KING VICTORY INVESTMENT LTD v. CHAN HON WING AND ANOTHER

CACV 302/2023, [2024] HKCA 849

On Appeal From [2023] HKCFI 2292

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 302 OF 2023

(ON APPEAL FROM HCA NO 1702 OF 2022)

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(By Original Writ and Order of Master Kent Yee to carry on dated 16 March 2023)

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J U D G M E N T

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Hon Chow JA (giving the Judgment of the Court):

INTRODUCTION

1.  This is the Defendants’ renewed application by summons dated 1 February 2024 to the Court of Appeal seeking a stay of execution of the summary judgment dated 6 July 2023 (“the Judgment”) entered by Master Queenie Lau (“the Master”) in favour of the Plaintiff against the Defendants for the sum of HK$15 million together with interest thereon and costs of the action pending the Defendants’ appeal against the order of Deputy High Court Judge Le Pichon (“the Judge”) dated 31 August 2023 (“the Order”), whereby the Judge dismissed the Defendants’ appeal against the Judgment.

2.  Pursuant to Order 59, rule 14A of the Rules of the High Court, Cap 4A, we determine this application without a hearing on the basis of the parties’ written submissions only.

BACKGROUND FACTS

3.  The basic facts of this case are fully set out in the Judge’s reasons for decision dated 6 September 2023 (“Reasons for Decision”), and will not be repeated here. For the purpose of disposing of the present application, the following brief summary, taken largely from the Reasons for Decision, should suffice.

4.  The Plaintiff is an investment holding company and a wholly-owned subsidiary of Super Strong Holdings Limited (“Listco”), a Hong Kong listed company. Listco and its subsidiaries are engaged in the business of construction and building management.

5.  The Defendants were husband and wife. The 2^nd Defendant had worked in the banking industry and held senior administrative positions in commercial institutions. From around 2013, through their corporate vehicle, More Wealth Development Limited (“More Wealth”), the Defendants began to purchase land in Tan Ka Wan, Sai Kung.

6.  On 8 August 2019, the Plaintiff and More Wealth entered into a joint venture agreement (“the JV Agreement”) for a project (“the Project”) involving the development and sale of part of More Wealth’s land (“the Lands”) at Tan Ka Wan totalling approximately 151,571 square feet by a “JV Company”. The Plaintiff and More Wealth respectively owned 65% and 35% of the JV Company.

7.  The JV Agreement provided for (a) the injection of HK$12 million in cash by the Plaintiff as capital for the JV Company; (b) the assignment of the Lands to the JV Company by More Wealth in 3 stages; (c) the appointment of the project manager for the Project by the Plaintiff; and (d) 50% of the sale proceeds of the Lands received to be applied as dividends and distributed on a quarterly basis.

8.  The Plaintiff appointed W M Construction Limited (“WM”), an indirect subsidiary of Listco, as project manager for the Project.

9.  On 29 October 2019, the Plaintiff and the Defendants entered into a loan agreement (“the Loan Agreement”), whereby the Plaintiff agreed to lend HK$15 million to the Defendants at the interest rate of 3% per annum (“the Loan”). The Loan together with all accrued interest was repayable 12 months from the date of the Loan Agreement subject to the Defendants’ right by written notice served not later than one month before the repayment date to extend the repayment date by 6 months.

10.  The Defendants duly served a notice to extend the repayment date by 6 months. Hence, the Loan fell due for repayment on 28 April 2021. No repayment of the Loan was made by the Defendants on or before 28 April 2021.

11.  Thereafter, at the Defendants’ request, the Plaintiff entered into a series of six “supplemental agreements” with the Defendants, whereby the repayment date of the Loan was extended finally to 30 November 2022, but at the increased interest rate of 6% per annum from 28 April 2021. The 3^rd, 4^th, 5^th and 6^th supplemental agreements were preceded by letters from the Defendants to the Plaintiff proffering various excuses for requesting for an extension of time to repay the Loan, including cashflow problem due to Covid 19, additional time required to process financing of US$10 million from a financial institution, the sudden outbreak of Omicron, and cashflow delays due to Omicron.

12.  On 14 November 2022, the Plaintiff’s solicitors gave notice to the Defendants that appropriate action would be taken without further notice if repayment was not made as provided by the 6^th supplemental agreement. On 5 December 2022, the Plaintiff issued the writ in this action claiming against the Defendants for the sum of HK$15 million together with interest and costs.

13.  On 11 January 2023, the Plaintiff applied for summary judgment of its claim against the Defendants. On 6 July 2023, the Master made an order entering judgment for the Plaintiff.

14.  On 31 August 2023, the Judge heard, and dismissed, the Defendants’ appeal against the Master’s order.

15.  The principal defence[1] raised by the Defendants against the Plaintiff’s claim is based on an alleged oral representation or assurance made or given by one Mr Ko, a director of the Plaintiff and an executive director of Listco, prior to the making of the Loan Agreement such that it would be inequitable to allow the Plaintiff to rely on the strict terms of repayment in the Loan Agreement/supplemental agreements (“the Oral Representation Defence”).

16.  According to the 2^nd Defendant:

(1)  The Loan Agreement was part of an “Overall Collaboration Agreement” that arose during the negotiation for the JV Agreement of 8 August 2019. The Overall Collaboration Agreement comprised three components, including, inter alia, (i) a capital injection by Listco into the JV Company, and (ii) the Loan to the Defendants personally.

(2)  During the negotiation, Mr Ko represented to the 2^nd Defendant the following –

“Ko stated that the land development works in respect of the lands to be sold should probably be completed within one year and the parties could start selling some pieces of land at around one year after the advancement of the loan, so that my late husband and I could use the sale proceeds to repay the loan. However, as delay was not uncommon for construction works, I originally had some reservation about the progress of land development works as estimated by Ko and asked what if the interruption in land development works delayed the intended sale of lands. Ko then agreed to insert a clause for an extension of time for repayment for 6 months to provide for such a situation, and he further said that if we still could not repay, the Listed Company could take away the 35% shares in the joint venture company that were under the name of More Wealth as repayment. Ko added that it was only ‘on paper’ and we could sort things out if and when delay happened (verbatim in Cantonese: ‘寫我就係咁寫到時我哋可以商量嘅’). Given the context of our discussion, I understood Ko (acting on behalf of the Listed Company) to have made a representation that the Listed Company would grant an extension of time for the repayment of the loan until proceeds were reaped from the sale of lands after the completion of land development works (‘the Representation’)”[2].

(3)  The following encapsulates the Defendants’ alleged understanding and interpretation of the Representation –

“16. As a result, D2 understood Ko to have represented that the ListCo would grant an extension of time for the repayment of the loan until proceeds were reaped from the sale of lands after the completion of land development works (under the joint venture project), which formed a common understanding.

17. Furthermore, there was common understanding that [the Defendants] were not obliged to repay the loan until the completion of the land development work and the sale of the lands.

18. In other words, there was a promise made to [the Defendants] that no demand for repayment of loan would be made before the receipt of sale proceeds.

19. The JV Agreement dated 8 August 2019 was executed based on the [Overall Collaboration Agreement] and common understanding.”[3]

17.  The Judge rejected the Oral Representation Defence on the ground that it is simply not credible. At §39 of the Reasons for Decision, the Judge commented as follows:

“In those circumstances, the credibility of the Defendant’s factual case has to be assessed against the totality of the available evidence. In that regard, it should be noted that:

(a) the Representation contradicts the clear terms of the Loan Agreement and the 1^st to 6^th Supplemental Agreements;

(b) it also sits uncomfortably with the written extension requests made in 2021 and 2022 which proffered various ‘reasons’ for the delay in making payment, thus implicitly recognising the obligation to make payment instead of taking issue with the obligation having arisen;

(c) had the Representation been made, the response one would have expected from the Defendants would be that the demand was premature;

(d) the Defendants have not explained why, if the Representation had been made prior to the Loan Agreement, they agreed (by entering into the 1^st Supplemental Agreement) to increase the interest rate from 3% to 6% as from 28 April 2021;

(e) it is inexplicable that the Representation defence did not feature at all in the letters dated 23 November 2022 and 7 December 2022 from the D2’s solicitors in response to the Plaintiff’s demands for payment of 14 and 30 November 2022 and was only put forward in [the 2^nd Defendant’s 2^nd Affirmation] made more than 4 months after the commencement of this action;

(f) D1 never replied to the letters from the Plaintiff’s solicitors and his silence has never been explained;

(g) assuming, in the Defendants’ favour, that Mr Ko had said to D2 that the repayment provision ‘was only ‘on paper’ and we can sort things out if and when delay happened’, to take those words to mean that

(i) the Plaintiff would extend repayment deadline until ‘after the completion of the land development works’ and

(ii) ‘proceeds were reaped from the sale of lands’

requires a huge quantum leap in logic;

(h) as already noted, there is a total absence of relevant particulars relating to the Representation.”

18.  On 27 September 2023, the Defendants filed and served a Notice of Appeal against the Order.

19.  On 10 November 2023, the Judge dismissed the Defendants’ application for a stay of execution of the Judgment pending their appeal against the Order. The Judge’s reasons for dismissing the stay application were given on 16 November 2023 (“Reasons for Decision (Stay)”).

20.  On 1 February 2024, the Defendants made the present renewed application for a stay of execution of the Judgment pending appeal. The stay application is advanced on the basis that: (i) the Defendants have at least an arguable appeal; and (ii) there is an appreciable risk that the Plaintiff may not be able to repay the judgment sum should the Defendants succeed on appeal, which would leave the Defendants irremediably prejudiced.

APPLICABLE PRINCIPLES

21.  The principles governing an application for a stay pending appeal are well established:

(1)  The applicant is required to demonstrate a “good reason” for a stay of execution.

(2)  Generally speaking, the existence of merely an arguable appeal cannot by itself amount to a sufficient reason to justify a stay. It is the minimum requirement before a court would even begin to consider granting a stay.

(3)  In other words, if the court is not convinced that there exist arguable grounds of appeal, no stay will be granted however exceptional the circumstances may otherwise be justifying a stay of execution.

(4)  On the other hand, the existence of a strong appeal or a strong likelihood of success will usually by itself enable a stay to be granted because this would constitute a good reason for a stay.

(5)  In most cases, where the court is faced with simply the existence of an arguable appeal, it becomes necessary for the applicant to provide additional reasons as to why a stay is justified.

(6)  Commonly, this is done by demonstrating that without a stay the appeal would be rendered nugatory, for example, because of an appreciable risk that the respondent to the appeal would not be able to repay in the event of a successful appeal against a money judgment, or because the failure to grant a stay would have a serious deleterious effect on the applicant.

(7)  In considering an application for a stay pending appeal, it would be impractical and even undesirable for the court to go deeply into the merits or strengths of the appeal, although the court must still form a preliminary view of these aspects.

See the judgment of Ma J (as he then was) in Stay Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84, at §§9-10.

MERITS OF THE APPEAL

22.  Two substantive grounds of appeal are raised in the Defendants’ Notice of Appeal:

(1)  Ground 1 contends that the Judge erred in her analysis of the Oral Representation Defence in §39(a)-(c) and (f)-(h) of the Reasons for Decision.

(2)  Ground 2 contends that the Judge, in rejecting the 2^nd Defendant’s evidence regarding the Representation, failed to properly take into account various matters, namely –

(a)  the JV Agreement and the Loan Agreement were clearly inter-related and formed part of a broader series of transactions contemplated by the parties under the Overall Collaboration Agreement (which was never disputed by the Plaintiff);

(b)  the Loan advanced by the Plaintiff to the Defendants was not a free-standing loan, but rather a loan made between joint venture partners for the purpose of funding the acquisition of the Lands under the Project;

(c)  against such a background, it is entirely plausible and credible for the parties to have agreed that (i) the Loan advanced under the Loan Agreement should be repaid using the land sales proceeds under the Project; and (ii) repayment would not be demanded by the Plaintiff from the Defendants until after the completion of the land development works and proceeds were reaped from the sale of the lands.

23.  As noted by the Judge in the Reasons for Decision (Stay): (i) the Defendants’ former counsel (Mr Yeung) fairly acknowledged that the Defendants were not in a position to show the existence of a strong appeal or a strong likelihood of success, but maintained that they had an arguable appeal, and (ii) the Defendants had singularly failed, in the Notice of Appeal, to address §39(d) of the Reasons for Decision which read as follows:

“the Defendants have not explained why, if the Representation had been made prior to the Loan Agreement, they agreed (by entering into the 1^st Supplemental Agreement) to increase the interest rate from 3% to 6% as from 28 April 2021”.

24.  This is, in our view, an obvious weakness in the Oral Representation Defence. If the Plaintiff had indeed made a representation to the Defendants that Listco (or the Plaintiff) would grant an extension of time to the Defendants for the repayment of the Loan until proceeds were reaped from the sale of the Lands, or there was a common understanding that the Defendants were not obliged to repay the Loan until the completion of the land development work and the sale of the Lands, it is difficult to see why the Defendants would agree to pay additional interest of 3% per annum on the principal amount of the Loan under each of the six supplemental agreements. In this regard, it is also relevant that in the construction contract entered into between the JV Company and WM dated 18 October 2019, it was provided that the construction period for stage I of the development of the Lands was anticipated to be 2 years. Thus, it must have been obvious to the Defendants that, even with the additional 6 months for repayment of the Loan provided for in the Loan Agreement (up to 28 April 2021), the Defendant would likely be required to repay the Loan before there could be any return from the development and sale of the Lands. In such circumstances, it is difficult to see why the Defendants would enter into an agreement on 29 October 2019 which provided that the Loan would have to be repaid within 18 months from the date of the Loan Agreement.

25.  Notwithstanding this obvious weakness in the Oral Representation Defence, which was pointed out in the Judge’s Reasons for Decision (Stay) given on 16 November 2023[4], this matter was not addressed in Mr Kwan’s Skeleton Submissions for the Defendants dated 7 February 2024 filed in support of the present application. It was only after this omission had been highlighted in the Plaintiff’s submissions dated 19 February 2024[5] that the Defendants sought to address it in the Reply Submissions for the Defendants dated 27 February 2024. In summary, the Defendants argue that:

(1)  The increase of the interest rate from 3% per annum to 6% per annum formed part of the terms of the six supplemental agreements signed by the parties. The circumstances under which they were signed have been set out in the 2^nd Defendant’s 2^nd Affirmation, at §§46-48.

(2)  As explained, the Defendants signed the six supplemental agreements in reliance on the Representation and “on the understanding that the Plaintiff was bound to extend time for repayment of the Loan until proceeds could be reaped from the sale of lands after the completion of the land development works”. Consistent with the Representation, the time for repayment of the Loan was repeatedly extended notwithstanding that each of the supplemental agreements provided that there would be no further time extension. After the 6^th supplemental agreement, the Plaintiff reneged on the Representation and decided not to grant any further time extension. The Plaintiff’s representative claimed that he was placed in a “very difficult position” because the Plaintiff’s parent company had been questioned by the SFC regarding the repeated time extensions.

(3)  On a careful analysis of the evidence, the signing of the six supplemental agreements is fully consistent with the Defendants’ case:

(a)  The effect of the Representation is that “the Plaintiff had no discretion and was required to extend time for repayment of the Loan, until the completion of the project and profits were generated from the sale of land, so long as [the Defendants] are paying interest to the Plaintiff”.

(b)  The Representation only obliged the Plaintiff to extend the time for the repayment of the Loan, but did not address whether there would be any adjustment to the interest rate during the extension period. It follows that the Defendants’ agreement to an increase of the interest rate from 3% per annum to 6% per annum is not in any way inconsistent with the Oral Representation Defence.

(c)  The fact that the time for repayment of the Loan was repeatedly extended by way of the six supplemental agreements is corroborative of the Defendants’ case that the Plaintiff had made the Representation. It is clear from the parties’ conduct that the written agreements did not fully encapsulate the terms on which the parties dealt with each other.

(d)  In Mr Ko’s 2^nd Affirmation, at §§40-41, he claimed that the Plaintiff initially agreed to extend time due to the Defendants’ assurance to make repayment. Mr Ko later told the 2^nd Defendant that no further extension would be granted when the delay had become too substantial. However, if the Representation had never been made, there would be no need for the Plaintiff to provide any explanation for its refusal to extend time. The very fact that the Plaintiff’s representative found it necessary to explain its refusal to extend time suggests that the Representation was made.

26.  The difficulty with this explanation for the Defendants’ agreement to accept an increase in the interest rate from 3% per annum to 6% per annum (namely, the effect of the Representation was only that the Plaintiff was bound to grant an extension of time to the Defendants to repay the Loan, but would leave it free to the parties to agree on an adjustment to the interest rate) is that this would be a very uncommercial arrangement and would not provide any real comfort to the Defendants, because the Plaintiff might insist on a high interest rate and/or the parties might not be able to come to terms on the revised interest rate, in which event that they would be thrown back to the terms of the Loan Agreement.

27.  More generally, it is not easy to see how the alleged Representation, namely, “寫我就係咁寫到時我哋可以商量嘅”, could be understood to mean that the Plaintiff was “bound” to grant an extension of time to the Defendants for repayment of the Loan.

28.  This is not the occasion to come to any definite view on the merits of the appeal, for it is well established that, when considering an application for stay of execution pending appeal, the court should not go deeply into the merits of the appeal, and is only required to form a preliminary view of these aspects. The merits of the appeal will have to be fully ventilated at the substantive hearing of the appeal. On a preliminary basis, we are not satisfied that the Defendants’ appeal is reasonably arguable, still less that the Defendants have a strong appeal or their appeal has a strong likelihood of success.

29.  In view of the above conclusion, it becomes unnecessary for us to consider the question of whether a refusal of the stay application would render the Defendants’ appeal nugatory because of an appreciable risk that the Plaintiff may not be able to repay the judgment sum should the Defendants succeed in the appeal, which would leave the Defendants irremediably prejudiced. For the sake of completeness, we shall deal with this matter briefly.

30.  Essentially, the Defendants’ argument is based on the fact that the Plaintiff, although a wholly-owned investment vehicle of a listed company, has no known substantial assets or business operations and has a paid-up capital of only HK$1. Mr Ko has, however, affirmed that the Plaintiff has consistently been holding a substantial amount of cash at bank: as at both 30 June 2022 and 30 June 2023, the Plaintiff’s cash at bank has consistently been over HK$10 million, and the Plaintiff’s net assets have also consistently been over HK$10 million[6]. Although Mr Ko has not produced any supporting bank statement or financial statement, we are not able, in the present application, to disregard this sworn evidence filed by the Plaintiff.

31.  The Defendants also rely on the fact that Listco has not given any undertaking or guarantee that it will repay any sum received by the Plaintiff from the Defendants should they succeed in the appeal. In view of the fact that the Plaintiff is a judgment creditor and is prima facie entitled to recover the judgment sum from the Defendants, we fail to see why it or its parent company should be required to give an undertaking or guarantee to repay the money as a condition for being permitted to levy execution on the Judgment.

32.  What seems to us to be significant is that, if the Defendants are genuinely concerned that they might not be able to recover any sum received by the Plaintiff from the Defendants should they succeed in the appeal, their position could be secured by paying the judgment sum into court, there being no evidence or suggestion that they are unable to do so. No such offer has ever been made by the Defendants in their evidence or submissions.

33.  Overall, we are not persuaded that the Defendants have shown that, without a stay, they will be irremediably prejudiced as alleged.

DISPOSITION

34.  The Defendants’ summons dated 1 February 2024 is dismissed with costs to the Plaintiff, to be summarily assessed. The Defendants shall have leave to file and serve a statement of objection (limited to 2 pages) to the Plaintiff’s statement of costs dated 29 February 2024 within 14 days from the date of this judgment.

35.  The above order as to costs is an order nisi, which shall become absolute unless an application is made to vary the same within 14 days from the date of this judgment. In the event that an application is made to vary the costs order nisi, the application will be dealt with on paper, and the Court will give further directions on the application, including the length of the written submissions which may be filed by the parties.