PA INVESTMENT FUNDS SPC acting on behalf of and for the account of PA FINANCE FUND SEGREGATED PORTFOLIO v. ABLAZE RICH INVESTMENTS LTD AND OTHERS

HCA 1338/2022

[2024] HKCFI 2718

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1338 OF 2022

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BETWEEN

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DECISION

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A. INTRODUCTION

1.  Upon the Plaintiff (“P”)’s application for summary judgment by its summons dated 13 January 2023 (“the O14 Summons”) and after a substantive hearing, Master Cruden on 6 June 2023 ordered (“the June Order”) that the 1^st to 3^rd Defendants (respectively “D1”, “D2” and “D3”, together “Ds”) be given leave to defend conditional upon making a payment into court, the precise amount and term of which would be determined on papers after the parties have filed their affirmation evidence and submissions thereon.

2.  Then on 22 August 2023, the Master ordered that the condition for leave to defend was that Ds were to pay into Court within 3 months the sum of HK$30,000,000 (“the Condition”, which sum was about 15% of the full amount claimed by P), failing which P would be at liberty to enter judgment with costs (“the August Order”).

3.  On 5 December 2023, upon Ds’ default in meeting the Condition, judgment was entered against Ds (“the Judgment”) that they do pay P:

(1) A sum of US$20,387,784.29 or its Hong Kong dollar equivalent;

(2) Interest on the sum of US$5,192,376.64 from 10 November 2018 to 12 October 2022;

(3) Interest at the rate of 8% per annum accruing on the sum of US$20,387,784.29 from 13 October 2022 until payment; and

(4) P’s costs of this action, including all costs reserved and the costs of the O14 Summons, with certificate for one counsel.

4.  By Notice of Appeal taken out on 8 December 2023, Ds sought an extension of time to appeal, and then to appeal against the June Order and the August Order to have them, and the Judgment, be set aside, and for an order that the O14 Summons be dismissed or alternatively that unconditional leave to defend be given to Ds.

B. THE BASIC FACTS

5.  The following narrative of the basic facts, which are undisputed, is largely taken from P’s Skeleton Submissions.

B1. The parties

6.  P is a segregated portfolio of an exempted company registered under the laws of Cayman Islands as a segregated portfolio company. It is currently managed by China PA Asset Management (Hong Kong) Company Limited, an indirect subsidiary of Ping An Insurance (Group) Company of China, Ltd.

7.  D1, a BVI company, was and is a controlling shareholder of Great Harvest Maeta Holdings Limited (“Great Harvest”), a company listed on the Hong Kong Stock Exchange.

8.  D2 and D3 were and are at all material times directors and shareholders of D1. They are also the Joint Chairpersons and Executive Directors of Great Harvest, and D3 is also the Chief Executive Officer of Great Harvest.

B2. The Facility Agreement, the Guarantee, and Ds’ breach

9.  On 29 April 2016, P as lender, D1 as borrower, and D2 and D3 as guarantors entered into the Facility Agreement whereby P agreed to lend to D1 a loan of US$30,550,000 (respectively “the Facility Agreement” and “the Loan”) which would be repaid together with interests (at 6% per annum) 24 months after the date on which the Loan was to be made. The Facility Agreement is governed by the laws of Hong Kong and the parties agreed therein that the Hong Kong courts have exclusive jurisdiction[1].

10.  On the same day, ie 29 April 2016, D2 and D3 as guarantors for the Loan entered into the Deed of Guarantee (“the Guarantee”).

11.  On 4 May 2016, P advanced the Loan in the sum of US$30,550,000 to D1. The date for the repayment of the Loan and interest therefore fell on 4 May 2018.

12.  On 4 May 2018, in breach of the Facility Agreement, D1 failed to repay to P the Loan plus interest in sum of US$3,666,000 totalling US$34,216,000 or any part thereof.

13.  Despite 2 demand letters issued by P to each of Ds on 18 May 2018 and 8 June 2018, Ds still failed to repay the sum or any part thereof to P.

14.  On 26 June 2018, P issued Statutory Demands against each of Ds demanding repayment of the sum.

15.  On 8 August 2018, D1 repaid P HK$71,471,007 (equivalent to US$9,100,065.83) to partially settle the sum.

16.  On the next day, ie. 9 August 2018, P issued another round of demand letters to each of Ds demanding repayment of the sum of US$25,859,224.38, being the amount of the outstanding indebtedness (including accrued interest) as on 9 August 2018.

17.  On 9 November 2018, D1 repaid an additional sum of US$6,000,000 to partially settle the outstanding indebtedness.

18.  On 26 July 2019, P issued further Statutory Demands to each of Ds demanding them to repay the outstanding indebtedness (including accrued interest) as on that date in the sum of US$21,561,214.54.

19.  On 11 September 2020, P further issued another round of demand letters to each of Ds for the outstanding indebtedness (including accrued interest) as on that date in the sum of US$23,432,360.08. However, Ds failed to repay the outstanding indebtedness or any part thereof.

20.  P emphasized, which was not disputed by Ds, that in the above-mentioned 5 instances in which P demanded repayment (by way of demand letter or Statutory Demand), Ds did not for once dispute their respective liability to repay, and that in the 2 instances in which D1 made partial repayments, it did so without protest.

B3. HCA 1705 / 2020 and the Standstill Agreement

21.  On 6 October 2020, P commenced HCA 1705/2020 against Ds to recover the outstanding indebtedness.

22.  With a view to engaging in negotiation in relation to the settlement of the claims in HCA 1705/2020, P and Ds entered into the Standstill Agreement dated 1 February 2021 (“the Standstill Agreement”).

23.  By paragraph A under “Background” in the Standstill Agreement, Ds acknowledged, inter alia, that they owed P the sums claimed in HCA 1705/2020.

24.  As agreed by Clause 2.1 of the Standstill Agreement, and in performance thereof, the parties’ solicitors endorsed the Consent Summons dated 3 February 2021 to discontinue HCA 1705/2020 with no order as to costs. On 18 February 2021, leave was granted to formally discontinue HCA 1705/2020.

25.  However, in breach of the Standstill Agreement, D1 only repaid 2 sums to P, respectively US$600,000 on 1 March 2021 and US$350,000 on 5 July 2021, to partially settle the outstanding indebtedness, despite repeated demand letters issued by P.

26.  Under the Standstill Agreement, the standstill period expired on 31 December 2021.

B4. This Action and relevant procedural history

27.  On 12 October 2022, P commenced this Action against Ds claiming the sum of US$25,580,160.94 being the total outstanding indebtedness including interest accrued as at that date.

28.  No Defence has been filed by any of Ds despite the grant of 3 orders for time extensions.

29.  As said, P took out the O14 Summons on 13 January 2023. After multiple extensions and after an unless order was imposed by a Master on 28 March 2023, Ds filed on 25 April 2023 the 1^st affirmation of D2 (“Yan 1^st”) in opposition.

30.  In Yan 1^st, Ds for the first time disputed liability for the Loan and raised 3 matters by way of defence.

31.  On 6 June 2023, the O14 Summons was heard substantively and, as said, Master Cruden granted conditional leave to defend.

32.  Pursuant to the directions of the Master, Ds filed the 3^rd affirmation of D2 (“Yan 3^rd”) on 10 July 2023 showing their financial circumstances. It was there disclosed that after the due date for the repayment of the Loan and interest (ie. 4 May 2018):-

a. In March 2019 and August 2021, D2 and D3 sold 2 pieces of landed property for a total sum of HK$417.35 million (§39 of Yan 3^rd).

b. In September 2022 (just before this action was commenced), D2 and D3 sold another 2 pieces landed property for a total sum of HK$230 million (§39 of Yan 3^rd).

c. On 1 May 2023 (just before the hearing of the O14 Summons), D2 and D3 transferred their shares in Top Gains Minerals Macao Commercial Offshore Limited to their son Yan Yui Ham (§32 of Yan 3^rd).

33.  On 22 August 2023, the August Order was made, and as said, Ds failed to comply with the Condition and the Judgment was entered on 5 December 2023.

C. PRINCIPLES ON EXTENDING TIME TO APPEAL

34.  The principles are trite and not disputed:

a. In considering whether to extend time, the Court has to consider all relevant factors, particularly (1) the length of the delay, (2) the reasons for the delay, (3) the merits of the proposed appeal, and (4) the degree of prejudice to the other party.

b. Though the absence of an acceptable explanation for the delay does not preclude the court’s discretion to extend time, the Court should be slow to accede to an application to extend time in the absence of an acceptable reason for the delay.

c. On the other hand, the Court must always recognize that the primary aim in exercising the powers of the Court is to secure the just resolution of the dispute in accordance with the substantive rights of the parties.

(Hong Kong Civil Procedure 2024 §58/1/9)

D. LENGTH AND REASON FOR THE DELAY; PREJUDICE TO P

35.  It is common ground that the time for appealing against the June Order and the August Order expired on 20 June 2023 and 5 September 2023 respectively. There was thus a delay of 5½ months and over 3 months. The delay was clearly substantial.

36.  As said by Mr Ho (leading Mr Ng), counsel for P, the procedural history set out in §§27 to 33 above demonstrated that Ds all along have been dragging their feet to delay P’s claim.

37.  While Ds acknowledged that they understood the time limit within which to appeal, the only explanations given for the delay was that they “have been tirelessly working behind the scenes since as early as June 2023 to explore a potential amicable settlement” and “have been working … to raise funds to satisfy the condition”[2].

38.  I accept Mr Ho’s comments that these were but allegations of having made efforts to try to comply with the 2 Orders (thus implicitly affirming that the Orders were rightly made) and not good explanations for not initiating the appeal earlier or in time; and as such, they indeed betrayed the disingenuity of Ds’ allegation that the intended appeal has merits. Mr Ng, counsel for Ds, did not attempt, in my view sensibly, to persuade the Court that these were good explanations for the delay.

39.  Thus, no good reason or explanation for the delay has been given.

40.  P said it will suffer prejudice if the time extension was granted, in that the outstanding indebtedness has been due since 3 May 2018 and 6 years have passed, while in the meantime, Ds have made substantial disposal of assets in the form of landed properties between March 2019 to September 2022 in the value of over HK$640 million, and D2 and D3 also transferred their shares in Top Gains Minerals Macao Commercial Offshore Limited to their son just before the O14 Summons was heard, and therefore if extension is granted, this action may be rendered nugatory, leaving no or insufficient Ds’ assets against which P can enforce. Such prejudice is not disputed by Ds.

41.  Thus, I find that there is much force in Mr Ho’s submission that the unexplained substantial delay and prejudice to P tilt firmly against granting time extension for Ds’ intended appeal. That said, I turn next to consider whether the merits of the intended appeal are as strong such that unconditional leave to defend ought to be granted and that the discretion should be exercised to extend time nevertheless.

E.   DEFENCE 1: THE FACILITY AGREEMENT AND THE GUARANTEE WERE EXECUTED TO MISLEAD THE MAINLAND CHINESE AUTHORITIES

DEFENCE 2: THE FACILITY AGREEMENT AND THE GUARANTEE WERE TAINTED WITH ILLEGALITY

42.  I think it is convenient to discuss these 2 Defences together.

E1. The factual allegations

43.  In relation to these 2 Defences, the factual allegations are as follows.

44.  In §§14 to 16 of Yan 1^st, D2 deposed to, in gist :

a. In early 2016, D2 and D3 as directors of D1 were minded to obtain a loan of US$30 million as operating fund for D1. He negotiated with one Mr Gu (“Gu”) of 廣州匯垠天粵股權投資基金管理有限公司 (“Tianyue”), who agreed to provide a loan of RMB207,010,000 with RMB50,000,000 of which lent by one 上海喬普貿易有限公司 (“Qiaopu”) (the legal representative of which was D2’s brother Yin Jianhua) and the rest lent by 广州汇垠博森投资合伙企业(有限合伙) (“Bosen”), a subsidiary of Tianyue.

b. Tianyue told D2 that the loan would be advanced to D1 by depositing the same into D1’s bank account outside of PRC through complicated transactions and structures involving a number of companies, legal consultants and various authorizations (actual words in Chinese : “該架構涉及多家公司、法律顧問和跨越多個管轄區的文件”).

c. Tianyue told D2 not to interfere, not to ask and they would advance the money to him (actual words in Chinese : “天粵團隊又告訴我 ‘不要管，不要問 … 我們會匯錢給您的’ ”).

d. Noteworthily, D2 said in no uncertain terms that he did not participate in these complicated transactions and structures (actual words in Chinese: “我當時未有參與操作過程”).

45.  In Yan 1^st, D2 continued to depose that it was later when Bosen sued him and Qiaopu in Guangzhou Intermediate People's Court that he gained some understanding into these transactions and structures.

46.  D2 then deposed in §§17 to 18 in Yan 1^st as to what that he “thought” (“認為”) the structures were. For convenience, I will quote the summary given in §12 of Mr Ng’s written submissions (together with the hearing bundles references he cited) :

“(1) On 22 April 2016, Bosen, Aofeng and Qiaopu jointly signed a Guangzhou Huifu Yiyang Investment Partnership (Limited Partnership) Agreement (the “Partnership Agreement”) [B2/24/404], establishing Guangzhou Huifu Yiyang Investment Partnership (Limited Partnership) (“Huifu LP”). According to the agreement, Aofeng is the general partner, Qiaopu is the subordinated limited partner, and Bosen is the preferred limited partner.

(2) On 26 April 2016, Bosen contributed RMB 157,000,000.00 to Huifu LP, representing 75.842% of its equity, Qiaopu contributed RMB 50,000,000.00 (representing 24.153% of its equity) and Aofeng contributed RMB 10,000.00 (representing the remaining 0.005% of the equity). The total capital contributed amounted to RMB 207,010,000 with RMB 2,400,000 reserved as channel fees.

(3) On 25 April 2016, Qiaopu and Bosen entered into a “Forward Acquisition Agreement of Shares in Partnership Assets” (the “Purchase Agreement”) [B2/24/419], stipulating that Qiaopu would acquire Bosen’s shares in Huifu LP at an annual interest rate of 12% upon the completion of the distribution of profits.

(4) On 18 April 2016, Huifu LP, as the asset trustee, jointly signed the “Guangfa Overseas Investment No. 21 Asset Management Plan Asset Management Agreement” (“Management Agreement”) [B2/24/426] with Guangfa Fund Management Co., Ltd. (Asset Manager) (“Guangfa”) and Bank of Communications Co., Ltd. (Asset Custodian). The agreement stated that Huifu LP subscribed to the Guangfa Overseas Investment No. 21 Asset Management Plan. Around the end of April 2016, Tianyue arranged and borrowed Guangfa’s Qualified Domestic Institutional Investor (QDII) overseas investment foreign exchange quota and converted it into USD 31,438,229.87.

(5) On 29 April 2016, Guangfa, as the asset manager of Huifu LP’s specific client asset management plan, signed the “Structured Note Subscription Agreement Linked to Investment Portfolio of USD 31,219,600.49” (“Guangfa Subscription Agreement”) [B2/24/484] with Chance World Global Investment Limited (“Chance World”), which is established by Partners Financial Holdings Limited (“Partners”) for this specific purpose. The agreement stipulated that Guangfa and Huifu LP, as a whole, would purchase structured notes denominated in USD issued by Chance World. Around early May 2016, Guangfa paid USD 31,219,600.49 for the notes, and Guangfa received a channel fee of USD 218,629.38, representing the difference between the exchanged USD and the issuance fee charged by Chance World.

(6) On 29 April 2016, Chance World and PA Finance Fund Segregated Portfolio signed the “Subscription Agreement” (“Chance World Subscription Agreement”). The agreement stipulated that Chance World, as the buyer, would purchase non-publicly issued shares of Ping An Sub-Fund, with a total value of USD 30,758,227.08.

(7) On 3 May 2016, Chance World subscribed to the non-publicly issued shares of Ping An Sub-Fund, and Partners, on behalf of Chance World, paid USD 31,219,600.49 as a subscription payment. Ping An Sub-Fund received a channel fee of USD 461,373.41.

(8) On 29 April 2016, P entered into the “US$30,550,000 Facility Agreement” (“Facility Agreement”) with Ds. The agreement stipulated that P would transfer USD 30,550,000.00 to Ablaze [D1] (being the “Fund User” designated by Qiaopu). On the same day, Mr Yan [D2] and Ms. Lam [D3] provided the purported guarantees.”

47.  Ds now said :

a. “the true commercial transaction” (as put by Mr Ng in his written submissions) or “in its core, the true meaning of these structures” (actual words in Chinese: “就其核心而言，該貸款結構的真實意思”, §19 of Yan 1^st) in the present case was for D1 to borrow from Tianyue via its subsidiary Bosen.

b. All the agreements signed by other parties in these transactions and structures are just a matter of formality, principally put in place to circumvent the foreign exchange regulations in Mainland (actual words in Chinese: “在這貸款結構操作過程中簽署的協議，均是形式上簽訂的，主要是為了規避中國有關外匯管制的規則和條例”, §19 of Yan 1^st).

c. P knew about these transactions and structures.

48.  Ds principally relied on a one-page statement dated 17 April 2023 entitled “情況說明” allegedly signed by Gu[3] in which was said that all the other transactions and agreements were entered into by way of formality and the true purpose was to allow the fund to be transferred out of Mainland to reach D1 (actual words in Chinese: “其中委托管理、购买理財产品、投資基金等都是外在形式，各方签订的所有有关合同文件也只是形式上签订的，真正意思并非执行上述目的，实际仅是为了方便資金出境并到达耀丰投資有限公司”).

E2. The expert evidence adduced by Ds

49.  In support of Defence 2, Yan 1^st exhibited the expert report of Li Gang[4] (“Li”). P exhibited the expert Opinion of Xie Qing[5], but at the hearing P did not refer or rely on it.

50.  Mr Ng in his written submissions drew attention to Li’s opinion that:

a. Guangfa, which holds QDII investment quota, transferred the quota to others for the purpose of lending, thereby violating Article 44 of the Regulations of the People’s Republic of China on Foreign Exchange Administration (Revised in 2008), Article 6 of the Regulations on the Foreign Exchange Administration of Overseas Securities Investments by Qualified Domestic Institutional Investors, and Article 4 of the Notice of State Administration of Foreign Exchange on Issues concerning the Foreign Exchange Administration of Overseas Securities Investments by Fund Management Companies and Securities Companies (§11).

b. The Partnership Agreement and the Purchase Agreement in essence amounted to a loan contract. It can be inferred that the true intention of Bosen and Qiaopu in signing the two agreements was not to establish a partnership to obtain partnership profits and assume partnership risks through production and operation, but rather to achieve the purpose of repayment and interest payment through the establishment of a partnership and the transfer of shares in the partnership assets at a fixed premium (§11(a)&(b)).

c. The Partnership Agreement, Purchase Agreement and the four related agreements were under one transaction, that was, Guangfa acted as the channel connecting domestic and overseas, and Chance World and Ping An Sub-fund were the bridges overseas, thereby transferring the funds of Huifu LP from within Mainland to overseas, ultimately achieving the purpose of lending the money overseas to D1 (§11(d)).

d. In a similar case previously dealt with by the State Administration of Foreign Exchange, it took the view that similar actions violated Article 6 of the Regulations on the Foreign Exchange Administration of Qualified Domestic Institutional Investors’ Overseas Securities Investment (SAFE Announcement No. 1 of 2013) and Article 44 of the Foreign Exchange Administration Regulations of the People’s Republic of China (Revised in 2008)(§11(f)).

51.  However, of note and importantly, Li further opined that:

a. In answer to Question 1 posed to him, his conclusion was that it was Guangfa who violated the above-mentioned provisions (§12);

b. In answer to Question 2 posed to him, the punishment or penalty would be that the gain derived by Guangfa from these transactions would be confiscated and a penalty of around 30% of the value would be imposed against Guangfa (§13); and

c. In answer to Question 3 posed to him, namely, “如果該通道架構違反了中國內地法律法規，該通道架構下所有相關協議的效力是否受此影響 (“問題 3”)”, Li’s answer was

“綜上所述，結合本報告第11點、第12點可知，廣發基金違反報告第9(a) 點所述之 ”效力性強制性規定” ，其作為當事人簽訂的 《廣發海外投資21號資產管理計劃資產管理合同》和《關於31,219,600.49 美元的與投資組合掛鉤的結構化票據認購協議》通常會被認定為無效。” (§21)

That is, Li opined that the Management Agreement and the Guangfa Subscription Agreement would usually be adjudged as invalid or unenforceable.

52.  Therefore and in other words, Li in answering Question 3 did not opine that the other agreements, particularly the Facility Agreement or the Guarantee would be unenforceable under Mainland law.

E3. Ds’ contentions

53.  In Defence 1,

a. Mr Ng relied on Alexander v Rayson [1934] 1 KB 169 to submit that there is a proposition in law that

“It is well established that if a document was drawn up from the outset in such a way to mislead third parties, then the contractual document would be unenforceable for illegality.” (§21 of his written submissions)

b. Mr Ng then submitted that the Facility Agreement and the Guarantee were drafted “in order to defraud the public by inducing them to believe that it recorded a genuine transaction” and therefore arguably they are unenforceable.

54.  Under Defence 2, Mr Ng contented that arguably the illegality under Mainland law would taint and invalidate the Facility Agreement and the Guarantee.

55.  Mr Ng further contended that such question of illegality is not suitable to be determined on a summary judgment application and therefore the O14 Summons ought to be dismissed.

E4. Is Defence 1 an arguable defence ?

56.  As have mentioned, Ds relied solely on Alexander v Rayson which was decided in 1934.

57.  In Alexander v Rayson, the UK Court of Appeal allowed the appeal and applied the maxim ex turpi causa non oritur actio and refused to assist Alexander to enforce an agreement against Mrs Raydon. In that case, Mrs Rayson agreed to rent a flat in Piccadilly in the City of Westminster and signed with the landlord Alexander 2 documents of the same date which were provided by him. One of the documents was a lease of the flat with certain services at £450 a year, the other was an agreement for certain services most of which was already covered by the lease for £750. The CA held that essentially there was only one transaction between the parties, and that the splitting up of it into 2 documents was a device essential for the success of Alexander’s fraud against the Westminster City Council in deceiving the Council as to the true rateable value of the flat.

58.  The case was but one of the many instances where the Court refused to lend its assistance to enforce between the parties certain terms contained in an agreement which was intended to be used for the purpose of effecting an unlawful purpose. In this regard, I accept Mr Ho’s submission that the case did not establish or support the vague, wide and stand-alone proposition now contended for by Mr Ng that a document executed “to mislead third parties”, per se and without more, is rendered unenforceable. Evidently, much more need to be shown to establish that the agreement was illegal or was executed for an unlawful purpose such as to make it unenforceable.

59.  Indeed, the law regarding the defence of illegality has much developed since Alexander v Rayson. Recently, in Monat Investment Ltd v All Persons in Occupation of Part of No 16 Ma Po Tsuen [2023] 2 HKLRD 1311, the Court of Appeal has the occasion to discuss a number of UK Supreme Court cases leading to Patel v Mirza [2017] AC 467 and Patel itself, and held that “the range of factors approach” based on the trio of necessary considerations in Patel should be adopted as the test in Hong Kong.

60.  It is not necessary for me to delve into this any deeper. The point is that, and with respect to Mr Ng, I do not accept that the law is such that the Facility Agreement and the Guarantee would be unenforceable merely because they allegedly “were executed to mislead the Mainland Chinese Authority”. I find Defence 1 not an arguable defence. Rather, Ds’ contention of illegality should be properly analysed in the context of Defence 2.

E5. The Facility Agreement and the Guarantee “tainted” and invalidated or made unenforceable by illegality?

61.  Mr Ng argued that there is a principle established by Spector v Ageda [1973] Ch 30 that an apparent innocent transaction would be regarded as “tainted” by an illegal one and thereby affected by the same illegality and becomes unenforceable. Mr Ng further cited the local case of Wa Lee Finance Co Ltd v Staryork Investment Ltd (HCMP 2242/2000, unrep., DHCJ To (as he then was), 13 May 2003) as an instance where Spector v Ageda was applied

62.  Mr Ho’s contention in response is that Ds’ reliance on these cases was misconceived in that these cases have no application nor relevance in the present case where alleged foreign illegality is raised, in which situation the Court of Final Appeal has in Ryder Industries Ltd v Chan Shui Woo (2015) 18 HKCFAR 544 authoritatively laid down the principles. I will return to this in §67 below after I have said these.

63.  Spector v Ageda was clearly decided on its own facts. Megarry J (as he then was) stated at the outset that he “shall have to consider a part of the law relating to illegality upon which there seems to be no authority directly in point” (at 35G) and later that he did “not wish to decide more than is necessary to dispose of this case” (at 45E). There, Spector was enforcing a second charge of a property against Ageda, one of the joint chargors, as security for a loan owed to Spector, which loan arose in this way. One Mrs Maxwell, the sister of Spector, lent £1040 to 2 joint borrowers, of which Ageda was one. Spector was a solicitor and acted for Mrs Maxwell in her action against the borrowers, which action ended when the borrowers raised questions of illegality over the loan in that the Moneylenders Act 1927 were contravened by reason that Mrs Maxwell claimed to be a licensed money lender when she was not licensed, the loan charged compound interest and the memorandum of loan did not meet the requirement of the Act, which memorandum as found by Megarry J in the judgment, was altered by Spector after they had come into being. Spector then acted for the borrowers in the meantime in their effort in trying to obtain another loan from another lender. Later, Spector lent to the borrowers a loan of £1,180 to pay off their said loan owed to Mrs Maxwell, on which now Spector sued. On those facts, Megarry J held

“… It seems to me that where, as here, the subsequent transaction is entered into by a person who not only knows of the partial illegality of the prior contract but also is in a real degree responsible for it and wishes to avoid the consequence of it (as I think that Mrs. Spector probably did), then unless that partial illegality is shown to relate solely to some defined portion of the subsequent transaction, so that only that defined portion is affected, the whole of the subsequent transaction will be affected by the illegality. …” (at 45E-G, my emphasis).

64.  Again, the case was decided on its own facts. While the word “tainted” by illegality was used there by the learned judge, I do not think a general “doctrine of tainting” was established such as would help Ds here by characterizing vaguely that the Facility Agreement and the Guarantee were “tainted”. In my view, in raising such illegality defence, it all the more behoves Ds to condescend into particularity as to the precise basis, reasons and facts as to why the Facility Agreement and the Guarantee would become unenforceable thereby.

65.  Equally, Wa Lee Finance Co Ltd was decided by To J on its facts. The learned judge applied the maxim of ex turpi causa non oritur actio when he found that:

“In my view, the Snyder Agreement, the Synder Action and the Cancellation Agreement were all part of a sham, a charade to give effect to the earlier illegal Snyder Loan agreement so that the illegal loan and illegal interest would become secured under the valley loan agreement which is clothed with legality” (§111, my emphasis).

66.  Importantly and here, Ds confirmed before Master Cruden, and also confirmed at this hearing, that they did not contend that the Facility Agreement or the Guarantee was a sham. In other words, it is not contested that Ds’ contractual obligation to make repayment was indeed created by the Facility Agreement and the Guarantee, which otherwise are valid and enforceable transactions, save the contention that they were “tainted”.

67.  In Ryder, the plaintiff sought to enforce a joint venture agreement governed by Hong Kong law, and claimed about HK$6.5 million due thereunder. The defendant contended that enforcement was barred as a result of certain acts of performance of the joint venture agreement which were illegal under PRC law, namely that the Commission Processing Enterprise used materials imported duty-free by a Wholly Foreign Owned Enterprise established by the plaintiff in the PRC for the production of mobile telephones contrary to the Measures of Customs of the PRC for the Supervision of Goods for Processing Trade.

68.  There, the CFA reiterated that the HKSAR and the Mainland are parts of one country, but for the purposes of the conflict of laws they are separate law districts and held that the following 5 principles represented Hong Kong law:

“First, if the contract is unenforceable under its proper law (whether chosen by the parties or otherwise), then it will not be enforced by the Hong Kong court. The importance of this principle is that it applies to limit the enforceability of the contract regardless of the place of required, intended or actual performance. Moreover, it is irrelevant whether the bar on enforcement is a foreign penal law of the sort which will not be directly enforced by a Hong Kong court.

Secondly, if the performance of the contract requires or necessarily involves conduct which is illegal under the laws of the place where it is required to be performed, then it will not be given effect regardless of its proper law.

Thirdly, the contract will not be given effect regardless of its proper law “if the real object and intention of the parties [at the time of concluding the contract] necessitates them joining in an endeavour to perform in a foreign and friendly country some act which is illegal by the law of such country notwithstanding the fact that there may be, in a certain event, alternative modes or places of performing which permit the contract to be performed legally” [citing Foster v Driscoll [1929] 1 KB 470, 521, per Sankey LJ].

Fourthly, violation of foreign laws in the actual performance of a contract may, even though not required or initially intended, lead to the unenforceability of the contract before a Hong Kong court, regardless of its proper law. It has recently been stated in England at first instance that a contract will not be enforced if it has been “performed in such a way that one party (or both parties) commits a legal wrong”. It is, however, respectfully suggested that this is to state the principle too rigidly, and that a more flexible approach having regard to the seriousness of the foreign illegality is required to determine whether public policy and comity really require enforcement of the contract to be denied in such a case.

Fifthly, the above four principles apply irrespective of whether the illegality under foreign law existed at the time of contracting or arose subsequently.”

69.  Applying these principles, the CFA concluded that the joint venture agreement was enforceable as the breaches were not a very serious contravention of the law, not conduct which could be described as iniquitous, had not resulted in actual criminal or enforcement proceedings in the PRC and were mere administrative contraventions.

70.  Mr Ng submitted that Ryder was concerned with “the question of the enforceability in Hong Kong of a contract governed by Hong Kong law when it has been performed in the PRC partly in breach of PRC law” (Ryder at §8), and not with the “doctrine of tainting” under Spector.

71.  I do not accept such submission insofar as saying that Spector rather than the principles in Ryder is applicable in the present case.

72.  Firstly, and as said, I do not accept that Spector established any “doctrine of tainting”. Moreover and as said, for the defence arising out of domestic illegality, the present law is what has been held in Monat Investment Ltd (see §58 above). Even if the present case merely concerned domestic illegality, Ds have not tried to address the Court as to how their present allegations of illegality would have been an arguable defence under the “the range of factors approach” as held to be applicable in Monat Investment Ltd, thereby making the Facility Agreement and the Guarantee arguably unenforceable.

73.  Secondly and pivotally, if Mr Ng’s submission is correct, then this “doctrine of tainting” is trans-jurisdictional and, despite there is a conflict of law issue, transcends the analysis and authoritative holding and principles in Ryder and effectively making them otiose. This, in my view, could not be right.

74.  Save it was submitted that Ryder does not concern the “doctrine of tainting”, Ds have not advanced any further contention where the principles in Ryder apply (as I hold above that they do).

75.  Moreover and as have noted, Li did not even say that the law in Mainland might render the Facility Agreement and the Guarantee unenforceable, but only the Management Agreement and the Guangfa Subscription Agreement might be so rendered.

76.  In this regard, it will be recalled that Ds are not now contending that the series of transactions or structures were sham or that they were indeed one, but are now very vaguely contending that “the true commercial transaction” or “the true meaning of these structures” was to enable the Loan to be made to D1 through an illegal use of the QDII investment quota. It seems to me that on proper analysis, what Ds are really saying are that the source of the fund P used to lend to D1 was obtained via a channel that involved the breach by Quangfa of the regulations governing the use of the QDII quota. Li opined that under Mainland law the penalty would be imposed against Guangfa and none other, and only the 2 agreements signed by Quangfa might be rendered unenforceable. It therefore seems to me that applying Ryder, it is not very arguable that the Facility Agreement and the Guarantee, both performed in Hong Kong and governed by Hong Kong law, would thereby be rendered unenforceable.

77.  Mr Ho further submitted, which I accept, that in relation to whether the Guarantee would be affected by the alleged Mainland illegality, there was a further reason why it would not, as follows.

78.  In Clause 2.1(c) of the Guarantee[6], D2 and D3 as guarantors had expressly agreed :-

“In consideration of the Lender granting a USD30,550,000 term loan facility to the Borrower under [the Facility Agreement], each Guarantor hereby irrevocably and unconditionally: …

(c) agrees with the Lender that if any obligation guaranteed by him is or becomes unenforceable, invalid or illegal, he will, as an independent and primary obligation, indemnify the Lender immediately on demand against any cost, loss or liability it incurs as a result of the Borrower not paying any amount which would, but for such unenforceability, invalidity or illegality, have been payable by it under the Facility Agreement on the date when it would have been due. …” (Mr Ho’s emphasis)

79.  Mr Ho submitted that in the following cases in which were construed similar provision in guarantees, it has been held :

a. A clause similar to Clause 2.1(c) “imposes a primary obligation on [the guarantor] to indemnify the plaintiff if the obligation guaranteed by it is or becomes unenforceable, invalid or illegal. This is a concurrent liability … and create a liability in debt …” (Southwest Securities (HK) Brokerage Ltd v. Nieumarkt Investments Ltd [2021] HKCA 740 at §5.9 per Cheung JA).

b. Similarly, in Shenzhen Development Bank Co. Ltd. v. New Century Int’l (Holdings) Ltd. (unrep. HCA2976/2001, unrep., 31 July 2002, DHCJ Johnson Lam (as Lam PJ then was), it was held, on the proper construction of clauses 3(1) and 14(1) there which together were similar to Clause 2.1(c), that the alleged illegality of the underlying loan agreement would not have affected the guarantee.

80.  Mr Ng first submitted that P should not be allowed to rely on Clause 2.1(c) as the clause was not pleaded in the Statement of Claim. I must reject that submission. It is strictly not necessary for P to pleaded Clause 2.1(c) to support its claim against D2 and D3 on the Guarantee. If Ds’ Defence raises the defence of illegality and if P relies on Clause 2.1(c) to counter that pleaded defence, then P is required to plead the clause in its Reply. However, No Defence is yet filed by Ds. This issue of illegality affecting the enforceability of the Guarantee was raised for the first time in Yan 1^st. In a summary judgment application, P is clearly entitled to rely on Clause 2.1(c) to rebut the contention that illegality is an arguable defence against the enforcement of the Guarantee.

81.  Secondly, Mr Ng cited the case of廣東匯立投資有限公司 v Wong Man Pan (HCA 10027/2000, unrep., Recorder Andrew Liao SC, 5 November 2001) as an instance that unconditional leave to defend was given when the plaintiff was enforcing a guarantee and the defence was that the underlying loan was illegal under Mainland law. Evidently, decisions on summary judgment applications are facts sensitive. In that case, it was common ground between the parties that the underlying loan was void. Also, the decision was pre-Ryder such that the learned Recorder did not really analyse the foreign illegality under the principles in Ryder. I think the case is distinguishable on the facts and in any case does not assist Ds here.

82.  In the premises and in the round, I take the view that Defence 2 is shadowy.

E5. Illegality defence not suitable for O14 ?

83.  Mr Ng submitted that it is well-established that these illegality points could not be resolved in an O14 application and thus, as a rule, the O14 Summons should be dismissed, citing 廣東匯立投資有限公司 (supra) and Lesnina H DOO v Wave Shipping Trade Co Ltd [2022] 2 HKLRD 727, at §§58-60.

84.  The relevant reasoning of the learned Recorder in 廣東匯立投資有限公司 was short, while Deputy High Court Judge Dawes SC in Lesnina only observed that “where the applicability and/or force of foreign law is in dispute, the Court cannot determine the summary application on assumed facts and would need to resolve the expert evidence before the Court can decide whether, as a matter of public policy, to enforce the specific transaction in question” (§58). Evidently, where those considerations apply, it is likely and generally, the point cannot be resolved summarily. Again, and in my view, the decision has to be taken on the specific facts and issues of the case. I do not accept that these cases established as a matter of course, or as a rule, that illegality points, once raised, would render an application for summary judgment necessarily inappropriate.

85.  I therefore do not accept Mr Ng’s said submission. Rather and as set out above, the illegality point raised by Ds here does not involve resolving any conflict in expert evidence or any substantial disputes of relevant facts.

F. DEFENCE 3: BREACH OF MONEY LENDERS ORDINANCE

86.  Ds raised an issue that P was a money lender under Money Lenders Ordinance Cap 163 (“MLO”), and as P was unlicensed, the Facility Agreement and the Guarantee are not enforceable pursuant to section 23 thereof.

87.  Section 2 of the MLO defines a “money lender” as “every person whose business (whether or not he carries on any other business) is that of making loans or who advertises or announces himself or holds himself out in any way as carrying on that business”.

88.  Mr Ng relied on the cases of Xiao Zhiyong (supra) and Chan Siu Chu Zoe v Choi Chiu Yuk (HCA 698/2012, unrep., 21 February 2014, Registrar KW Lung) for the propositions that (a) whether one is a money lender within the meaning of MLO is a question of fact to be determined for each case, and each case must depends on its own facts, (b) the number of transactions made by the lender is not the determining factor, even one transaction may be sufficient if there is evidence to show that the lender was a money-lender at the time of the transaction.

89.  Mr Ng contended that the fact that the amount of the Loan was substantial and that the Facility Agreement and the Guarantee are sophisticated documents would tend to show that P was a money lender.

90.  Mr Ng also pointed to P’s internal committee materials in March 2016 which stated that P as a segregate fund would mainly lend funds to a BVI company (ie. D1), and that P’s activity concentrated on a single project “which mainly involved lending and borrowing”[7].

91.  Mr Ho referred to the case of Outstanding Management Consultation Ltd v. Gold Topmont Ltd [2023] HKCFI 155 at §§30 – 32 per Peter Ng J :

“30. … In this regard, the burden in establishing that the Plaintiff was a moneylender is squarely on the 1^st Defendant: Chow Wun Sing Winston v Yiu Chun Luk unrep, HCMP2923 of 2002, 25 July 2006, Chu J (as she then was) at [64]. This is also not disputed.

31. In Link Excellent Ltd v Ruijun Technology Ltd unrep, HCA 1993 of 2016, 6 November 2017, at [20], Lisa Wong J observed that the carrying on of a “business” requires a degree of repetition, system and continuity. Accordingly, a single loan, or even several isolated loans, is generally insufficient to cause a lender to be treated as a “money lender” within section 2 of MLO.

32. This court agrees with the observation of Lisa Wong J in principle. However, the fact that the loan is an isolated transaction or that there is just one single loan is not conclusive of whether a lender is in the business of making loans: Chow Wun Sing Winston v Yiu Chun Luk supra at [68]. Ultimately, the determination of whether a person is a moneylender is fact sensitive and each case must necessarily depend on its own facts: Wealthy Land Investments Group Ltd v Florescent Holdings Ltd [2022] HKCFI 649 at [21] and [39]” (Mr Ho’s emphasis).

92.  This Court respectfully agrees that in principle the carrying on of a “business” requires a degree of repetition, system and continuity.

93.  Mr Ho also drew attention to that fact that the 1^st defendant in Outstanding Management Consultation Ltd relied on the same matters as Ds here while was unable to proffer any evidence showing any system, repetitiveness or continuity, and the learned judge there so assessed the matter and then gave summary judgment:

“52. This court has not lost sight of the other factors relied upon by the 1st Defendant in evaluating the nature of the Loan ie the Plaintiff and the 1st Defendant had no pre-existing relationship, the amount advanced under the Facility Agreement was substantial, the rate of interest was significant and the documentation was sophisticated and professionally drawn under legal advice. But the weight that can be placed on them must be counterbalanced by the lack of evidence showing any system, repetitiveness or continuity on the part of the Plaintiff in making loans or its holding out as carrying on the business of money lending.”

94.  The learned judge’s assessment in that case is apposite here, though in the present case I am not asked by P to find that this Defence 3 is completely unarguable, but merely that it is shadowy and so lacks merits such that I am prepared very nearly to give judgment to P on this point. By reason of the matters discussed above, I have no hesitation to come to that conclusion.

G. ONE FURTHER POINT

95.  Mr Ng also relied on Billion Silver Development Ltd v All Wide Investments Ltd [2000] 2 HKC 262 and submitted that, as in that case, while I take the view that Ds’ case lack merits, but there are here also unexplained features of the claim in that it also bears the appearance of falsity and questionable conduct, this Court therefore should not make tentative assessments of the respective chances of success of the parties, but should give unconditional leave to defend so that the matters can be ventilated at trial.

96.  Mr Ng, however, did not specify what “the unexplained features” of P’s claim are and what “appearance of falsity and questionable conduct” he was referring to. I understand that he was referring to the same set of allegations Ds were making relating to the Mainland illegality.

97.  I accept Mr Ho’s submission that Billion Silver Development Ltd is clearly distinguishable. By reason of matters said above and in the below section, I am prepared to accept that these matters should be allowed to go to trial, but I take the view that the leave to defend should be conditional.

H. CONDITIONAL LEAVE

98.  By reasons aforesaid, I am of the view that Defence 1 is unarguable and Defence 2 and Defence 3 are shadowy and on which I am prepared very nearly to give judgment. In my view, giving conditional leave to defend is appropriate.

99.  My view is reinforced by the fact, as have been emphasized by Mr Ho, that all along until the Judgment was entered, Ds have not disputed liability and have been repeatedly making partial repayments and have negotiated and entered into the Standstill Agreement on the express basis that they acknowledged their liability.

100.  Mr Ng barely submitted that the Condition should not be imposed because Ds could not meet it, but without referring to the evidence showing that Ds in fact did not have the financial means or contending how the Master’s assessment was wrong. As mentioned, Ds have filed affirmation evidence before the Master showing that they have substantial assets and have disposed of many after the due date of repayment of the Loan and while the O14 Summons was pending. In the affirmations, there were but mere assertions that Ds have to meet other financial obligations. The Master has carefully considered the matter and in my view set the appropriate amount for the Condition. There is simply no substance to this submission, and I reject it.

I. DISPOSAL

101.  In the premises, I refuse to grant leave to Ds to extend time to appeal, and as concluded above, even if I granted leave, I would have given conditional leave and hence dismissed Ds’ appeal.

102.  Ds’ Notice of Appeal is accordingly dismissed. P asked for the costs to be paid by Ds to be taxed on indemnity basis under Clause 10.2(g) of the Facility Agreement with certificate for 2 counsel. Provisionally I think it appropriate and so order on nisi basis to become absolute after 14 days unless any party applies by summons to vary within that time.

103.  I thank Mr Ho and both Mr Ng for their helpful assistance.