CMIC FINANCE LTD v. FLYING EAGLE AVIATION LTD

HCA 2692/2008

in the high court of the

hong kong special administrative region

court of FIRST INSTANCE

ACTION no. 2692 of 2008

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J U D G M E N T

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1.  These are two cases where judgment is sought under Order 14.  In my view, they are really quite simple cases.

2.  The first one is the case brought by Dynamic Chance Holdings Limited against the first defendant, of which it was a shareholder, and against two guarantors of the loan.  The loan was for US$1,638,000 and the loan agreement was signed, as indeed were the guarantees, on 5 July 2004.  The loan was only a short-term loan.  It was to be repaid on 28 September 2004.

3.  The long and short of it is that the loan was never repaid and attention has been drawn to a number of letters in correspondence taking one up to as late as November 2006.  I do not propose to recite that correspondence but, on at least two occasions, the defendant agreed to repay the loan.  There is no suggestion in that correspondence that that loan was not repayable.  There was no suggestion it was not a loan.  These suggestions only came in the defence and in the affidavits.  In any event, the defence which has been filed seems to me to be rather curious.

4.  The amount of the loan corresponds with what might have been a down-payment, or a first payment, in respect of purchase of aircraft from the Boeing Company.  The purchase of those aircraft never went ahead and so the amount was never used for that.  The amount is not exactly the same but it is close enough that that would be right.

5.  In the defence, it is, first of all, pleaded that Mr Li, on behalf of the plaintiff, orally agreed that the plaintiff would treat the amount of US$1,638,000 as an investment in the operation of the first defendant and would not ask for the return of the said US$1,638,000, or any part thereof, even after the resale of the aircraft.  Then later, it is said that

“Mr Li, on behalf of the Plaintiff, stressed that the Plaintiff would not enforce the Loan Agreement and the Deeds of Guarantee against the 1st to the 3rd Defendants and would not demand the 1st to 3rd Defendants for repayment of the said sums in order to have long-term profits for 1st Defendants”.

6.  Again, it is later pleaded that it was not a loan and so on and so forth.

7.  That is flatly contradicted by the terms of the correspondence which was entered into.  When it came to the hearing today, it was argued, very strongly, that this loan has to be read in the light of the first shareholders’ agreement and, in particular, paragraph 31.  Starting at clause 29, that reads:

“The Parties agree that in order to finance the Company, interest-free Shareholder loans will, from time to time, be provided to the Company by each Shareholder pro-rata to each Shareholder’s ownership in the Company.  In the event that a Shareholder is unable or unwilling to comply with this provision, it may be waived by unanimous agreement of the other Shareholders.  In the event that only some Shareholders are willing to provide such loans, these Shareholders will be paid a negotiated rate of interest and may be provided with additional security.

30.  Funds required from time to time by the Company will be obtained to the greatest extent possible by borrowing from a bank or other institutional lender.”

And 31, which is the clause upon which primary reliance is placed, says:

“Except when precluded or otherwise prohibited by the terms of any debt financing and to the extent permitted by the laws of Hong Kong, the net Profit of the Company available for distribution after making such provision and transfers to reserves as shall be required in the opinion (expressed by Special Resolution) of the Board to meet expenses or anticipated expenses, shall be distributed annually (unless otherwise unanimously agreed), firstly by way of repayment of the Loans on a pro-rata basis and, secondly by way of dividend.”

8.  On the basis of that, it was argued that the loans would be repaid out of profits and it was said the first aircraft was not to be delivered until 2010 and, therefore, profits could not possibly come before then.

9.  But that is not what the clause says at all.  It is quite clear that the clause is a clause which deals with how profits will be distributed and, specifically, the part relied on says that there will not be any dividends until the loans have been repaid, which is a very different thing.

10.  Then one turns to the evidence which has been filed by the second defendant.  From that, it is quite clear that the second defendant knew exactly what she was signing.  She says that she could see the documentation that was given to her was drafted by solicitors, by Li & Partners, and that they were loan agreements and deeds of guarantees.  Obviously, somebody who is involved in a company that is proposing to make a commitment to purchase aircraft in the order of which the first defendant was likely to be engaged in, could be expected not to be a babe in the wood, as it were, and know exactly what a document meant and be perfectly capable of understanding it.

11.  Indeed, there is no suggestion in the second defendant’s affirmation that she did not understand exactly what she was signing.  What she says is that Mr Li, on behalf of the plaintiff, in effect, said that the documentation had to be signed to explain and record the payment by the plaintiff of the money which would go to the Boeing Company as the initial payment.

12.  Even if one took that at its face value, that might be said to have constituted the loan agreement as some form of receipt which would then go on the company file.  That is a matter which I will deal with in a moment.  But it simply cannot explain the guarantees which were signed.  There was no basis for signing guarantees if that was the purpose of this documentation.

13.  All in all, it seems to me that, looking at the facts of the case, one thing is clear, that a great deal more money than this initial 1 per cent deposit was going to have to be raised, if the aircraft were going to be purchased.  That, in my view, as a matter of practical reality, explains why the loan was drafted in terms of only being for three months: after three months, the shareholders would normally have got together and decided how the long-term financing for these aircraft was going to be arranged and, as the shareholders’ agreement made clear, if the financing was only going to come from one party, then there would be a negotiated rate of interest.  Again, that shows that the three months’ period for this loan was exactly what it was meant to be.

14.  All in all, in any event, I consider that the evidence which is sought to be put forward so contradicts the terms of the loan agreement and the guarantees which are clear on the face of them, that I very much doubt that that evidence would be admissible in any event.  I consider it flouts the parol evidence rule.  One cannot give evidence to contradict the terms of documents such as those.  That is a second ground upon which any defence which has been put up would fail.

15.  The second action is an action by CMIC Finance Limited and it is simply against the defendant.  That is based on a loan agreement which was dated 31 May 2005 and was for an amount of HK$5 million.  In respect of that, there was interest payable and that is 6 per cent interest per annum.  The loan was to be repaid on 31 July 2005.

16.  One of the features of the loan which has been raised in court is that there was some security being provided in respect of the loan, but I cannot see how that affects the validity of this loan or its enforceability in any way.  What has been raised, not in the defence which has been filed but in the affidavits and was dealt with in the course of argument, is that the plaintiff in this case is a moneylender and it is authorised to carry on business under the Money Lenders Ordinance, Cap. 163.  There are difficulties in relation to it because there was no summary of the provisions as required by section 18(1)(b) of the Money Lenders Ordinance, and it does not set out a declaration as to the place of negotiation and completion of the loan agreement required under section 18(2)(j).

17.  However, as has been acknowledged in the course of argument on both sides, the court does have a discretion to enforce the agreement to the extent it is equitable to do so and to give judgment, despite the fact that there has been breach of the Ordinance in different respects.  What is clear is that the court should take into account the circumstances of the matter and should only grant summary judgment if it is clear that the court is almost bound to grant final relief at any trial.

18.  In my view, I cannot see any basis for saying that these discrepancies, which are, in the circumstances, minor and relate to a document which is clear on its face, would preclude any court from granting final relief.  The documentation is clear.  The money was borrowed.  There is no question but that there was a drawdown of the loan and, in my view, it is repayable and judgment should be given, notwithstanding the absence of the two matters referred to which are required under the Ordinance.

19.  I would therefore give judgment in both cases in favour of the plaintiff.

(Submissions on costs)

20.  Interest in HCA 2693 at the rate of P plus 1 per cent to run from the date of service of the writ.  Interest on HCA 2692 at 6 per cent as per the claim.