CATHERWOOD LTD v. FENG JIN LIANG

CACV 79/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 79 OF 2013

(ON APPEAL FROM HCA NO. 1651 OF 2011)

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BETWEEN

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REASONS FOR JUDGMENT

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Hon Lam VP (giving the Reasons for Judgment of the Court):

1.  In this action, the Plaintiff sought Order 14 judgment against the Defendant in respect of a loan of $57 million advanced pursuant to a written agreement dated 17 February 2010. On 26 March 2013, L Chan J [“the Judge”] gave summary judgment in favour of the Plaintiff in the sum of $57 million with interest and costs. The Defendant appealed against the judgment. After hearing submissions, we dismissed the appeal. We now give reasons for our judgment.

2.  The Plaintiff’s claim is a simple claim for repayment of a loan which was advanced pursuant to the written agreement of 17 February 2010 [“the Agreement”].  The Defendant did not dispute the execution of the Agreement.  Nor did he dispute that the loan amount was advanced by the Plaintiff to him.  However, he contended that the Agreement did not reflect the full picture.  He said that there was an oral agreement [“the Oral Agreement”] between him and Mr Or Wai Sheun of the Plaintiff that the loan would be converted into the Plaintiff’s investment in a company called Landcome Group Limited [“Landcome”] if the Plaintiff decided to take up an option to invest into Landcome through the acquisition of the shares of a company called China Group Oriental Limited [“CGOL”], which in turn owned 72.5% shareholding in Landcome.  The option was granted under a Heads of Agreement of 25 January 2010 between the parties.  Landcome itself held the interest in a coal mining business in the Mainland called Shanxi Lanbao Energy Company Limited.

3.  It is common ground that the Plaintiff did take up the option under the Heads of Agreement and invest into Landcome through CGOL.  The Plaintiff entered into a sale and purchase agreement on 22 March 2010 for the acquisition of CGOL and loan capital to CGOL from the Defendant at the price of $1,000 million.  The transaction was completed.     

4.  The Defendant also relied on another oral agreement in the court below. In the appeal, Mr Li SC said he would not rely on that other oral agreement (referred to as “the 1st Oral Agreement” by the Judge in his judgment of 26 March 2013).  Therefore, we need not be concerned with that.

5.  The Plaintiff disputed the existence of the Oral Agreement.  Bearing in mind that this is an application for summary judgment, as the Judge quite rightly said at para 59 of his careful judgment:

“… The question is whether the allegation that there was this oral agreement is believable. …”

Though this was said in the context of the 1^st Oral Agreement, the Judge actually applied the same approach with regards to the Oral Agreement.

6.  After a careful and elaborate analysis of the evidence, the Judge concluded at para 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 1^st and 2^nd agreements. Having reviewed the contemporaneous documentary evidence, my answer to this question is no.”

7.  Despite Mr Li’s efforts to persuade us that the Judge was wrong in coming to that conclusion, we are of the view that the Judge was plainly right.

8.  The correct approach of the court in considering whether summary judgment should be granted is well established.  Mr Li referred us to the relevant paragraphs in Hong Kong Civil Procedure 2013 and Mr Lin referred us to some familiar authorities: National Westminster Bank plc v Daniel [1993] 1 WLR 1453; Mass International Ltd v Hillis Industries Ltd [1996] 1 HKC 434 and Paul Y Management Ltd v Eternal Unity Development Ltd CACV 16 of 2008, 12 Aug 2008.   We do not see any need to discuss these cases or the relevant principle at length as there was no disagreement between counsel on the proper approach.  This appeal turns on whether the Defendant’s assertion in relation to the Oral Agreement was believable.

9.  We have no quarrel with Mr Li’s submission that the question whether it is believable that the parties had made the Oral Agreement should not be determined simply by reference to the wording of the Agreement and the omission of terms similar to the Oral Agreement in the Agreement.  We also agree with Mr Li that this question should be determined by having regard to the relevant factual matrix at the material time.  However, we do not agree that the Judge had ignored the relevant factual matrix and decided the matter simply on account of absence in the Agreement of a clause similar to the terms of the Oral Agreement.  In his careful judgment of 26 March 2013, the Judge had gone through the relevant factual background and the relevant events and documents relied upon by the Defendant at great length.  Obviously, these matters were very much in the mind of the Judge when he decided to give summary judgment. 

10.  It is not necessary for us to repeat all the details which have been fully set out by the Judge in his judgment.  We would only highlight some significant events and documents.

11.  We have already mentioned the Heads of Agreement.  One important feature in the Heads of Agreement is the pro rata contribution to the working capital of Landcome after the exercise of the option to purchase by the Plaintiff as envisaged by Clause 7.2 of this document.  The option did not give the Plaintiff the right to acquire 100% shareholding in Landcome.  CGOL only owned 72.5% of the shareholding in Landcome.  The remaining 27.5% were held by the Defendant’s company China Win Capital Limited.

12.  As the Defendant himself deposed at paras 15 to 17 of his Affirmation of 25 September 2012, there was a need of substantial injection of working capital into the coal mining business for the purposes of acquiring, consolidating coal mines and upgrading the facilities of the same. The Heads of Agreement clearly envisaged that the Defendant had to be responsible for his share of capital injection in that regard.

13.  Clause 7.2 of the Heads of Agreement was repeated in the sale and purchase agreement of 22 March 2010, see Clause 7 of that agreement.  Similar provision was included in the Deed of Guarantee dated 22 March 2010 executed by the Defendant in favour of the Plaintiff, see Clause 1.4 which provides:

“1.4 Guarantor 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 Guarantor is failing to contribute his portion in relation to the approved operating working capital and required financial assistance from the Buyer, the Guarantor undertakes and covenants to repay such financial assistance or loan within the agreed period to the Buyer together with interests thereon accrued.”

14.  The $57 million was advanced by the Plaintiff to the Defendant on 18 February 2010 by deposit into the Defendant’s bank account.  Under the Agreement, the Defendant would repay the loan on demand on or before 16 May 2010.  It was also stipulated that the loan should be used by the Defendant for on-lending to Landcome for the coal mining business.  The repayment date could be extended. Clause 5 of the Agreement provides:

“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 the Lender absolutely.”

15.  Mr Li relied on the following features in the Agreement to contend that it was plausible that the Defendant had made the Oral Agreement with Mr Or:

(a) The lack of action on the part of the Plaintiff to demand repayment until September 2012 despite the stipulated date for repayment; and

(b) The assignment of the Landcome loan by the Defendant to the Plaintiff.

16.  Mr Li further submitted that the provision for repayment in the Agreement was consistent with the Oral Agreement because it was to cater for the event that the Plaintiff did not take up the option to invest into Landcome.  As such, counsel contended, the Judge was wrong in holding that it was inconsistent with the Oral Agreement at para 73 of the judgment.  What the judge actually said at that paragraph was as follows:

“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.”

17.  We do not see anything wrong in that analysis. Contrary to the submission of counsel, the Judge did not find the assertion of the Defendant as to the Oral Agreement unbelievable simply because of this observation at para 73.  The Judge also said at para 80:

“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.”

18.  The Spent Loan Agreement to which the Judge referred at that paragraph was another loan agreement of 22 February 2010 by which the Plaintiff advanced another $200 million to the Defendant.  Clause 3 of that agreement provided:

“3. The Lender hereby agree that upon exercise of the rights to purchase the BVI Interests as provided therein the Agreement and subject to the terms and conditions of the definitive sale and purchase agreement and/or other agreements in relation thereto, (i) the Loan Amount shall be treated and applied towards the payment for part of the Consideration and (ii) the Loan Amount shall be repaid or deemed to be repaid upon completion of the sale and purchase of the BVI Interests.”

19.  Again we see nothing wrong in the Judge’s reasoning in this respect.

20.  In this connection, the only explanation offered by the Defendant as to why there was such a glaring omission in the Agreement (if his assertion as to the Oral Agreement were true) was the demonstrably false case that he had no opportunity to study the Agreement and that he was assured by Mr Yeung of the Plaintiff, see paras 25 and 26 of his Affirmation.  That was shown to be disingenuous by the email communications between the Plaintiff and the staff of the Defendant concerning the draft of the Agreement on 16 and 17 February 2010.

21.  Of the alleged delay on the part of the Plaintiff in seeking recovery of the $57 million, the Plaintiff had given an explanation for the same which the Judge accepted at para 90 of the judgment.  The same explanation also dealt with Mr Li’s submission on the lack of reference to this outstanding loan in correspondence prior to September 2011 and the lack of action regarding the execution of the assignment.  On the evidence, we are of the view that even in the context of an Order 14 application, it was open to the Judge to accept such explanation in view of the unchallenged fact that the Plaintiff had a much greater interest in the profit margin of the coal mining business and the Defendant continued to manage the coal mining business until July 2011.    

22.  As regards the assignment of the Landcome loan pursuant to Clause 5 of the Agreement, it is not disputed that the Defendant did not execute the assignment though there was a draft assignment prepared by the Plaintiff together with the draft of the Agreement.  There is also a dispute as to whether the Defendant had actually used the $57 million for on-lending to Landcome.

23.  We cannot resolve the factual dispute as to whether the Defendant had in fact on-lend the sum to Landcome.  Even assuming the Defendant had done so, and even assuming that Mr Li’s argument that Clause 5 could operate as an equitable assignment is correct (which we do not need to decide upon in this judgment), it does not lend support to the Defendant’s case of Oral Agreement.  There was no reason why the Plaintiff could not deem it prudent to have the double protection of having recourse against both the Defendant and Landcome for this loan and the assignment was to achieve that purpose.  Thus, the provision for assignment of the Landcome loan cannot exonerate the Defendant from his primary responsibility to repay under the Agreement and it does not increase the believability of the assertion on the Oral Agreement.

24.  Given that the $57 million was clearly not advanced as part of the purchase price for the Plaintiff’s acquisition of CGOL (see para 17 of the Second Affirmation of Mr Yeung as to the particulars of the payment of the $1,000 million purchase price), the fact that it was used for the coal mining business does not necessarily mean that it was capital contribution by the Plaintiff.  It could equally be the Defendant’s capital contribution under the pro rata arrangement.  The Defendant’s assertion that it was booked as Plaintiff’s loan is not supported by any contemporaneous records.

25.  Thus, the provision in the Agreement that the $57 million must be used for the business of Landcome could not enhance the credibility of the Defendant’s assertion of the Oral Agreement.

26.  In the circumstances, we do not accept that the Judge failed to consider the assertion of Oral Agreement in the context of the relevant factual matrix.  We also reject Mr Li’s submission that the conduct of the Plaintiff was indicative of the making of the Oral Agreement.  Nor do we find any unexplained or questionable dealings on the part of the Plaintiff which calls for leave to defend being granted.  The facts of the present case are very different from those in Billion Silver Development v All Wide Investments Ltd [2000] 2 HKC 262, see in particular p.265B to H.  We do not harbour any suspicion or doubts as to the validity of the Plaintiff’s case on the lending of the $57 million to the Defendant. In contrast, the Defendant is not able to pinpoint a single piece of contemporaneous documentary evidence to advance his case on Oral Agreement.

27.  For these reasons, we agree with the Judge that the Defendant had not raised any believable defence and the appeal was dismissed accordingly.