XCHRX CHINA MERCHANTS BANK v. I-CHINA HOLDINGS LTD. AND ANOTHER

HCA 7266/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7266 OF 2000

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R U L I N G

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1. The Plaintiff brings this summons for judgment under Order 14 of the Rules of the High Court.

2. The Plaintiff's claim in this action arises from two agreements:

(i) a "Loan Assumption Deed" dated 30 December 1998 under which the 1st Defendant agreed to take over the indebtedness of two other companies, Rich China International Limited (RCL) and Minivest International Limited (MIL) to the Plaintiff in the sum of US$22.5 million (the "Loan Assumption Deed"),

(ii) a "Loan Agreement" of 31 December 1998 with the 1st Defendant under which the Plaintiff agreed to make available to the 1st Defendant a term loan facility of US$35 million, which the 1st Defendant drew down in full (the "Loan Agreement").

3. In so far as the Loan Assumption Deed is concerned the Plaintiff's case is that the 1st Defendant discharged US$12.5 million of the $22.5 million indebtedness it had assumed by authorising the Plaintiff to debit the 1st Defendant's account under the Loan Agreement in that sum. That left the balance of US$10 million payable under the Loan Assumption Deed in respect of which the 1st Defendant had delivered two post-dated cheques to the Plaintiff, one for the Hong Kong dollar equivalent of US$2.5 million dated 31 December 1999 (the 1st cheque), the other for the Hong Kong dollar equivalent of US$7.5 million dated 3 December 2000 (the 2nd cheque).

4. When the 1st cheque became due it was presented but dishonoured.

5. The Plaintiff claims against the 1st Defendant under the Loan Assumption Deed for the sum of US$2.5 million on the 1st cheque, alternatively the whole sum of US$10 million remaining outstanding under the Loan Assumption Deed plus interest.

6. Under the terms of the Loan Assumption Deed, the Plaintiff procured the 2nd Defendant to execute a debenture by way of floating charge over its assets to secure the outstanding balance of US$10 million. The Plaintiff's case is that under the terms of this debenture, the 1st Defendant's default has crystallized the floating charge into a fixed charge. The Plaintiff claims against the 2nd Defendant a declaration that the floating charge has been crystallized into a fixed charge and is now enforceable and judgment for the sum of US$10 million plus interest.

7. In so far as the Loan Agreement of 31 December 1998 is concerned, interest is payable on the amount drawn down quarterly. The Plaintiff claims that the 1st Defendant has failed to pay interest since 21 June 1999 and that accordingly the whole principal of US$35 million and interest thereon totalling US$37,482,699.00 is payable. The Plaintiff claims that sum plus interest thereon against the 1st Defendant under the Loan Agreement.

8. The Defendants' defence alleges that the Loan Assumption Deed is voidable for misrepresentation, essentially on two grounds:

(i) that the Plaintiff is in breach of a term fully to disclose to the 1st Defendant certain material facts which it was obliged to disclose; in addition or alternatively,

(ii) the Plaintiff had misrepresented that it did not hold any encumbrance over certain material property under the terms of the agreement.

9. The 1st Defendant claims rescission of the Loan Assumption Deed and alleges that the Plaintiff is liable to repay the US$12.5 million paid under the Loan Assumption Deed and that it is not liable on the cheque for US$2.5 million.

10. The 2nd Defendant claims that his liability to the Plaintiff under the debenture is conditional upon the 1st Defendant being liable to the Plaintiff under the Loan Assumption Deed. In the light of the 1st Defendant's claim for rescission of the Loan Assumption Deed, it claims that it is not liable under the terms of the debenture.

11. The 1st Defendant counterclaims for the sum of US$12.5 million being the amount it advanced under the Loan Assumption Deed and a declaration that the deed is rescinded and that it is not liable to the Plaintiff under its terms. The 2nd Defendant counterclaims for declaration that it is not liable to the Plaintiff under the terms of the debenture.

12. Although the Plaintiff's summons under Order 14 seeks judgment under both the Loan Assumption Deed and the Loan Agreement, Mr Wong for the Plaintiff conceded at the commencement of the hearing that the Defendants did have an arguable case in respect of the claim on the Loan Assumption Deed. He is therefore only seeking judgment against the 1st Defendant under the Loan Agreement. This part of the claim does not concern the 2nd Defendant.

13. The amount to which Mr Wong claims the Plaintiff is entitled under the Order 14 summons is the amount drawn down under the Loan Agreement (US$35 million) less $12.5 million out of the sum drawn down, representing the sum which the 1st Defendant had paid to the Plaintiff under the Loan Assumption Deed and upon which he concedes the 1st Defendant has an arguable case, plus interest.

14. The 1st Defendant's pleaded defence to the claim under the Loan Agreement is stated in paragraph 44(4) of the Defence in the following terms:

"if the 1st Defendant is liable to the Plaintiff under the Loan Agreement as alleged or at all (which is denied), the 1st Defendant is entitled to set off the aforesaid claim in extinction and/or diminution of the Plaintiff's claim"."

15. The "aforesaid claim" is the claim in respect of the US$12.5 million which the 1st Defendant is alleging was paid on a consideration that had wholly failed or money paid pursuant to a voidable contract which had been rescinded. In other words, while generally denying liability under the Loan Agreement, it is not specified on what grounds, save in so far as the set-off is concerned. The 1st Defendant has not pleaded repudiation of the Loan Agreement or claimed rescission.

16. In the absence of notice of the rescission of the loan by the 1st Defendant (in contrast to its plea of rescission of the Loan Assumption Deed), Mr Wong argues that the Plaintiff is entitled to judgment. He argues that by serving the defence and counterclaim and electing to rescind the Loan Assumption Deed but making no reference to rescission of the Loan Agreement and in particular not seeking a declaration that the Loan Agreement is rescinded, the 1st Defendant was electing not to avoid the Loan Agreement.

17. The 1st Defendants' defence to this argument is based upon paragraph 11 of the affirmation of the Plaintiff's own witness Xia Jin Qing, the manager of its Offshore Banking Department. Mr Xia said: "I wish to repeat that the Loan Agreement was made between the Plaintiff and the 1st Defendant in consideration of the Loan Assumption Deed". Mr Shieh for the 1st Defendant argues that on this basis both the Loan Agreement and the Loan Assumption Deed were part of the same "package". If the Loan Assumption Deed is rescinded for misrepresentation this would also vitiate the Loan Agreement. The Plaintiff's claim under the Statement of Claim is simply in contract under the Loan Agreement. If the Loan Agreement is vitiated by fraudulent misrepresentation and rescinded, the Plaintiff has no claim in contract, but only for instance under a claim for money had and received. There is no such claim in the Statement of Claim. The court cannot assume that there would be no answer to a claim by the Plaintiff for money had and received. There might for instance be a defence of change of position (see Lipkin Gorman v. Karpnale [1991] 2 AC 548, 578 at F). Mr Shieh admits that this point was not raised on the pleadings but argues that for the purpose of Order 14 proceedings the defence is not precluded from raising defences which had not been pleaded (see Incorporated owners of Haifong Mansion v. Convey Advertising HCA 9773 of 2000 at page 5). Although that 1st Defendant may not have hitherto elected to rescind the contract, Mr Shieh stated that by his submissions he made that election on behalf of his client.

18. Despite an initial unattractiveness, I am persuaded that Mr Shieh's submissions are correct. I am unable to find that simply by denying liability in its defence without specifying upon what grounds and in particular without asking for a declaration that the Loan Agreement had been rescinded, the 1st Defendant was electing to affirm the contract. Election or affirmation requires an occasion calling for election. The act relied on must be clear and unequivocal and must be consistent only with a desire to affirm and inconsistent with a desire to terminate the contract. Silence does not per se amount to affirmation though depending on the act it may be evidence of affirmation. (see Chitty paragraph 6-120, The Kanchenjunga [1990] 1 Ll LR 391 at 398, Spencer Bower "Actionable Misrepresentation" 4th ed. Paragraphs 245-246)

19. I do not find that the 1st Defendant did anything which indicated that they were affirming the validity of the Loan Agreement. The fact that it did not specify the basis upon which it was denying liability under the Loan Agreement or plead repudiation cannot be said to be consistent only with an affirmation of the continued validity of that Agreement. I do not find that Shirley Choi Sui Lui, the 1st Defendant's witness has ever denied that the Loan Agreement was made in consideration of the Loan Assumption Deed. In paragraph 23 of her 3rd affidavit she expressly relies upon the argument now advanced by Mr Shieh.

20. I find therefore that the 1st Defendant has an arguable defence in respect of the Loan Agreement on the Plaintiff's claim as it is now framed.

21. I dismiss the Plaintiff's summons and give unconditional leave to the Defendants to defend.

22. In view of the circumstances, I make the following orders as to costs; that the costs in so far as the summons relates to the Loan Agreement be costs in the cause and the costs in so far as the summons relates to the Loan Assumption Deed be costs to the 1st and 2nd Defendants.