CHEN WEI WU v. CHENG YANG

HCA 2604/2017

[2022] HKCFI 2597

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2604 OF 2017

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J U D G M E N T

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1.  In this action, the Plaintiff (“Chen”) sues under two oral agreements for a total sum of HKD450 million. The Defendant (“Cheng”) did not appear at the trial.

2.  In order to understand the agreements, the background against which they were made is important.

3.  In early August 2016, Chen, Cheng and Mr Lin Xu Ming (“Lin”) wanted to invest in a Hong Kong listed company, Champion Technology Holdings Ltd, by acquiring 27.9% of its shares which were beneficially owned by Mr Kan Man Lok (“Kan”). The acquisition would be made via a BVI company, Wave High International Ltd (“Wave High”) (“Proposed Acquisition”).

4.  The Proposed Acquisition would cost HKD570 million, plus HKD30 million in middleman fee. The shares of Wave High would be allotted to Chen, Cheng and Lin in the proportions of 40%, 30% and 30% respectively. They would fund the Acquisition in accordance with their shareholding. However, Chen would provide the initial funding for which loan agreement(s) would be signed by Cheng and Lin. Part of such initial funding, in the sum of HKD270 million, would be structured such that Chen’s company (Shenzhen Tang Shang Group Ltd (“Tang Shang”)) would provide securities for Lin’s company (Golden Shine International Ltd (“Golden Shine”)) to obtain a bank loan. The loan would then be channelled to Wave High to pay for the Acquisition. It was agreed by the 3 men that Chen would become the chairman of Champion Technology after the Acquisition.

5.  Pursuant to the Proposed Acquisition, Chen paid a sum of HKD100 million to Kan as “reservation” on behalf of the 3 participants by 6 tranches all made on 26 August 2016.

6.  In a meeting held on 29 September 2016, Cheng asked Chen to withdraw from the Proposed Acquisition telling him that he would not be suitable to become the chairman of Champion Technology. Cheng and Lin would continue with the Acquisition. Chen was further asked by Cheng to lend him money to enable him to complete the Acquisition.

7.  In the late evening of 29 September 2016, Chen and Cheng made two oral agreements as follows :

(1)  Under the 1^st Oral Agreement, Chen agreed to provide a total of HKD300 million to Cheng, which comprised of:

(a)  the sum of HKD100 million that had already been paid to Kan; and

(b)  a further sum of HKD200 million.

Cheng agreed to repay the latter HKD200 million in a timely manner.

(2)  Under the 2^nd Oral Agreement, Cheng agreed:

(a)  to transfer 51% of the shares in Culture Landmark Investment Ltd, a Hong Kong listed company, which he owned to a company nominated by Chen within one month (on or before 28 October 2016) at market price;

(b)  to pay Chen a sum of HKD250 million on 28 September 2017 (ie, 12 months later), to (i) repay the HKD100 million and (ii) to compensate Chen for withdrawing from the Proposed Acquisition.

8.  Subsequently, Chen and Cheng signed a written Co-operation Agreement dated 29 September 2016 which evidenced the material terms of the two Oral Agreements. There was also a Confirmation dated 30 September 2016 and signed by Cheng in which he acknowledged the receipt of HKD300 million from Chen pursuant to the Co-operation Agreement.

9.  In performance of his obligation under the 1^st Oral Agreement, on 30 September 2016, Tang Shang provided RMB 195.58 million as security for a bank loan of HKD200 million to Golden Shine. The money was transferred to Wave High by Golden Shine on the same day. It appears from the documentary evidence that on 30 September 2016, a cashier order in the sum of HKD200 million was issued in favour of Lawnside International Ltd (Kan’s company).

10.  In breach of the 1^st Oral Agreement, Cheng has failed to repay Chen the sum of HKD200 million. Also, in breach of the 2^nd Oral Agreement, Cheng has failed to pay Chen the agreed sum of HKD250 million. Accordingly, Chen claims against Cheng the total sum of HKD450 million.

11.  Alternatively, Chen claims against Cheng a total sum of HKD300 million which he had paid in connection with the Proposed Acquisition based on restitution.

12.  In the Defence filed by Cheng, he denied the payment of HKD100 million by Chen. Although Cheng acknowledged the payment of HKD200 million by Wave High for the Acquisition, he did not admit that the money was procured by Chen. Cheng alleged that the agreed payment of HKD250 million was for interest. Either the HKD150 million (HKD 250 million minus HKD100 million) was interest payment for the alleged loan of HKD100 million or the HKD250 million was interest for the loan of HKD300 million[1]. Hence, the agreement to pay the HKD250 million was unenforceable and/or liable to be re-opened under ss 24 and 25 of the Money Lenders Ordinance, Cap 163 (“Ordinance”).

13.  At the trial, Chen gave evidence and called his assistant, Mr Zhou Houjie (“Zhou”) as a witness.

14.  Given the absence of Cheng at the trial, Chen was only required to prove his case. Whilst his case was not free from peculiar features, eg, the funding arrangement for the Proposed Acquisition (see para 4 above), I find that it was reasonably well-supported by the contemporaneous documents. The Co-operation Agreement and the Confirmation were largely consistent with Chen’s case. Indeed, it can be seen from Cheng’s Defence that his factual case was not vastly different to that of Chen.

15.  Most importantly, the documentary evidence demonstrated the payment of HKD100 million to Kan. Chen explained in his viva voce evidence that the payments were made by a subsidiary of his company, Zhong Xin Da Ltd. As regards the HKD200 million, the documents showed that the loan to Golden Shine was repaid by Chen via another corporate entity on 9 October 2017.

16.  As further support of Chen’s case, he (with related parties) did acquire 53.8% of the Shares in Culture Landmark by 23 January 2017, and Chen was made an executive director and chairman of that company.

17.  In the premises, I accept that Chen has proved his factual case.

18.  In respect of the alleged breach of the Ordinance, the applicable principles can be found in Secretary for Justice v Global Merchant Funding Ltd [2015] 2 HKLRD 843, where the CA considered the principles to be applied in determining whether certain contractual arrangement was a loan within the meaning of the Ordinance. The judgment was given by Kwan JA (as she then was) who held at [19] to [21] :

“  It is trite law that “in determining the legal categorisation of an agreement and its legal consequences the court looks at the substance of the transaction and not at the labels which the parties have chosen to put on it” … However, it is also pertinent to bear in mind that the task of looking for the substance of the parties’ agreement may arise in a case where the written agreement is a sham intended to mask the true agreement, and also in a case without any question of sham. …

  Here, the court looks for “some objective criterion in law” by which it can test whether the agreement the parties have made does or does not fall into the legal category in which the parties have sought to place their agreement … In this kind of situation, one should look “only at the written agreement” in order to ascertain from its terms whether it amounts to a transaction of the legal nature which the parties ascribe to it, instead of seeking to discover from extrinsic evidence the true agreement where there is a sham. In other words, it is an “internal consideration” of the agreement itself, on the basis that the parties intended to be bound by its terms, and by nothing else …

  Where there is no one clear touchstone by which it can necessarily and inevitably be said that a document which is not a sham and which is expressed as an agreement for sale and purchase must necessarily, as a matter of law, amount to a loan, it is necessary to look at the provisions in the agreement as a whole to decide whether in substance it amounts to an agreement for sale and purchase of future receivables or an agreement for a loan, …”

19.  On appeal to the CFA, Secretary for Justice v Global Merchant Funding Ltd (2016) 19 HKCFAR 192, giving the judgment of the Court, Ribeiro PJ held that :

“13. Perhaps because the legislation is penal and, if misapplied, may be commercially disruptive, the Courts have consistently taken a restrictive view of what constitutes money lending. …

21. … The MLO’s definition of a “loan” to include “every agreement (whatever its terms or form may be) which is in substance or effect a loan of money” must be understood to be referring to an agreement which has the legal substance or effect of a loan and not an agreement with such an economic or commercial substance or effect. Methods of financing which may be economically indistinguishable from a loan repayable with interest may well be differently categorised in law.

22. Assuming that the transaction is not merely a sham, the Court can only decide whether a transaction is or is not a loan by construing the relevant documents and analysing the legal effect of what the parties have actually agreed. The language used by the parties is relevant but if it is inconsistent with what, as a matter of law, they have mutually agreed, the Court disregards the parties’ terminology in categorising the transaction.

49. … While the transaction plainly represents a form of finance indistinguishable in economic effect from a loan with interest, it is not a loan in legal substance and effect and therefore falls outside the MLO.”

20.  In this case, I find the separation of the oral agreement reached between Chen and Cheng on 29 September 2016 into the 1^st and 2^nd Oral Agreements to be somewhat artificial. It is likely that there was one negotiation over that evening. However, even if the court is to hold that there was only one agreement which embraced the terms of the 1^st and 2^nd Oral Agreements, I do not believe that, as a matter of legal substance and effect, the agreement was a loan.

21.  Firstly, there were a number of constituent parts to the agreement: (a) the loan of HKD300 million; (b) repayment of HKD200 million in a timely manner; (c) the sale and purchase of 51% of the shares in Culture Landmark; and (d) compensation of HKD250 million which encompassed the repayment of HKD100 million.

22.  Secondly, the suggestion that the HKD150 million or HKD250 million was the interest payment for the loan of HKD 100 million or HKD300 million (see para 12 above) ignores the fact that Chen was required to give up a matured investigation opportunity and it was agreed that he should be compensated for it. Although one may say that the compensation by way of: (a) the opportunity to acquire the majority shareholding in another listed company and (b) payment of HKD150 million in 12 months was very generous, there is no evidence as to the perceived benefit Chen would lose in giving up on the Proposed Acquisition. Such matter is best left to the businessmen and is not something on which this court can speculate.

23.  Thirdly, there is no evidence (nor any suggestion in Cheng’s Defence) of any negotiation over the terms of the interest payment, eg, how long was Cheng allowed under “timely manner” to repay the HKD200 million and what would be the interest payable if the HKD200 million was not repaid in such fashion. If the agreement was in substance a loan, such negotiation would, in all probabilities, have taken place.

24.  For these reasons, I do not agree that the 1^st and 2^nd Oral Agreements whether considered separately or in conjunction were in breach of the Ordinance.

Disposition

25.  Accordingly, judgment should be entered in favour of Chen for the sum of HKD450 million, with costs of the action to be taxed if not agreed.

26.  I also award interest on the judgment sum as follows :

(1)  For the amount of HKD200 million due under the 1^st Oral Agreement, pre-judgment interest from the date of Writ, ie, 14 November 2017 until today at prime rate(s);

(2)  For the amount of HKD250 million due under the 2^nd Oral Agreement, pre-judgment interest from the date it fell due, ie, 28 September 2017 until today at prime rate(s);

(3)  Post-judgment interest on the entire judgment sum at judgment rate(s) until payment.

27.  I have declined to award pre-judgment interest at prime plus 1% as sought by Chen for two reasons. Firstly, interest at prime rate(s) is not ungenerous in light of the low interest environment of recent years. Secondly, there is no evidence of the opportunity cost to Chen as a result of not having his money repaid as agreed.