ACUTE RESULT HOLDINGS LTD v. LIONCAP GLOBAL MANAGEMENT LTD

HCA 820/2018

[2018] HKCFI 1634

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 820 OF 2018

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REASONS FOR DECISION

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1.  This matter came before me by way of an application for default judgment. After having heard counsel, Lioncap not appearing, either in person or by solicitors and counsel, I granted the judgment sought with reasons to follow. These are my reasons.

2.  The Writ with Statement of Claim (“SoC”) attached in these proceedings was served at the registered office of Lioncap on 17 April 2018.  No acknowledgement of service has been filed nor has any defence been filed.  In these circumstances Acute Result applies for judgment by default under Order 19, rule 7 of the Rules of the High Court.  The summons for judgment by default has been duly served.

3.  The statement of claim asserts that Acute Result is the beneficial owner of 40.54% of the issued shares in Cabeen Fashion Limited (“Cabeen”), a Cayman Islands company which is listed on the Main Board of the Hong Kong Stock Exchange. 

4.  The SoC asserts that by a loan facility made on 15 November 2016, Lioncap Asia Ltd, an associated company of Lioncap, agreed to provide a term loan facility of HK$120 million to Acute Result.  Security for the facility was provided by Acute Result entering into a Share Pledge Agreement (“the Agreement”) with Lioncap, whereby Acute Result pledged 134 million shares in Cabeen. Pursuant to the Agreement the shares were placed in an account with China Merchants Securities (HK) Co Ltd (“CIMB HK”) as custodian.

5.  CIMB HK is a registered participant of the Central Clearing and Settlement System (“CCASS”). This system increases market transparencyby enabling the public to look up the total number of shares held by a particular party in a company listed in Hong Kong.  The CCASS record duly showed that CIMB HK held 134 million Cabeen shares as at 12 January 2017.

6.  The effect of the Agreement is that Acute Result remained at all material times the sole legal and beneficial owner of the 140 million shares.

7.  On 15 November 2016, Acute Result and Lioncap entered into afurther Share Pledge Agreement (“the 2^nd Agreement”), entitling Acute Result to withdraw dividends which may have accrued on the pledged shares.

8.  In March 2017, 30 million Cabeen shares were released from the Pledge and returned to Acute Result by mutual agreement.  CCASS then recorded that CIMB HK held 114 million Cabeen shares which included Acute Result’s remaining 104 million shares (“the remaining 1^st tranche”).

9.  On 20 April 2017, by an Addendum to the Loan Facility Agreement (“the Addendum”) the loan facility was reduced to HK$50 million and 59,920,000 Cabeen shares were released and returned to Acute Result. There remained 47,080,000 Cabeen shares pledged as security for the facility remaining of HK$50 million.

10.  The CCASS record demonstrated that as at 2 May 2017, CIMB HK held 57,080,000 Cabeen shares of which 47,080,000 were Acute Result’s pledged shares.

11.  On 20 April 2017, Acute Result and CIMB HK signed an Instruction Letter permitting Lioncap to borrow Acute Result’s remaining 47,080,000 shares for a period of 36 months.  The shares were to remain in CIMB HK’s account.  Contrary to this arrangement by 5 June 2017 the number of shares held by CIMB HK was shown in the CCASS account to have reduced below that number.  As at 19 June 2017, the CCASS record showed that CIMB HK held only 29,960,000 Cabeen shares.

12.  In September 2017 Acute Result exercised an option to withdraw dividends in the sum of $2,259,840.  Notwithstanding the exercise of that option that sum by way of dividend has not been paid to Acute Result.

13.  In July 2017, there were discussions between Acute Result and Lioncap Asia in respect of a separate loan facility to be secured by a new share Pledge.  As a result of those discussions, Acute Result transferred a further 21 million Cabeen shares into CIMB HK’s account (“the 2^nd tranche”). This increase in the number of Cabeen shares held by CIMB HK was duly reflected in the CCASS record at 50,960,000 shares.  However no new loan arrangement was entered into.

14.  As no new share pledge had been entered into, Acute Result remained the lawful owner of the further 21 million Cabeen shares, notwithstanding that they had been deposited in CIMB HK’s account.

15.  On 8 August 2017 the CCASS account showed that CIMB HK held only 34,662,209 Cabeen shares.  This shortfall gradually increased over time.  Acute Result demanded the return of the shares.  In November 2017, 2,259,209 shares were returned to Acute Result.  CIMB HK has not returned the remaining 18,740,791 Cabeen shares (“the missing 2^nd tranche shares”) from the 2^nd tranche to Acute Result, despite due demand.

16.  In March 2018, Acute Result discovered that CIMB HK and Lioncap were involved in litigation over similar circumstances with other parties in respect of share pledges of another company.  These proceedings were accordingly brought seeking appropriate relief, which includes declarations and damages or, in the alternative, an accounting.

17.  There is no doubt about the power of the court to grant judgment under Order 19, rule 7.  Where no defence is filed, there is an implied admission of the facts, and the court is entitled to assume that the SoC has been impliedly admitted: Wu Ka v Wu Kuo Cheng [2003] 3 HKLRD 658.  The court does not receive evidence but must give judgment according to the pleadings alone.

18.  It is not the normal practice of the court to make a declaration without trial but where a plaintiff has a genuine need for declaratory relief an injustice would be done if a declaration was denied, consequently, in those circumstances, the court may make a declaration; see Hong Kong Civil Procedure, Vol 1, §19/7/20.

19.  The undisputed pleadings in the SoC establishes that CIMB HK or Lioncap have, without consent from Acute Result, procured the transfer out of the remaining 1^st tranche shares and refused to pay the dividend of HK$2,259,840.  Acute Result was at all material times the sole legal and beneficial owner of the missing 2^nd tranche shares which Lioncap has removed without consent or authorisation.

20.  Acute Result seeks a mandatory injunction against Lioncap requiring it to restore the missing 1^st tranche shares and damages to be assessed or alternatively an account of profits.  The usual rule is that a plaintiff must elect between alternative remedies, however that rule is inapplicable where the application in question is for a default judgment where it may be unreasonable to require the plaintiff to make his choice without further information: Re Ng Wai Jing [2016] 2 HKLRD 1460 and Island Records Ltd v Tring International plc [1996] 1 WLR 1256. 

21.  The present case falls squarely within the exception to the usual rule.

22.  Acute Result is plainly entitled to a declaration that it is and was sole beneficial owner of both the remaining 1^st tranche shares and the missing 2^nd tranche shares.  The declarations and other orders sought are entirely in accordance with the pleadings and justified in the circumstances.

23.  Mr Mak has put before me a draft minute of the orders sought which include orders that Lioncap render all necessary accounts, the mandatory injunction, declaration is, and declarations of Acute Result’s entitlement to elect between an assessment of damages or an account for profits and costs.