GEMINI FUNDS LTD v. CHINA BEIDAHUANG INDUSTRY GROUP HOLDINGS LTD AND ANOTHER

HCA 1948/2019

[2021] HKCFI 227

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1948 OF 2019

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DECISION

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Introduction

1.  This is the plaintiff’s application for summary judgment under Order 14 against the 1^st and 2^nd defendants.

2.  The 1^st defendant is a company listed on the Hong Kong Stock Exchange.  A winding up petition was presented against it on 15 August 2019 by an alleged creditor.  I was informed at today’s hearing that the petition has been adjourned to March this year. 

3.  The 2^nd defendant, Jiang Jianjun (江建軍), was an executive director of the 1^st defendant until 16 August 2019 when he tendered his resignation.

4.  The plaintiff is a shareholder of the 1^st defendant.  At present, it holds 10,000,000 shares in the 1^st defendant.  It is common ground that he became a shareholder in April 2015 when he acquired 5,000,000 shares.  A share certificate was issued to the plaintiff for that amount.  I shall refer to these shares as “the Original Shares” and the certificate as “the Original Certificate” below.  They feature prominently in the defendants’ case.  It is also common ground that on 7 January 2016, the plaintiff was issued a further 5,000,000 shares as bonus shares and that a share certificate was issued in respect of these bonus shares by the registrar of the 1^st defendant (“the New Shares” and “the New Certificate” respectively).

5.  In this action, the plaintiff claims that up to now the 1^st defendant has failed to deliver the New Certificate to it, and update the Shareholder Account List to reflect the plaintiff’s holding of the New Shares.  It now seeks an order for the delivery up of the New Certificate and an order for the proper entry to be made in the Shareholder Account List.  The plaintiff also claims damages for the loss of use of the New Shares against the 1^st defendant.

6.  As against the 2^nd defendant, the plaintiff says that he had instructed the 1^st defendant to withhold the New Certificate from the plaintiff.  In the premises, the plaintiff also claims against the 2^nd defendant damages for the loss of use of the New Shares.

7.  The plaintiff’s application for summary judgment is supported by two affirmations made by Mr Yuan Yi Qiang (袁毅強).  Yuan has been and is still a director of the plaintiff.

8.  The defendants put forward a defence, which is set out in the 2^nd defendant’s 1^st Affirmation which was made in opposition to the summary judgment application.  The affirmation was first produced and shown to the plaintiff’s solicitors in draft form in early April 2020.  It was done this way because the 2^nd defendant, who resides in Mainland China, was not able to come to Hong Kong to affirm the evidence due to the coronavirus pandemic.

9.  In gist, the defendants say that a “Loan Agreement” was entered into on or about 19 May 2015.  Under that agreement, a Mr Zeng Yongguan (曾擁光) agreed to advance a loan to a company called 成都游外游科技有限公司深圳分公司(“YWY”).  The plaintiff, acting through Yuan, agreed to be one of the guarantors of the loan and further agreed to pledge the Original Shares, together with its ancillary rights, as security for the loan by delivering the Original Certificate to the 1^st defendant, who acted as the agent of Zeng.  The loan was advanced and subsequently became due.  However, the plaintiff has to date failed to implement the pledge.  Given that the New Shares are ancillary rights to the Original Shares, the defendants say that Zeng is entitled to a lien or encumbrance over the New Shares.  The 1^st defendant, being Zeng’s agent, is accordingly entitled to hold on to the New Certificate pursuant to the Loan Agreement.

10.  There is a counterclaim made by the 2^nd defendant, which is based on the same factual premise.

11.  The issue before me is whether the defence as set forth above is arguable and if so, the case ought to be tried.

Legal principles

12.  The Order 14 principles are well-known.  In determining whether the defendant has a defence, the approach is twofold.  First, factually, is what the defendant says believable?  Secondly, as a matter of law, even if what he says is believable, does what he says amount to an arguable defence in law? See, eg, Schindler Lifts Hong Kong Ltd v Ocean Joy Investments Ltd [2003] 1 HKC 438 at §10 per Ma J.

13.  On the first question, it is not appropriate to embark on a mini-trial of the action on affidavit evidence.  The court simply asks itself whether what the defendant says is credible.  As Godfrey JA put it in Ng Shou Chun v Hung Chun San [1994] 1 HKC 155 at 158: “The issue is not whether the defendant’s assertions are to be believed; it is whether those assertions are believable”. Further, the court will not take the alleged defence on its face value but test it against the evidence disclosed, including contemporaneous documents.  The court will also consider the inherent probability of the defence: see, eg, Paul Y Management Ltd v Eternal Unity Development Ltd CACV 16/2008, 12 August 2008 at §19 per Cheung JA.

The defence

14.  The plaintiff’s claim is simple and straightforward.  I have already set it out in paras 4 to 6 above.

15.  On the contrary, the defendants’ case is more complicated.  It needs to be scrutinised with care.  Their case is as follows.

16.  The Loan Agreement was made by the following parties:

(1)  YWY as borrower of the loan;

(2)  Zeng as lender;

(3)  The plaintiff, acting through Yuan, as one of the three guarantors;

(4)  The 2^nd defendant as another guarantor; and

(5)  Wan Xian Dong as the remaining guarantor.

17.  The Loan Agreement was made partly in writing and partly orally.  The written part was in the form of a one-page Chinese document entitled “借款协议” and dated 19 May 2015 (“the Chinese Agreement”).  I reproduce the terms below. “甲方” and “乙方” refer to YWY and Zeng respectively:

“…

1. 乙方同意分期给甲方借款300万元人民币，借款期限半年；

2. 借款月息2%，按季度支付利息；到期还本。

3. 甲方保证按时还款，否则需以其股权作为抵押。

4. 本合同签署后第二个工作日，乙方先打首期款150万元(或等值港币)到甲方指定账戶。甲方如需提取剩余借款150万元，甲方須提前7天通知乙方付款。

5. 甲方委托香港发峻有限公司(Wealthy Legend Corporation Limited)收款，…”

18.  The points to note at this juncture are that the loan was repayable after 6 months and that if YWY did not repay on time, it should put up its shares as security (clause 3).  The Chinese Agreement was signed by YWY and Zeng.  Notwithstanding that the terms did not provide for any guarantee, at the bottom of the page, Yuan, the 2^nd defendant and Wan signed with their finger imprints next to the words “保证人”.

19.  In addition to the terms in the Chinese Agreement, the parties also orally agreed as follows (“the Oral Terms”):

(1)  The plaintiff, acting through Yuan, guaranteed the repayment of the loan and interest.  The plaintiff further agreed to take steps to pledge the Original Shares, together with all its ancillary rights, as security for the loan by delivering the Original Certificate to Zeng or his agent (“the alleged pledge agreement”).

(2)  The 2^nd defendant also agreed to guarantee the repayment of the loan and interest.

(3)  The 1^st defendant, acting through the 2^nd defendant, agreed to act as Zeng’s agent to hold the Original Certificate.

(4)  The plaintiff, acting through Yuan, agreed to indemnify and reimburse the 2^nd defendant for any loss suffered arising as a result of the Loan Agreement, whether from his acting as guarantor or otherwise.

(5)  Wan also agreed to guarantee the repayment of the loan and interest.

20.  In his opposing affirmation, the 2^nd defendant explained in some detail how the alleged pledge agreement and his own guarantee came about.

21.  At that time, Yuan told Zeng that the recipient company of the loan proceeds was owned by him beneficially and the proceeds would eventually go to him.  The 2^nd defendant then explained (at para 12):

“At the beginning of the negotiation for the Loan, both Yuan and [Wan] offered to provide their personal guarantee as collateral security for the Loan, but Zeng was not satisfied with their mere personal guarantee. Since Yuan claimed to have just invested about RMB3.0 million through the Plaintiff to acquire 5,000,000 shares of the 1^st Defendant, Zeng asked Yuan to pledge these shares to his favour. Yuan agreed but advised that although he was (and he still is) both the director of the Plaintiff and the beneficiary of the ‘Gemini China Opportunity Fund’ (which is under the control of the Plaintiff), it would take some time to do the documentation, and to procure the Plaintiff to complete the pledge of the said shares. Instead, he on behalf of the Plaintiff, counter-proposed to ask me to guarantee the Loan (which I agreed) and to appoint the 1^st Defendant (through me) to act as Zeng’s agent to co-ordinate and to ensure completion of the pledge of the said 5,000,000 shares (together with all its ancillary rights).” (underline added)

22.  That was the background leading to the alleged pledge agreement. Further, on the assurance made by Yuan that he would repay the loan and given the back-to-back guarantee given by the plaintiff to the 2^nd defendant (see para 19(4) above), the 2^nd defendant agreed to act as the guarantor.

23.  I should pause here to note that the 2^nd defendant has not offered any explanation in his affirmation as to why the Loan Agreement was structured such that some of the terms were reflected in the Chinese Agreement in writing and the rest were agreed orally even though the two parts were both concluded “on or about 19^th May 2015”.

24.  In late November 2015, Zeng complained to the 2^nd defendant that YWY had failed to repay him the outstanding loan in the sum of RMB1,500,000.  The 2^nd defendant then informed Zeng that he had not yet received the Original Certificate.

25.  Shortly afterwards, on or about 1 December 2015, Zeng sent a document entitled “委託書” to the 1^st defendant (“the Letter of Request”).  It is a material document.  I reproduce below the content in full.

“本人曾擁光於2015年5月19日借款予成都游外游科技有限公司深圳分公司，現該公司尚欠本人人民幣1,500,000元尚未歸還，故要求貴司將所有有關公司及其董事及擔保人袁毅強先生在貴司的資產予以保存，並待有關款項清還後才將有關資產歸還借款人.” (underline added)

26.  The 2^nd defendant understood the Letter of Request to mean that the 1^st defendant should comply with the Loan Agreement and preserve the Original Shares.  However, since the Original Certificate had not been delivered to the 1^st defendant, the 1^st defendant could do nothing at that time.

27.  Shortly after that, the 1^st defendant issued the New Shares to the plaintiff as part of its exercise of issuing bonus shares.  Given the alleged pledge agreement, the 2^nd defendant instructed the board of the 1^st defendant to withhold the delivery of the New Certificate to the plaintiff.  The intention of the 2^nd defendant at that time was that the 1^st defendant should hold on to the New Certificate pending the repayment of the YWY loan or alternatively until Yuan delivered the Original Certificate to the 1^st defendant to complete the alleged pledge agreement.

28.  There then followed correspondence between the plaintiff and the 1^st and 2^nd defendants in which the plaintiff repeatedly demanded the 1^st defendant to deliver the New Certificate.  The correspondence was between 18 January 2016 to around early 2018.  It is not necessary for me to set out the emails or letters at length save to highlight the following:

(1)  The plaintiff first sent a written demand to the 1^st defendant by email sent on 18 January 2016.

(2)  The reply of the 1^st defendant came on 18 February 2016 by email.  The sender was the then Financial Controller of the 1^st defendant.  He wrote that “the shares” were with the 2^nd defendant and asked the plaintiff to contact the 2^nd defendant “for the shares”.

(3)  On 30 September 2016, at the 2^nd defendant’s instruction, an email was sent to the plaintiff, requesting Yuan to go to the 1^st defendant’s office on 3 October 2016 to collect the New Certificate.  In his affirmation, the 2^nd defendant explained that he intended to invite Zeng to come as well so that Zeng and Yuan could work out a solution about the dispute and the 1^st defendant and the 2^nd defendant himself could then be released from the duties under the Loan Agreement.

(4)  Yuan did not turn up on the scheduled date.  At the 2^nd defendant’s instruction, an email was sent to Yuan on 4 October 2016 to inform him that the 2^nd defendant would take the New Certificate to Shenzhen and Yuan should make arrangement to collect it.  The email also stated that the New Certificate was kept because a request had been received from the plaintiff’s creditor to safekeep it for him (“… 有关股票為何保存在深圳乃因為早前收到貴司之債主要求而代保存 …”). A copy of the Letter of Request was attached to the email.

(5)  In his affirmation, the 2^nd defendant said that Yuan did not collect the New Certificate in Shenzhen, “because [the 2^nd defendant] told him when he came along to collect it, he had to present the other share certificate to complete the pledge, or alternatively to work out a solution acceptable to Zeng to resolve the dispute”.

(6)  The next round of correspondence was in May and June 2017.  The plaintiff reiterated the demand and asserted that the withholding of the New Certificate on the basis of Zeng’s Letter of Request was illegal.  The plaintiff asked for the New Certificate to be delivered to its custodian bank or the registrar.  In the two reply letters stated to be written for and on behalf of both the 1^st and 2^nd defendants, Yuan was invited to go to 1^st defendant’s Shenzhen office to collect the New Certificate.

(7)  There was some further correspondence in 2017. The correspondence chain ended with a demand letter issued by the plaintiff’s solicitors in January 2018.

29.  I would pause here to note that in none of the correspondence was the alleged pledge agreement referred to.

30.  Mr Lawrence Cheung, counsel for the defendants, pointed out, however, that in the letter from the defendants’ solicitors sent in January 2020, there was a reference to “a collateral/oral agreement”.  But the full details were set out in writing for the first time only in the 2^nd defendant’s opposing affirmation, the draft of which was shown to the plaintiff in April 2020.

31.  Later, Zeng threatened to take legal action against the 2^nd defendant for breach of the personal guarantee.  The 2^nd defendant paid RMB1,500,000 to Zeng.  The 2^nd defendant produced a receipt signed by Zeng dated 28 August 2020 confirming that the payment was made on 29 September 2017.  The 2^nd defendant has however produced no bank records or other document as evidence of such payment.

32.  In the premises, the defendants say that Zeng is entitled to a lien or encumbrance over the New Shares and the 1^st defendant, as Zeng’s agent, is entitled to retain the New Certificate under the Loan Agreement until the loan is repaid or the Original Certificate is pledged.

33.  For the purpose of this application, Mr Cheung submitted that the evidence shows that the defendants have an arguable defence to the plaintiff’s claim and furthermore the 2^nd defendant has a counterclaim against the plaintiff arising from his payment of RMB1,500,000 to Zeng.  Mr Cheung further submitted that the terms of the Loan Agreement and the true meaning of the documents should be canvassed in cross-examination at trial.

34.  As regards the defence, the plaintiff’s position is that it was never a party to the Chinese Agreement.  Yuan confirmed that he was one of the three guarantors to the Chinese Agreement and he was acting in his personal capacity but not on behalf of the plaintiff.  He has no knowledge of the plaintiff being involved in the Loan Agreement.

Discussion

35.  Having considered the evidence before me, I am of the view that the defendants’ factual case that the plaintiff was a guarantor of the loan advanced by Zeng to YWY and that the plaintiff had made the alleged pledge agreement is incapable of belief.  The case is tainted with inherent improbabilities and is contradicted by or inconsistent with contemporaneous documents.  That factual case is the underlying premise justifying the withholding of the New Certificate by the defendants.  As such, the defendants have failed to raise any arguable defence or triable issue.

36.  The first big question mark over the defendants’ case is that their factual allegations are not borne out by, and in fact contradict, the Chinese Agreement.  The defendants allege that the plaintiff was one of the guarantors of the loan to YWY.  However, that was not what was stated in the Chinese Agreement.  It was Yuan’s own signature which appeared next to the words “保证人”.  It was not specified that he was signing on behalf of the plaintiff.  The plaintiff’s name was nowhere to be seen in the Chinese Agreement.  Even though the Chinese Agreement was not drafted by professional lawyers (Mr Cheung referred to it as a homemade document), it would have been easy for the parties to simply write out the plaintiff’s name to signify that it was the plaintiff, not Yuan, who agreed to act as the guarantor. That was not done and what is notable here is that the defendants have provided no explanation for such discrepancy.

37.  The other notable and material omission is of course that the alleged pledge agreement was not mentioned at all in the Chinese Agreement.  According to the defendants’ case, Zeng was relying on the Original Shares as security for the loan to YWY as he was not comfortable with just the two guarantees from the plaintiff and Wan (see the underlined words in para 21 above).  The 2^nd defendant set out in some detail the negotiations which led eventually to the making of the alleged pledge agreement.  Given its importance to Zeng, it is against inherent probability that the Chinese Agreement did not expressly refer to it.  This is particularly so in view of clause 3 which referred to YWY shares as security.  Why mentioned one security and omit the other one?  There is no immediately apparent reason for the glaring omission.  The defendants have not offered any explanation.

38.  The alleged agreement by the plaintiff, acting through Yuan, to act as guarantor and the alleged pledge agreement were both made orally by the parties.  Mr Ken Cheng, counsel for the plaintiff, highlighted that both the Oral Terms and the Chinese Agreement were concluded on or about 19 May 2015.  The obvious question here is why the parties chose to split the Loan Agreement into a written part and an oral part when they were made at the same time.  And, further, why would they choose to leave the rather important provision for security over the Original Shares to the oral part only? 

39.  It is true that people sometimes do enter into contract, which is made partly in writing and partly orally.  However, when that happens, there is usually a reason for it.  The defendants, have not put forward any reason.  Here, the amount at stake was RMB3,000,000 (although in the end only RMB1,500,000 was advanced according to the defendants).  It is not a small sum of money.  It is inherently improbable that the parties would have concluded the Loan Agreement in such a casual manner in the sense that the important term regarding security was left out from the written Chinese Agreement.

40.  Mr Cheung attempted to explain that since all the individuals are laymen, they cannot be expected to take the same care with the drafting and structuring of their agreement as a professionally trained lawyer would.  That is of course a point to be taken into account in evaluating the credibility of the defendants’ case.

41.  However, Yuan, the 2^nd defendant and Zeng do appear to be business people who have operated and transacted businesses in the commercial world.  The 2^nd defendant was an executive director of the 1^st defendant, a Hong Kong listed company.  Zeng was in the course of advancing a loan to the tune of a few million RMB.  They must be taken to be capable of appreciating at least the different legal entities involved in the loan and the importance of the security arrangement regarding the Original Shares.  These are the fundamental commercial terms of the loan which commercial people like them would be concerned with in concluding the agreement.

42.  Mr Cheung further attempted to explain that the existence of the Oral Terms is inherently plausible.  Apart from the words “保证人”, the Chinese Agreement did not contain any provision on the guarantee.  It is therefore to be inferred that there must be some other terms “on the side” to deal with the guarantee.  In my view, that may be a fair point.  However, the alleged Oral Terms reached go well beyond the scope of the guarantees to be given by the three guarantors.  They allegedly cover the important provision on security.  They also allegedly cover the cross-guarantee given by the plaintiff to the 2^nd defendant.  I consider that it is inherently implausible for the parties to omit such important provisions from the written document and leave them to be dealt with orally.

43.  The second major doubt over the defendants’ case is to be found in the Letter of Request sent by Zeng to the 1^st defendant shortly after the loan was due.  Its purpose was apparently to inform the 1^st defendant that the loan to YWY in the sum of RMB1,500,000 was due and remained outstanding and to request the 1^st defendant to retain the assets of (a) YWY (“有關公司”), (b) YWY’s director (“其董事”) and (c) Yuan as guarantor (“擔保人袁毅強先生”), which were held by the 1^st defendant until the loan was repaid. 

44.  What stands out starkly from the Letter of Request is that not only was there no mention of the plaintiff’s name, but also that Zeng, in his own words, referred to Yuan, not the plaintiff, as the guarantor.  This is contradictory to the defendants’ present case that the plaintiff agreed to act as the guarantor pursuant to the terms of the Loan Agreement.

45.  Furthermore, there was no mention at all of the alleged pledge agreement in the Letter of Request.  According to the defendants’ own case, the pledge of the Original Shares was important to Zeng when considering the grant of the loan to YWY.  In the end Zeng appointed the 1^st defendant to be his agent to collect the Original Certificate.  Yet in the Letter of Request to the 1^st defendant, Zeng made no reference to either the plaintiff’s assets or the Original Shares, which the 1^st defendant was supposed to collect.

46.  In sum, the main planks of the defendants’ case are contradicted by the Letter of Request.

47.  Mr Cheung submitted that the words “所有” in “所有有關公司” was a reference to all the companies related to Yuan who had assets in the possession of the 1^st defendant and that the only such company was the plaintiff.  In my view, that is a rather strained construction of the language.  In any event, if correct, this would be a very oblique reference to the plaintiff and one must ask why Zeng did not simply refer to the plaintiff’s name.  Furthermore, the objective fact remains that there was no mention of the alleged pledge agreement.

48.  The third matter which casts significant doubt over the defendants’ case is the complete omission of any reference to the alleged pledge agreement in the correspondence exchanged between the plaintiff and the defendants prior to the present action.  If the alleged pledge agreement had indeed been part of the Loan Agreement, it is plainly against inherent probability that the defendants would have omitted to mention it altogether in the correspondence.  That was the reason why the defendants have been withholding the New Certificate from the plaintiff.  Yet in the face of repeated demands made by the plaintiff, the defendants chose not to mention the reason for their refusal to deliver up.

49.  It is also puzzling why in some later correspondence in 2017, the defendants even invited the plaintiff to go to the defendants’ office to collect the New Certificate.

50.  To sum up, there is no inherently plausible reason why the alleged pledge agreement was concluded orally and separately from the written Chinese Agreement.  On the face of the contemporaneous documents, the plaintiff was never stated to be the guarantor of the loan.  On the contrary, Yuan was explicitly referred to as the guarantor instead, twice in written documents.  See the Chinese Agreement dated 19 May 2015 and Zeng’s Letter of Request dated 1 December 2015.  There has also been no mention of the alleged pledge agreement in the contemporaneous documents, including the above two documents and all subsequent correspondence, prior to the action.  In view of the importance of the alleged pledge agreement which is said to be the reason why the defendants have been withholding the New Certificate, the omission does not make sense and is inexplicable.

51.  I remind myself that I should not conduct a mini-trial in this application.  However, that does not mean that the defendants’ allegations should be taken at face value.  Having tested them against the contemporaneous documents and inherent probabilities, it is clear that the defendants’ case is unbelievable and can safely be rejected outright in a summary fashion.  There is therefore no need to consider the second stage question on whether the alleged facts would give rise to a sustainable defence as a matter of law. 

52.  The defendants have failed to show an arguable defence.  There is no reason why the claim should be tried.  The plaintiff should have summary judgment on its claim.  The 2^nd defendant’s counterclaim is built on the same factual premise, which I have found to be unbelievable.  It would not therefore affect the plaintiff’s entitlement to judgment in the main claim.

Conclusion

53.  For the above reasons, I order that judgment be entered as follows:

(1)  The 1^st defendant do deliver the New Certificate to the plaintiff by depositing the same with DBS Bank Ltd, Hong Kong Branch, the plaintiff’s designated custodian bank within 42 days from today.

(2)  The 1^st defendant do enter the plaintiff’s particulars regarding the New Shares into the 1^st defendant’s Shareholder Account List within 28 days from today.

(3)  The 1^st and 2^nd defendants do pay damages to the plaintiff to be assessed.

[Submissions on costs]

54.  The plaintiff do have costs of the action incurred on liability and the application, including all reserved costs save for the costs of the hearing on 8 September 2020.  The costs are summarily assessed at $200,000.