charging order absolute it is inevitable that I have to decide on the Issue first.  Clause 6(b) of the Subscription Agreement (dated 22 February 2006) read as follows :

“擔保方[i.e. DiChain Holdings]同意將連同Farsight Holdings Ltd.名下合計之10億股迪辰亞洲股份(Free from all and any Encumbrace)(簡稱‘託管股份’)交由迪辰亞洲[i.e. Pearl Oriental]之代表律師託管，直至本條款a項達成為止。”

31. The plaintiffs in their Amended Statement of Claim pleaded that by this clause 6 DiChain : “agrees to pledge” the Shares and that DiChain Holdings has wrongfully failed and/or refused to deliver the shares to the 1^st plaintiff’s solicitors.

32. In the prayer, they also seek for an order for specific performance of this clause 6 against DiChain Holdings for its carrying into execution the delivery of the Shares to the 1^st plaintiff’s appointed solicitors.

33. In its public circular issued on 4 May 2006, Pearl Oriental had also unequivocally stated that DiChain Holdings as warrantor “agree to pledge” the Shares to the solicitors as collateral.  In an email dated 8 May 2006 sent by Mr Eddie Yu, financial controller of Pearl Oriental/Orient Day, to Mr Fan Di, director and former majority shareholder of DiChain Holdings, the former also referred to the arrangement as one “to provide pledge” of the Shares.

34. In LKH’s letter to CMKI dated 20 June 2007, Pearl Oriental/Orient Day again repeated their case of agreement to pledge through LKH who stated that the Shares “are under contract to pledge” to their client. 

35. Thus putting the plaintiffs’ case at their highest, clause 6(b) can only be construed as involving or contemplating the creation of a pledge, i.e. at best it was only an “agreement to pledge” instead of a vaild pledge. 

36. There was no actual transfer of the Shares to the plaintiffs or to their order.  The custodian of the Shares, DBS Vickers Holdings had repeatedly stated that they were still holding the Shares to the order of DiChain Holdings.

37. It is trite law that delivery of the subject property is absolutely necessary to complete the pledge, although the transfer of possession may be actual or constructive.  See Snell’s Equity, 31^st ed., §41-01 to 41-02; Halsbury’s Laws of England, 4^th ed. (2007 Reissue) Vol. 36(1) §3; Dublin City Distillery Ltd v. Doherty [1914] AC 823 at 843 (per Lord Atkinson), as reaffirmed by the Privy Council in Official Assignee of Madras v. Mercantile Bank of India Ltd [1935] AC 53 at 58 (per Lord Wright).

38. There was no evidence whatsoever of any acknowledgment or attornment by DBS in favour of Pearl Oriental/Orient Day.  On the contrary, as revealed by the correspondences between CMKI, LKH and the solicitors for DBS, DBS has never regarded itself as holding the Shares to the order or direction of Pearl Oriental/Orient Day or LKH. 

39. As a matter of construction the submissions of the plaintiffs could not be accepted.  The agreement only said : “同意……交由……迪辰亞洲之代表律師託管……”.  This simply means an agreement to deliver the Shares to solicitors for Pearl Oriental for custody only.

40. DiChain Holdings also emphasised the word “託管” in an email dated 23 May 2006 shortly before the execution of the subscription agreement between them as follows :

“原协议我方只是将股票托管在律师行，并不是质押。”

41. In other words the word “pledge” had never been used and the Chinese version at best can only be interpreted as “custody”. 

42. Thus I accept the submission of Mr Chan for the Bank that the factual basis in terms of the Subscription Agreement cannot be any one of the four recognised types of consensual security known to the law, namely :

(1)     pledge;

(2)     contractual lien;

(3)     mortgage; and

(4)     charge.

None of these four consensual security known to the law can apply in the pleadings between Pearl Oriental/Orient Day and DiChain Holdings.  The parties merely expressed their intention that DiChain Holdings shall put the Shares in custody(託管)of the plaintiffs’ solicitors and had never used the word “pledge”(質押)or “mortgage”(按揭)or “charge”(押記)under the Subscription Agreement.

43. Mr Simon Yip, counsel for Pearl Oriental and Orient Day submitted that clause 6(b) has created an equitable mortgage or charge in favour of them.  He cited the following authorities, namely :

(a)      Swiss Bank v. Lloyds Bank [1982] AC 584, at p. 595 D-E, F-G;

(b)     Halsbury’s Laws of Hong Kong Vol. 19(2), para. 280.146 and 280.151; and

(c)     Fisher and Lightwood’s Law of Mortgage, 11^th Edition, para 2.1.

44. However, a closer reading of these authorities do not support the contention that clause 6(b) has created an equitable mortgage or charge.

45. In respect of an equitable mortgage, I accept the submission of counsel for the Bank that no legal or equitable mortgage could have been created because there was no transfer of ownership of the shares by way of security.  There is no equitable charge created either since Pearl Oriental/Orient Day did not have a present right to have the shares made available to them.  In National Provincial and Union Bank of England v. Charnley [1924] 1 KB 431 at 449 Atkin LJ said :

“It is not necessary to give a formal definition of a charge, but I think there can be no doubt that where in a transaction for value both parties evince an intention that property, existing of future, shall be made available as security for the payment of a debt, and that the creditor shall have a present right to have it made available, there is a charge, even though the present legal right which is contemplated can only be enforced at some future date, and though the creditor gets no legal right of property, either absolute or special, or any legal right to possession, but only gets a right to have the security made available by an order of the Court.  If those conditions exist I think there is a charge.  If, on the other hand, the parties do not intend that there should be a present right to have the security made available, but only that there should be a right in the future by agreement, such as a licence, to seize the goods, there will be no charge.”

46. In Cinema Plus Ltd v. ANZ Banking Group Ltd [2000] NSWCA 195 (200 NSW Lexis 746, 28 July 2000), it was held that the reference by Atkin LJ that a contractual right to seize goods in the future is not a charge.

Conclusion

47. By reasons of the aforesaid matters, I have decided the Issue in favour of the Bank in that DiChain Holdings has not created any security interest over the Shares referred to in clause 6 of the subscription agreement in favour of Pearl Oriental/Orient Day.  Accordingly the Bank should not take the Shares subject to any interest of Pearl Oriental/Orient Day. 

48. Consequently there is no reason why I should not make the charging order absolute.

49. For the aforesaid reasons I have made an order that the charging order nisi should be made absolute and the Order 14 appeal should be allowed in favour of the Bank.

50. For the same reason as expressed by Master A. Ho on 18 January 2008, Pearl Oriental and Orient Day should also pay costs on indemnity basis in respect of the Order 14 appeal.