NICETON WORLDWIDE LTD v. ARCHIE SANI-TECH (BVI) LTD AND OTHERS

HCA 2412/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2412 OF 2004

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J U D G M E N T

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1.  The Plaintiff company, Niceton Worldwide Limited, (Niceton) sues the defendants for the return of the sum of $2 million advanced pursuant to a convertible loan facilities agreement, (the agreement).  The advance was made to the 1^st Defendant, Archie Sani-Tech (BVI) Limited, (Archie BVI), and guaranteed by the 2^nd, 3^rd, 4^th, 5^th and 6^th Defendants.  Summary judgment was given against the 2^nd, 4^th, 5^th and 6^th Defendants by the Master and they now appeal to this court.

2.  On 23 July 2004, Niceton granted to Archie BVI a convertible loan facilities agreement with an option for Niceton to convert the loans into shares in Archie BVI .  Under the terms of the agreement a first tranche of $2 million was to be advanced immediately, and a subsequent tranche of $5 million was to be advanced later, if certain condition were met.  The term of loan was for a period of one year, unless previously converted into shares in accordance with the convertible note.

3.  Before the Master, a number of defences were raised.  First, it was contended that alleged breaches of the agreement, upon which Niceton relied, had not taken place.  The Master held that the breaches were not proven and that Niceton was not entitled to rely upon any alleged breach in an application for summary judgment.  Niceton does not now challenge that finding.  However, the Master went on find that the loan was repayable upon demand, and accordingly entered summary judgment against the defendants.

4.  In so entering judgment the Master rejected defences including the capacity of Niceton to sue, the fact that the loan was a disguised loan which was in fact an investment, and not a loan, that a person involved in the transaction acted as a “double agent” for both Niceton and Archie BVI and the 2^nd Defendant, Archie Sani-Tech (HK) Limited, (Archie (HK), that the transaction contravened the Money Lenders Ordinance, and an issue of estoppel.  In the course of the hearing before me, Mr Cheung, who has put his case with his usual commendable frankness, abandoned all those defences.  He now relies upon two arguments to contend that there is an arguable defence. 

5.  First, he contends that the demand for repayment prior to the maturity date of the agreement, that is 12 months from the date of the advance, was repugnant to the objective of the arrangement and accordingly the advance could not in any event be an advance repayable upon demand.

6.  Second, he contended that the conduct of Niceton was such as to raise an estoppel to prevent Niceton from enforcing the loan prior to the expiry of the period of 12 months.

7.  The repugnancy argument is based primarily on the unreported decision of Goff J in Titford Property Company v Cannon Street Acceptances Ltd, (22 May 1975) unreported, in which the learned Judge found that where the bank in that case had granted an overdraft facility for 12 months to assist the Plaintiff in buying land and building on it, a clause providing that all monies should be repayable on demand was repugnant to the whole facility.  He said this:

“(the Bank) could not, in my judgment, with one hand grant a facility for a term for a purpose which to its knowledge clearly involves the Plaintiff in incurring expenditure and liabilities, with a view to ultimate profit, and with the other take it away by an unqualified right to require repayment on demand at any time.  In my judgment, therefore, I must modify clause 9, by reading it as subject to the provision as to the duration of this facility, or ignore it all together.”

8.  A significant fact in the decision, (the full text of which is unfortunately not available), is that the bank, as part of the arrangement, was to acquire a 20% shareholding in the borrower company.   Further, in the facility letter in that case, there was no indication, on its face, whether the “term loan” provision or “repayment on demand” provision was to prevail.

9.  In the present case, the facility agreement defined the “repayment date” as the “date falling one year after the date of this agreement”.  The relevant clause as to payment is clause 6.  The clause contains the following provisions:

	6.01	Subject to Clause 6.02, the Company shall repay to the Investor in full the Advances and all outstanding amounts under the Facilities (unless previously converted pursuant to the conversion rights under the Convertible Notes) on the Repayment Date.
“	6.02	Notwithstanding any provision to the contrary herein contained (whether express or implied), the Investor may at any time after the date hereof require the Company to repay the Advances together with interest accrued thereon and all outstanding amount in respect of the Secured Indebtedness on demand.  Such demand shall be in writing addressed by the Investor to the Company and may relate to the whole or part of the Advances and may require the Company to make repayment forthwith or on a date specified by the Investor in its demand.
	6.03	The provisions in the Convertible Notes in relation to payments and interest payments shall apply to and shall be deemed to form part of this Agreement, in particular, the Company acknowledges and agrees that it has no right to prepay the amounts due under the Facilities prior to the Repayment Date.”

10.  The case for the Defendants was that, having fixed a term of the loan by the definition of the repayment date, as one year, it was repugnant to that arrangement to make, at same time, provision that the sum advanced should be repayable on demand.  I do not accept that there is any repugnancy and am satisfied that the advance was repayable upon demand.  There are two reasons for this conclusion.

11.  First, it is plain from Clause 6.02 and that that Clause is to prevail over clause 6.01.  Clause 6.02 commences with the words:

“Notwithstanding any provision to the contrary herein contained (whether it is expressed or implied)”. 

It is absolutely clear from the use of that expression that the agreement that the loan should be for 1 year is subject to the lender’s right to demand earlier repayment.  It has been held numerous cases, in which the decision in Titford has been considered, that there is no inherent with repugnancy in such arrangement.  Those cases include Hong Kong and Shanghai Banking Corporation Limited v Ling Lee Kang Philip & Another [2001] 3 HKC 420, Lloyds Bank International Ltd & Another v Dericourt Investments Limited & Another [1983] 2 HKC 691, Hong Kong and Shanghai Banking Corporation Limited v Au King Wah unreported, HCA 4299/2001.

12.  In Williams & Glyn’s Bank Ltd v Barnes [1981] COMLR 205 Gibson J said:

“Can the bank, in including the term of their document, reasonably have supposed that the borrower would treat it seriously.”

I am satisfied that it is quite unarguable in the present case that the borrower would not have treated the provision seriously.  Both parties were separately legally represented when they signed all the agreements in question.  The 5^th Defendant, Mr Keung Shu Hoi, (Mr Keung), who has made all the affirmations on behalf of the Defendants in the proceedings, was and is a practicing solicitor, who must have understood precise terms of the documents being signed.

13.  In Titford,the bank had agreed to purchase 20% of the borrower company’s shares.  That it was so deeply involved with the company was plainly a factor upon which the Judge relied in holding that it was not intended, in the absence of it being clear that one clause prevailed over the other, that the loan should be able to be called up earlier than the term provided for in the agreement.  Here, quite differently, the lender has not taken shares in the company.  It has reserved to itself, through the convertible note, an option take shares.  It must be inherent in the existence of an option, that the option holder has the right not to exercise that option.  If the option is not to be exercised, it must follow that the option holder, who also lent money to the company, must retain the right to withdraw any money it had advanced to the company.  It simply makes no commercial sense to say that the lender may have an option to take shares, which it might not exercise, but may not demand repayment of its loan, when such a right is maintained in the document, in terms.

14.  I accept, as Mr Cheung pointed out, that five persons were effectively appointed by the lender be directors of Archie HK, and all of those five persons were signatories to the bank account opened by Archie HK.  That certainly enhanced the lender’s control over the defendant companies.  But it remains that the lender had an option which it may elect not to exercise.  Commercial reality says that in the event of the lender making the decision not to exercise the option, the five persons so appointed would resign their positions as director.  The fact that the lender had the right to appoint directors, and that those directors had signing authority on Archie HK’s bank account does not, in my view, alter the position.

15.  I am accordingly satisfied that there is no repugnancy between the provisions of the agreement, and that the agreement to advance the money was an agreement to advance money for a term, but which would repayable upon demand.  There is, in this point, no arguable defence.

16.  The second ground of defence sought be argued was an estoppel.  This involves an assertion by Mr Keung that oral promises had been made by Niceton, prior to the signing of the documents that the advance would not be called up for repayment prior to the expiry of the one-year period.  It is not, at this stage, appropriate to determine whether or not those assurances were given, but whether the evidence that they were given is believable.

17.  The effect of the allegation is there was an oral assurance given that the provision in the documentation that the loan would be repayable upon demand was a provision which could be ignored.  All of the documents were meticulously prepared and perused by separate legal advisors acting for both parties.  It is barely believable that a solicitor who was to be personally liable under the provision of the agreements would not ensure that such an assurance was reduced to writing, and incorporated in the relevant documentation securing the loan.  It is significant that there is no affidavit from the person with whom the arrangement is said to have been made, but merely a hearsay assertion by Mr Keung.

18.  While O.14  proceedings are not an appropriate venue to deal with the credibility, it cannot be left unsaid that Mr Keung’s view of commercial morality was such that he was prepared to enter in the agreements, believing that the lender did not have a Hong Kong Money Lenders Licence.  The plain inference that arises from his affidavit is that he entered into the agreement on the basis that it would be unenforceable, and with the intention of relying upon that fact to resist any demand for payment.  It says nothing for a solicitor of the Supreme Court that he should be prepared to act in such a way, even in his own personal capacity.

19.  The documents made following the alleged arrangement were prepared by lawyers and the demand provision was clearly set out.  The defendants had not only their own lawyer is to advise them, not one of their number was himself a practising solicitor.  In the whole of circumstances the suggestion that there was such a prior arrangement, overriding the plain terms of the documents, is simply not capable of the belief.

20.  This conclusion is reinforced by the subsequent conduct of the parties.  On 23 August 2004, the solicitors for Niceton wrote to the solicitors for the defendant companies informing them that Niceton would not now make the advance comprised in the tranche B facility.  There is no evidence of any response by the defendant companies or the guarantors to that letter.  On 6 October 2004, the demand was made alleging various default.  The response of the borrowers and the guarantors was to endeavour to negotiate an arrangement whereby Niceton would not demand repayment or enforce the legal documentation until the end of year 2004, in return for a withholding fee of $20,000.  Had there been an arrangement that the advance would not be called up until one year had expired, one would expect the borrower to immediately point that out in writing. To negotiate an extension, for a monetary consideration, for a period of only 2 1/2 months, when the advance is said to have 9 months yet to go before repayment is due, is entirely inconsistent with such an arrangement.

21.  The arrangement is categorically denied by Niceton.  There is no documentation whatsoever to suggest that any such arrangement had been made.  If such an arrangement have been made, particularly in circumstances where one of the guarantors to the loan was a solicitor, one would expect, at the very least, a letter confirming the arrangement.  If an arrangement had been made to extend the term for a monetary consideration of one would expect that there would have been evidence of payment of the sum of $20,000 by way of withholding fee.  There is no such evidence.  Again the allegations made by Mr Keung are wholly incredible and his affirmation fails to disclose any triable issue.

22.  Mr Cheung sought to argue a second estoppel, relying upon the letter of 23 August 2004, in which Niceton informed the companies that the tranche B facility would not be advanced.  He says that by failing to mention the requirement to repay the $2 million already advanced, Niceton has led the companies to believe that no demand would be made of that sum until the term of one year was up.

23.  Even if that representation can be drawn from the letter, and I seriously doubt that it can, there is no evidence that the defendant companies in any way acted upon that representation.  There is nothing in the evidence to say that they have not spent the $2 million tranche A advance that time and, relying on what they believed to be a representation, then went on and spent that money.  The affidavits fall far short of anything which might remotely reach the concept of an arguable defence.

24.  In all of the circumstances I am satisfied that the Master was quite right.  The appeal is dismissed, there will be an order nisi that the Defendants must pay the Plaintiff’s costs, on a party and party basis, on the appeal.