XCHRX YICKO FINANCE LTD. v. SUCCESS GOLD ENTERPRISES LTD.

HCA4586/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4586 OF 1999

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D E C I S I O N

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1. On 3 February 1999, Yicko Finance Limited ("Yicko") served statutory demands on Wong Tat Chun and his wife Chan Shan (together called "the Covenantors"). On 18 March 1999, Yicko commenced proceedings against Success Gold Enterprises Limited ("Success Gold"), a company controlled by the Covenantors for specific performance by Success Gold of its obligations under a Share Mortgage and other relief. The Covenantors' applications to set aside the statutory demands were served on Yicko on 22 March and on the following day, Yicko took out an Order 86 summons in the action. Before me are the applications to set aside the statutory demands and the Order 86 summons. The parties are agreed that the issues which arise in the setting aside applications are identical to those in the Order 86 summons. The court was invited to hear and determine the Order 86 application on the footing that its outcome would also serve to dispose of the setting aside applications. For convenience, I will refer to the Covenantors and Success Gold collectively as "the Defendants".

Yicko's case

2. It is common ground that as at 31 August 1998, Main Chance Investments Limited ("Main Chance") was unable to make repayment of the sum of $16.92 million ("the Debt") which fell due to Yicko. Yicko's case is that it agreed to reschedule the Debt by allowing Main Chance to repay by eight equal consecutive monthly instalments commencing 30 November 1998 in consideration of the following (collectively "the Security Documents") :-

(1) a Deed of Guarantee ("the Deed")whereby, inter alia, the Covenantors agreed to guarantee repayment of the Debt by Main Chance;

(2) the Share Mortgage by which Success Gold charged 270 million shares in China Elegance International Fashion Limited ("China Elegance"), in favour of Yicko to secure the due performance by the Covenantors of their obligations under the Deed of Guarantee;

(3) Charges over Securities Cash Trading Accounts C395 and 396 ("the Accounts") by which Star Gold Enterprises Limited ("Star Gold") and Gross Winners Investments Limited ("Gross Winners") respectively charged all shares and monies in their respective trading accounts with Yicko Securities Limited ("Yicko Securities") in favour of Yicko to secure the due performance by the Covenantors of their obligations under the Deed.

The Deed

3. The parties to the Deed were the Covenantors, Main Chance and Yicko. After reciting the Debt, Recital (B) was as follows :

"The [Debt] became due on 31st August, 1998. At the request of the Covenantors, and in consideration of the Covenantors agreeing to guarantee the due and punctual payment of all of the [Debt] Yicko has agreed to extend the time for the repayment of the [Debt] on the terms and conditions contained herein."

4. The Deed provided for the repayment of the Debt by eight equal consecutive monthly instalments commencing 30 November 1998. Postdated cheques were to be issued by the Covenantors. Main Chance and Yicko gave mutual representations and warranties to the effect that the Deed constituted legal, valid and binding obligations for Main Chance and Yicko. By clause 4, in consideration of Yicko extending the time for the repayment of the Debt, the Covenantors guaranteed, as primary obligors, the eight equal monthly instalments together with related full interest to date of payment. They also, as a separate, additional and continuing obligation, indemnified Yicko against all losses etc. arising out of the failure by Main Chance to make due and punctual payment of those instalments. Clause 5 of the Deed provided that upon execution of the Deed, the Covenantors should deliver the Share Mortgage in the form set out in the Schedule to the Deed duly executed by Success Gold, together with the documents required to be delivered to Yicko pursuant to the provisions thereunder as security for the due and punctual performance by the Covenantors or for their obligations under the Deed. The Deed further provided (by clause 6.1) that the Deed "constitutes the entire agreement between the parties".

The Share Mortgage

5. The parties to the Share Mortgage were Success Gold and Yicko. After reciting that China Elegance was a Bermudian company whose shares are listed on the Stock Exchange of Hong Kong, that by the Deed the Covenantors agreed to guarantee the due and punctual performance by certain repayment obligations of Main Chance towards Yicko, that Success Gold was the beneficial owner of 270 million shares of HK$0.01 each of China Elegance ("the Charged Securities") and that it was a condition in the Deed that the Share Mortgage be duly executed by Success Gold and delivered to Yicko, the Share Mortgage provided by clause 2.2 as follows :

"2.2 Deposit of Documents

For the purpose of enabling [Yicko] to exercise its rights under this Share Mortgage, [Success Gold] hereby undertakes forthwith upon the execution of this Share Mortgage to deposit, or procure that there be deposited, with the Escrow Agent appointed jointly by [Success Gold] and [Yicko] the certificates in respect of the Charged Securities together with instruments of transfer and contract notes in respect thereof, duly executed in blank."

Success Gold represented and warranted to Yicko that the Share Mortgage constituted legal, valid and binding obligations and acknowledged that Yicko had entered into the Deed and the Share Mortgage in reliance upon the representations and warranties contained in the Share Mortgage.

The Charges

6. Each of Star Gold and Gross Winners charged their respective Accounts (being C395 and C396) with Yicko Securities in favour of Yicko to secure the due performance by the Covenantors of their obligations under the Deed.

7. It is common ground that share certificates in China Elegance for only 226,297,823 shares and not for 270 million as provided by the Share Mortgage were delivered by Success Gold to the Escrow Agent. Further, it is common ground that instruments of transfer and contract notes were never delivered as required by clause 2.2.

8. The Security Documents were executed by the parties other than Yicko and delivered to the Escrow Agent on 11 September 1998.

9. None of the eight instalments has been paid.

The Defence

10. By way of background, it is necessary to summarize briefly the facts as asserted by the Defendants upon which the defence is based.

11. The Covenantors are substantial shareholders and directors of China Elegance. Chan Chun Keung ("Mr Chan") is a first cousin of Chan Shan, one of the Covenantors. Mr Chan is also a shareholder of China Elegance and at or about the time the Debt fell due in August 1998, he held approximately 231.5 million shares in China Elegance which were then trading at about HK$0.02 each. Mr Chan's investment in China Elegance had been at a cost of about HK$0.09 per share. He had incurred losses of about HK$22 million in that investment. Mr Chan allegedly applied pressure on the Covenantors to take some responsibility for his losses in China Elegance and it was proposed and allegedly accepted by Mr Chan that he would stop applying pressure on the Covenantors if they could find an independent third party to acquire China Elegance's shares from him thereby reducing his losses in that investment.

12. In September 1998, Gross Winners and Star Gold ("the Purchasers") said to be independent third parties, entered into negotiations with Mr Chan for the sale and purchase of his shares in China Elegance ("the Share Transaction") at $0.02 per share. As China Elegance's shares were trading at well below cost (which the Covenantors put at "about HK$0.09" and Mr Chan at "approximately HK$0.095"), Mr Chan required the Covenantors to assume and discharge the Debt for and on behalf of Main Chance. According to the Defendant, Mr Chan was the major shareholder of Main Chance.

13. The Covenantors' case is that they agreed to assume liability for the Debt contingent on the completion of the Share Transaction by mid-November 1998 ("the Condition"). The Accounts were thus opened with Yicko Securities and upon payment of the purchase price, a corresponding number of shares would be deposited into the Accounts which would then be charged to secure the due performance by the Covenantors of their obligations under the Deed.

14. It is common ground that the Share Transaction was not completed by 15 November 1998. In fact, by 17 December 1998, only approximately half of the shares subject to the Share Transaction had been deposited into the Accounts. Accordingly, the first line of defence is that neither the Deed nor the Share Mortgage ever took effect because of the non-fulfillment of the Condition.

15. The second line of defence is based on non-delivery of the Deed and the Share Mortgage ("the Escrow Documents"). Delivery which is required to perfect a contract made by deed, means an act done so as to evince an intention to be bound. See Vincent v. Premol Enterprises Limited [1969] 2 QB 609 at 619; Chitty on Contracts, 27th Edn. Vol.1, at 1-031. The Defendant's case is that because of the Condition, there was no delivery when the Escrow Documents were handed over to the Escrow Agent. Alternatively, they were delivered in escrow and it was submitted that if delivery was in escrow, there must be a triable issue and summary judgment would plainly be inappropriate.

Is the defence believable?

16. It is accepted that Yicko was not party to the Share Transaction, nor was it party to the 'compromise' between Mr Chan and the Covenantors. Further, both the Share Transaction and the compromise were made orally and there is no record in writing of their terms.

The Condition

17. The following are material factors to be taken into account in considering the credibility of the Defendants' case. First, neither the Deed nor the Share Mortgage mentioned the Condition. This is surprising since they were drafted by the legal representatives of Yicko and the Covenantors. Having regard to the raison d'être of the Escrow Documents which is clearly stated in the recitals, it is inconceivable that if the Escrow Documents were only to take effect upon fulfilment of the Condition, the Escrow Documents would not have made any reference to the Condition. Moreover, there is no evidence to suggest that Yicko knew about the Condition : all there is is a bald and unsubstantiated assertion. If Yicko did not know, it could not have been bound. Second, notwithstanding that the Share Transaction had to be completed by mid-November 1998, it is the Defendants' case that two cheques were deposited on 8 December 1998 as payment for the shares to be sold by Mr Chan under the Share Transaction. The Defendants sought to explain away the apparent inconsistency by alleging that the Purchasers had 'extended' the time for completion to 21 December 1998. Again, there is nothing in writing to substantiate the assertion as this ultimatum was apparently given orally. Coming as it did from corporate entities, it is surprising. Significantly, no particulars have been given of the person or persons who delivered the ultimatum and the attendant circumstances. Third, it is the Defendants' case that the Purchasers are independent third parties. If so, it is, to say the least, a little curious that they were willing to charge the shares so acquired to secure the Covenantors' performance under the Deed. No explanation for this act of generosity has been proffered, whether by the Covenantors or the Purchasers. Fourth, the Covenantors have not been consistent in their evidence as to the terms of the Share Transaction. In the Covenantors' March affirmation in support of the setting aside applications, the purchase price was stated to be HK$0.02 per share, but in the June affirmation, it became HK$0.023 per share. But on the evidence, the purchase price of 33 million of the shares deposited into the Accounts in December 1998 was in fact at HK$0.03 per share. The facts appear to be consistent with Yicko's case that the shares were to be acquired at market value subject to a reserve price of HK$0.023 rather than the case of the Defendants. Fifth, the Covenantors' solicitors were surprisingly recalcitrant when requested to state the terms of the Condition in January 1999. In fact, they studiously avoided particularizing the Condition until after the Covenantors had filed their affirmations some two months later in support of their application to set aside the statutory demands. According to the March affirmations of the Covenantors, the Condition was the completion of the Share Transaction on or before mid-November 1998. But in their June affirmations, the Covenantors proffered 'additional' particulars of the Condition or a qualification to it, namely the termination by Mr Chan of his interests and voting rights in China Elegance. The inference is inescapable that the Condition was being evolved in the course of 1999 and was not part and parcel of the arrangements reached in September 1998.

18. Moreover, the Defendants' June version of the Condition would not appear to be capable of being satisfied. Clause 4.02 of the Charges provided that Yicko could exercise voting rights pertaining to the China Elegance shares comprised in the Charges so long as the Debt remained unpaid. According to the Defendants, Mr Chan is :

"closely connected with [Yicko], being the brother-in-law of Cheung Choi Chuen, a director and shareholder of [Yicko] and holds shares in [Yicko] through his nominee".

On these assumed facts, fulfillment of the Condition could hardly have been effective in eliminating Mr Chan's influence over or involvement in the affairs of China Elegance.

19. Had the Share Transaction been completed at the price stated by the Covenantors, it would have produced HK$5.3 million for Mr Chan who had lost some $22 million by investing in China Elegance. It is not suggested that the price was at a premium. That being so, Mr Chan would not have derived any benefit from the sale above and beyond what he could have realized had the shares been sold in the open market which could easily have been done, China Elegance being a listed company. The Share Transaction offered Mr Chan nothing. If indeed as is the Defendants' case, the 'compromise' was to offer Mr Chan compensation for those losses, it would only make sense if the Share Transaction were coupled with the guarantee which at the same time constituted the quid pro quo to Yicko for the accommodation sought, i.e. the rescheduling of the Debt. It should not be overlooked that Yicko had no control over the satisfaction of the Condition. The necessary consequence of the Defendants' case is that repayment of the Debt was to be postponed for up to two and a half months (being the period between the Debt falling due and the expiration of the period for the fulfilment of the Condition) regardless i.e. possibly for no consideration. This makes no commercial sense.

20. In my judgment, when all these factors are taken together, in terms of credibility, there is virtually nothing left of the defence based on the Condition.

Delivery

21. The Defendants' submission that there was no delivery at all must be rejected in the light of the Defendants' evidence. In her March affirmation, Chan Shan stated that the Escrow Documents "were partially executed" and that in late September 1998, the Covenantors "delivered the Escrow Documents to ...[the] Escrow Agent ... jointly appointed by the Covenantors and [Mr Chan]" (at para.3(m)); that the Escrow Documents "were executed in escrow and were delivered to the Escrow Agent" (at para.4(b)). The Defendants' evidence is unequivocal : there was "delivery" and it was in escrow.

22. In the light of that evidence, it could not seriously be argued that there was no delivery. Counsel for the Defendants recognized as much since the first alternative, i.e. no delivery at all, was only tentatively advanced. In passing, I should mention that Governors and Guardians of the Foundling Hospital v. Crane [1911] 2 KB 367 is of no assistance since no one was involved other than the maker of the deed and her solicitor. The facts of the present case are wholly different.

23. The focus of the Defendants' submissions was on the escrow point. It was submitted that the fact that there was an Escrow Agent meant that there was an Escrow arrangement and delivery could only have been conditional. It was further submitted that the terms of the Escrow arrangement and its compliance are triable issues.

24. As will become apparent, I do not agree that triable issues would necessarily arise.

25. As to what the Escrow arrangement was, various versions have been given by the Defendants or on their behalf :

(1) It is stated in Wong Tat Chun's March affirmation that the Covenantors and Mr Chan :

"...jointly instructed the Escrow Agent to hold the Escrow Documents in his custody and not to release them ("Escrow Arrangement") unless and until the Escrow Agent has received notice from [Mr Chan] or either of the Covenantors that the Share Transaction has been completed."

(2) In the Covenantors' solicitors' letter dated 27 April 1999 to the solicitors for the Escrow Agent, it is stated that :

"It is our clients' instruction that:

...

3. all the parties to the Escrow Documents have jointly instructed [the Escrow Agent] to hold the Escrow Documents in his custody and not to release them unless and until [the Escrow Agent] has received notice from one Mr Chan Chun Keung and either of our clients that certain share transactions have been completed;" (emphasis added)

(3) In Wong Tat Chun's June affirmation, it is stated that the Covenantors and Mr Chan :

"...jointly instructed the Escrow Agent to hold the Escrow Document sin his custody and not to release them unless and until the Escrow Agent had received notice from [Mr Chan] on the one hand and my wife or me on the other to the effect that [Mr Chan's] interests and voting rights in China Elegance would come to an end and he would no longer interfere with the affairs of China Elegance..."

The Covenantors have thus given differing and inconsistent versions of the Escrow arrangement. This fact totally undermines the credibility of the Defendants' case, a conclusion that is reinforced by the letter dated 19 June 1999 from the Escrow Agent's solicitors to the Defendants' solicitors, which stated :

"Your clients' allegations regarding the arrangement for the return of documents simply do not square with our clients' understanding of the arrangement."

26. What is the effect of the various versions of the Escrow arrangement put forward by the Defendants being rejected by the court? It does not follow that the court is bound to reach the conclusion that there was no delivery at all simply because an Escrow Agent was involved. This would be so only if there is no other plausible explanation. But on the evidence, there is an entirely plausible explanation for the involvement of the Escrow Agent.

27. According to Yicko, at a meeting held on 7 September 1998 attended by Main Chance's representative, two directors of China Elegance, the solicitors representing respectively the Defendants and Yicko, after the wording of the Escrow Documents had been agreed in principle by all parties concerned, Mr Kenneth Ma of Chiu & Partners, the Defendants' solicitors, expressed the Defendants' concern over the potential disclosure requirement by them following the execution of the Share Mortgage and the charging of the China Elegance shares in favour of Yicko. It was felt that that might be seen by market analysts/investors as a sign of financial difficulties faced by the Covenantors and/or China Elegance.

28. There is unchallenged evidence that at about that time, i.e. September 1998, the regulatory authorities were advocating changes to the Securities (Disclosure of Interests) Ordinance in an attempt to make the charging/mortgaging of shares/securities (including warrants) in respect of listed companies by their substantial shareholders a disclosable circumstance. It was proposed and accepted that to leave the Escrow Documents undated for the time being, to be executed by Yicko and Main Chance, would avoid the possible disclosure requirement on the part of the Defendants. This arrangement would further ensure that the Share Mortgage would not be enforced before an event of default occurred and no charge would be registered over the China Elegance shares subject to the Share Mortgage which would lead to bad publicity or cast doubts as to the financial credibility of the Covenantors or China Elegance.

29. In my judgment, this is a perfectly valid explanation for the involvement of an Escrow Agent, such that the issue that there was no delivery does not even arise.

30. The correct test, as enunciated by the Court of Appeal in Ng Shou Chun v. Hung Chun San [1994] 1 HKC 155 at 158G is :

" 'Is what the defendant says credible?'. If so, he must have leave to defend. If not, the Plaintiff is entitled to summary judgment. The issue is not whether the defendant's assertions are to be believed; it is whether those assertions are believable."

Applying that test, I have no hesitation in concluding that the Defendants' assertions are not believable and that there is no defence to Yicko's claim for specific performance.

Is the Share Mortgage enforceable?

31. It is common ground that neither the Deed nor the Share Mortgage was executed by Yicko in September 1998. The circumstances in which the Escrow Documents were obtained, executed and subsequently returned to the Escrow Agent have been much criticized by the Defendants. I need not inquire into the circumstances in which they came to be executed by Yicko in January 1999 since, in my judgment, their enforceability is not dependent on the execution of the Escrow Documents by Yicko. The obligations sought to be enforced are those of the Defendants. Having executed, and, as I have found, delivered the Escrow Documents, the Defendants are bound.

Order

32. Yicko is entitled to the relief sought in the Order 86 summons and I make an order in terms. It follows that the Covenantors' applications to set aside the Statutory Demands fall to be dismissed.

33. Costs must follow the event and I make an order nisi to that effect.