SWORDLIGHT ENTRPRISES LIMITED v. CHIU TAO AND ANOTHER

IN THE COURT OF APPEAL

1997, No. 80

(Civil)

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J U D G M E N T

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Hon P Chan, Chief Judge:

1. The respondent which is the plaintiff in this action claims against the appellants which are the 1st and 2nd defendants in this action for the return of 10,000,000 shares in China Investments Holdings Limited. The action was commenced in January 1995. Pleadings were closed in September or early October in 1995. Almost three months after that, the plaintiff applied for summary judgment against the two defendants.

2. The learned Master gave leave to defend on condition that the two defendants should pay into court a sum of slightly more than $4 million. The plaintiff appealed to the Judge in Chambers against the Master's order and sought to enter judgment against the two defendants. The defendants asked the Judge to dismiss the O.14 application. The learned Judge dismissed the appeal and affirmed the Master's order imposing the condition.

3. The defendants now appeal and seek to set aside that condition. They are asking for unconditional leave to defend.

4. We granted leave to the plaintiff to file the Respondent's Notice out of time to argue on the point that the Judge's order can be supported on another ground.

5. It is not disputed that the plaintiff is the registered owner of 10,000,000 shares in China Investment Holdings Limited. It is also accepted that the plaintiff had tendered these shares to the defendants to enable the defendants to obtain a loan using the shares. Furthermore, although the plaintiff does not expressly admit this, it is clear from the trust letter exhibited by the defendants that the plaintiff had requested that half of the loan to be obtained would be given to Mr Wong of the plaintiff and the other half would be given to a Mr Deng who is now the 2nd defendant by counterclaim.

6. There are two main issues in this case. First, whether the defendants had made use of the shares to obtain a loan for the plaintiff and second, if the 2nd defendant had obtained such a loan, how it was applied.

7. The relevant principles in an Order 14 application are not seriously disputed in this case. First, the test is whether the defendants' defence is believable; second, the court should not embark on a mini trial on affirmations and third, if the defence is shadowy or the plaintiff very nearly gets judgment, then the court may impose conditions in giving leave to defend.

8. The learned judge having considered the evidence before him said at page 250:

" The test I must apply is to ask myself whether the defendants' assertions are believable and not whether they are to be believed. The defendants point to evidence of the deposit of shares in the 1st defendants name and the name of his sister with the Union Bank and the raising of the sum of $13 million at or about the time when these events took place as being evidence of the raising of the loan. I find that those assertions are believable. Accordingly, this appeal is dismissed.

I have, in dismissing the appeal, borne in mind that the Order of Master Chiu (sic) made on 4th March 1977 ordering that leave be given to the 1st and 2nd defendants by original action to defend was conditional upon their paying into court $4.1 million within 21 days from the date of the Order. I can see no reason to interfere with the condition placed upon the defence of this action by the defendants and do not interfere with that Order save that the defendants do have a further 14 days from 21st March 1997 to make payment of the sum of $4.1 million into court."

9. If the learned judge in the paragraphs to which I have referred was suggesting that because the learned Master had exercised her discretion in imposing the condition, there was no reason for him to interfere with such condition on appeal, that is, with respect, not the correct approach. An appeal from a Master is a hearing de novo. The learned judge should exercise his own discretion. On the other hand, I do not think Mr Tong for the appellants is correct in saying that as a general proposition, if the learned judge had found that the assertions of the appellants are believable, then it would necessarily follow that such assertions are not shadowy. This, in my view, seems to be a quantum leap which may not be justified by the circumstances of every case.

10. As regards the first issue, the plaintiff's case is that the defendants did not actually make use of the shares to obtain a loan. In fact, the 1st defendant transferred them into a margin account with the Union Bank and used the shares for the purpose of trading. The defendants' case is that pursuant to the agreement as evidenced by the trust letter, the shares were in fact used to secure a loan in the sum of approximately $8.3 million from Union Bank.

11. It is clear from the trust letter that the plaintiff had indeed agreed to entrust the 10 million shares to the 2nd defendant. It is also clear from the documents that by that trust letter, the plaintiff had authorised the 2nd defendant to "unconditionally" arrange for finance using the shares. It would appear that the Asian Pacific Nominees Company Limited had indeed released the shares to the 1st defendant. Since the shares are in the name of the plaintiff, it would seem that this must have been done with the permission of the plaintiff or its agent.

12. There is evidence that Asian Pacific Nominees Company Limited, the plaintiff, China Weal (Holdings) Limited, China Investment Limited are all connected with one another.

13. The document at page 65 shows that the 1st defendant did obtain the sum of $13,000,000 from Union Bank and that this happened at about the same time as the trust letter was issued. There are also exhibits showing that these shares had been deposited with the bank, although the documents do not show clearly that there was a loan of $8.3 million as alleged. In fact there is no document supporting this allegation. However, in my view, it cannot be said that the assertions made by the defendants are totally inconsistent with the documents.

14. With respect to the second issue, the question is : how did the defendants apply the loan if they did try and obtain it ? This turns on whether Mr Deng was in fact indebted to the 2nd defendant in the sum of $68 million which was then reduced to $18 million and whether Mr Deng had given directions or representations to the defendants to make use of the shares to reduce his own indebtedness.

15. The defendants said that Mr Deng was indebted to the 2nd defendant and upon his request half of the loan so obtained was used to reduce the debts. As to the remainder of the loan, Mr Deng represented that it should also be applied to reduce his indebtedness to the 2nd defendant. On the other hand, the plaintiff said that there was no proof of any such debts; there was no agreement showing that the 2nd defendant should apply the loan to offset such indebtedness; Mr Deng was not indebted at all and in any event he was not authorised to give the alleged representation or direction to the defendants. Mr Deng also denied having given such instructions or representations.

16. It is clear from the documents and in fact from Mr Deng's own admission that he was in control of China Weal Limited. The documents show that there had been four payments totalling $50 million to the 2nd defendant . However, these repayments were made by cheques drawn by China Weal Limited. On the other hand, as Mr Tong points out in his written submission, Mr Deng admitted in his pleading that they were his repayments although he did not say it was his personal debts that he was repaying. In fact, he even mentioned that one of the payments was made by mistake and another one was an over-payment.

17. In my view, there is some evidence which tends to support the allegation that there had been some debts due from Mr Deng. It cannot be said that there is no evidence to show such indebtedness. In other words, it cannot be said that the evidence is inconsistent with the defendants' allegation that Mr Deng was indebted to the 2nd defendant.

18. It is clear from the trust letter that the plaintiff had indeed agreed as to how the loan which would be obtained was to be applied. There is nothing to prevent the defendants from setting off this loan against Mr Deng's debts due to the 2nd defendant. In fact, the reduction of Mr Deng's existing debts would also be a use of the loan by him. It is arguable that the shares could not be released until and unless the plaintiff had agreed to repay at least half of the loan. As to the remainder of the loan, Mr Deng was the only person, prior to the transactions, whom Mr Chiu for the defendants knew and Mr Wong was not, prior to the transactions, known to the defendants. Whether Mr Deng had the authority to give such instructions is not material in the present appeal. Counsel's point is that the lack of authority goes to weaken the credibility of the defendants' assertions.

19. I note that the plaintiff is not claiming for $8 million or $4 million. The claim is for the return of the 10,000,000 shares on the ground that there had been a conversion. Having looked at the pleadings and the affirmations placed before the court, the position is this. Faced with the plaintiff's claim for the return of the shares, the defendants said that the plaintiff had agreed to release unconditionally the shares to the defendants to enable the defendants to obtain a loan. This the defendants had allegedly done and they claimed to have made use of the money for the benefit of Mr Deng according to his instructions. On the evidence, it cannot be said that the defendants' case is not believable. It cannot be said that the plaintiff is very nearly entitled to judgment. I am of the opinion that such assertions are not shadowy.

20. As far as the condition imposed by the learned Master is concerned, again, Mr Tong's point is valid. The plaintiff's case is that there was no loan at all obtained by the defendants on its behalf and so there is no question of any payment of money, whether it be $8 million or $4 million. In the circumstances, there is no reason why such a condition should be attached to the granting of leave to defend. I would therefore allow the appeal.

Hon Liu JA:

21. After the filing of the defence and counterclaim, it would be incumbent upon the plaintiff to verify its belief that there is no defence and explain why that is so by reference to the pleading filed. That did not appear to have been done in the O.14 application here. But Mr Tong is content with unconditional leave and this issue does not call for our decision. For the reasons given by the Chief Judge, I am not persuaded that there exist shadowy features in the assertions accepted by Gall J as believable. I agree that this appeal be disposed of in the manner my Lord proposes.

Hon Cheung J:

The only issue in this appeal is whether the condition should be imposed. I do not find the defence to be shadowy at all. For the purpose of the O.14 application, as my Lord, the Chief Judge, observed, there was evidence that money was obtained by the defendants from the Union Bank and the indebtedness of Mr Deng to the defendants is a matter to be tried. It was submitted that it was strange for the defendants to agree to Mr Deng's request without seeking confirmation from Mr Wong. Obviously the plaintiff, China Investment Holding Limited ("China Investment"), China Weal Limited ("China Weal"), Mr Wong and Mr Deng were all closely related. As apparent from China Investment's annual report, Mr Deng and Mr Wong were the Chairman and Vice-Chairman respectively of that company. The plaintiff which was controlled by Mr Wong and one Mr Li held 23.7% of the shares in China Investment. Mr Deng was a controlling shareholder of China Weal which also held shares in China Investment. The defendants' contention that they agreed to Mr Deng's request for the loan to be set off against Mr Deng's debt is not something so incredible that the condition should be imposed.