FULLSCALE ENTERPRISES LTD v. ASIA GOLF AND RESORT LTD

                                                                                           HCMP3252/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.3252 OF 2004

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REASONS  FOR  JUDGMENT

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1. At the conclusion of the hearing of this matter on 30 August 2005, I dismissed the defendant’s appeal against the master’s decision.  These are my reasons. 

Background

2. By way of an originating summons issued on 21 December 2004, the plaintiff claimed under a legal charge by which the defendant was obliged to deliver to the plaintiff vacant possession of various lots of land on Po Toi Island failing payment to the plaintiff of a sum of $5 million and interest due to the plaintiff under a loan agreement between Mak Chi Yeung (“Mak”), who was a director of the defendant, and the plaintiff as the assignee of the rights of the original lender.  The legal charge had been provided by the defendant as security for that loan to Mak.

3. On 16 June 2005, Master B. Kwan after hearing argument from a solicitor representing the plaintiff and counsel representing the defendant entered judgment in favour of the plaintiff.

4. The defendant appeals that decision and says judgment should not have been entered but that the matter should have been set down for trial, as it has a valid defence involving issues of fact.

The appeal

5. This is a rehearing.  The defence to the summons relied upon by the defendant is that the whole loan arrangement was a mere sham, and that the various loan documents, including the legal charge, had been concocted as part of a continuing scheme to deceive originally the Securities & Futures Commission (“SFC”) and subsequently the auditors of the plaintiff’s predecessor.  According to the defendant, who was represented by Ms Winnie Lau before me, matters came about in this way :—

6. In April 2001, Mak had become acquainted with a Kenneth Cheung (“Cheung”) during the course of a company Mak controlled, Sky Concord Development Ltd (“Sky”), acquiring a listed Hong Kong company.  Sky had borrowed money for the purpose of the acquisition from Digital World Finance Ltd (“Digital Finance”) and Cheung had controlled that company.

7. Following that, Mak had agreed to trade on the stock market on behalf of Cheung, on the understanding that Cheung would reimburse him by buying back loss making shares. 

8. Significant trading losses occurred and eventually totalled some $42 million.  Mak had gotten into financial difficulty as a result of this and was unable to have his companies repay to Digital Finance the $26 million still owing in respect of funds advanced by it to Sky for the acquisition of the listed company.  According to the defendant, Cheung then proposed to advance money to Sky so as to enable it to repay to Digital Finance the balance of the loan.  That was done by Cheung using a securities company he controlled, Everlong Securities Ltd (“Everlong”), to make loans to Sky and its holding company.

9. Following that, in the middle of 2002, the SFC questioned these loans, or at least Everlong’s loan ratio, and Cheung proposed a further plan to help reduce the outstanding balance.  The plan was that Mak was to personally borrow $5 million from Digital Finance and that money would then be paid into Everlong so as to reduce its loan ratio.  Mak agreed.  Those loan documents were prepared and a cheque was issued by a subsidiary of Digital Finance to Everlong so as to give effect to the plan. 

10. About a year later, in June 2003, Cheung contacted Mak again and said that to deflect any auditor’s enquiry concerning this $5 million loan, it was necessary to have security provided.  As a result, Mak took steps to have his family company, the defendant, provide the legal charge over property it owned on Po Toi Island.  He was promised by Cheung and two of Cheung’s subordinates at a meeting concerning the provision of the legal charge that it would not be enforced and was simply to satisfy the auditors. 

11. Ms Lau for the defendant argues that these are issues of fact which require a trial and that it was wrong of the master to deliver summary judgment on the originating summons.

The law

12. In an originating summons matter, a plaintiff has the burden of showing it is entitled to summary judgment, but as Ma J (as he then was) said in Wing Hang Bank Ltd v. Liu Kam Ying [2002] 2 HKC 57 : “… once this is prima facie demonstrated on the evidence, it is then up to the defendant to show that he does have a defence or defences to the claim.”  That is, the defendant must then demonstrate that there is a triable issue which amounts to a defence.  In the present case, there is plainly a prima facie case established by the plaintiff on the basis of the loan documents, the judgment against Mak and the terms of the registered legal charge.  The question is whether there is a triable issue.

13. For there to be a triable issue, the defendant must be able to put forward something in the nature of credible evidence : Kincheng Banking Corporation v. Centresign Co. Ltd, HCMP7239/1999 and Bank of China (Hong Kong) Ltd v. Keen Lloyd Resources Ltd, CACV1787/2001.

The issue

14. In the present case, the defendant has put forward matters of fact which, if established in contradiction of the clear terms of the loan documents, would afford him a defence.  The determining question is whether the matters raised by the defendant solely through the evidence of its director Mak are sufficiently credible so as to give rise to a triable issue.  The master thought not, and I agree.

15. Put quite simply, the defendant cannot advance a triable issue because its defence is entirely reliant on the credibility of Mak’s evidence.  His evidence is inherently unbelievable for a number of reasons. 

16. Mak has previously undertaken actions which are so plainly inconsistent with his present assertions so as to have effectively rendered them without prospect of credibility.  By those same actions he has effectively admitted the debt of $5 million owed by him which is central to the creation of the legal charge by the defendant.  

17. A starting point is the simple fact that Mak did not oppose summary judgment being entered against him personally on the $5 million loan amount on 12 July 2005, pursuant to Order 14 rule 3.  Mak was represented on that occasion.  His accepting summary judgment in that considerable amount simply cannot stand with his assertion that the loan itself was a sham and without commercial reality.

18. Further, Mak had admitted the same debt in a letter dated 15 September 2004 returned to the plaintiff’s auditors Messrs Deloitte Touche Tohmatsu.  It is true that his admission in that regard is consistent with his assertion that the loan was a sham designed to deceive the auditors, but he had also effectively admitted the loan when it had been assigned by Digital Finance to the plaintiff on 29 August 2003.  That assignment was by way of a deed of assignment and was copied to Mak and acknowledged by him in writing on 22 September 2003.

19. On the following day, 23 September 2003, a letter confirming the rescheduling of the loan between the plaintiff and Mak was sent.  By that letter, the plaintiff agreed to reschedule the loan by abandoning unpaid interest, but increasing the future interest rate from 18% per annum to 24% per annum and extending the loan repayment date to 30 September 2004.  Mak agreed in writing to accept the new terms of the loan which, importantly, included the creation of the present legal charge.  It seems wholly at odds with Mak’s assertion that the loan itself was a sham for him to have embarked on a rescheduling exercise of this nature whereby the interest rate was increased as well as a legal charge being required.  I do not think that the fact that the original lender Digital Finance rolled over the debt on its due date of 23 December 2002 without issuing a payment demand alters this position.  That particular debt meant little in the context of the $26 million apparently still owed to Digital Finance by Mak’s companies.

20. The cheque issued by Digital Finance’s subsidiary, representing the loan funds of $5 million, according to the documents before me was paid to Everlong to the credit of an account Mak held there.  So Mak apparently received real benefit from the loan he asserts was a sham.

21. The legal charge, which came into effect on 26 September 2003, was executed by the defendant, one of its signatories being Mak, and registered in the Islands and New Territories Land Registry.

22. All of these matters are documented in a detailed and perfectly straightforward way and on their face wholly undermine Mak’s version of events.

23. For Mak at a late stage of proceedings to assert that the creation of these documents and his actions in respect of them was part of a grand scheme of fraud involving himself as well as the plaintiff and Digital Finance, the plaintiff’s predecessor, in my judgment, is inherently incredible and the defendant, which relies entirely on Mak’s evidence in this regard to put forward its defence, has failed to show in the face of the documentary evidence supporting the plaintiff’s case, that it has a triable defence.

24. Accordingly, the appeal is dismissed.

Costs

25. Costs were dealt with at the conclusion of the hearing.  They were ordered in favour of the plaintiff on a solicitor client basis in accordance with the terms of the legal charge.

26. The plaintiff’s summons for amendment of the master’s orders was also dealt with at that time and was not opposed by the defendant and I made orders in its terms.