LAM KIN MING AND ANOTHER v. TONY WONG CHUN LOONG AND OTHERS

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS No. 3182 OF 1989

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BETWEEN

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Mortimer J.:

This is an originating summons which has been heard at short notice for reasons which will appear. The subject matter of the proceedings is the voting rights in shares of Jademan (Holdings) Limited, a public company incorporated in Hong Kong with issued capital in the region of $57m in 10 cent shares. The 1st Defendant is the owner of 41% of those shares. He holds them himself or through nominees.

2. On the 20th April of this year, trading was suspended in the company's shares on the Stock Exchange and on the 1st of June, an inspector was appointed by the Financial Secretary.

3. On the 14th June, the 1st Defendant resigned as Chairman and Director, and the next day he was charged with offences of conspiracy in relation to the company.

4. On the 12th July (contending that he was innocent of the offences charged) his family and connected directors resigned and it was announced publicly that he would distance himself from a controlling influence over the company's affairs.

5. The 1st Plaintiff, Mr. Zie and another had become directors of the company, and Mr. Zie had become Chairman. Now, it appears that the 1st Defendant was indebted to the 2nd, 3rd and 4th Defendants, that is James Capel (Far East) Limited, the Liu Chong Hing Bank and the Standard Chartered Bank. By the 10th August, the amount of his indebtedness was to Capel $59,421,386.00; to the Liu Chong Hing Bank $15,824,029.71; and to the Standard Chartered Bank $40,403,105.05. Those organisations held the 1st Defendant's shares by way of collateral. Capel held nearly a 11m snares, the Liu Chong Hing Bank, 40m shares, and the Standard Chartered, 75m. On the 10th August, by an arrangement between the 1st Plaintiff, the 2nd Plaintiff, and Mr. Zie the chairman, those debts of the 1st Defendant were re-structured by the Plaintiffs taking over the liability. The 2nd Plaintiff notionally lent money to the lst Defendant to pay off the debts, so that he was relieved of them in relation to the 2nd to 4th Defendants. The 1st Defendant charged the shares to the Plaintiff to secure the debts and they remained charged and deposited with the 2nd, 3rd Defendants and deposited with 4th Defendant to secure the Plaintiffs' indebtedness to them. I say 'Plaintiffs' because both Mr. Lam and the 2nd Plaintiff were involved in the re-structuring.

6. The situation in respect of the shares deposited with Capel and the 2 banks remained as before. Those held by Capel and Liu Chong Hing were mortgaged, whereas those with the Standard Chartered were simply lodged. To this I will refer in due course.

7. On the 10th August, as part of the re-structuring, two documents were wrought into existence. First a loan agreement between Tabor International and the 1st Defendant. By that agreement Tabor lent money to the 1st Defendant in order to discharge his indebtedness to the 2nd, 3rd and 4th Defendants. It is not necessary for me to refer to that document in detail, save to say that the loans were made and by Section 4(2) they could be drawn down by certain dates. There were 3 loans. So far as loans 1 and 3 were concerned the date was the 17th August 1989. Originally loan 2 which related to the re-structuring of the 3rd Defendant's loan, was available to be drawn down before the 30th September. However, upon the Defendant's request, that date was extended to the 30th November of this year.  As I understand, it has not yet been drawn down.

8. There were terms for repayment in Clause 6, setting out that the loans would be repaid by the 1st Defendant at $2m per month subject to a 7-day written demand for the full amount which in any event was to be repaid not later than the 31st December 1992.

9. Further, by Clause 15, the 2nd Plaintiff had an option until the 31st December 1992 to purchase up to $129m of the shares under provisions detailed in the Clause.

10. I turn to the security document which was signed by the parties on the same day. This charged the snares in favour of Tabor and it contains a number of provisions. By recital (e) contemporaneous with the execution of this agreement, Mr. Wong has instructed or procured the nominees to instruct the creditors and their nominees to hold the shares and the certificates relating thereto to the order of Mr. Lam, the 1st Plaintiff, or as he may direct subject only to any prior charges which the creditors may have there-over, and upon discharge of any such prior charge to hand them over to Mr. Lam, the 1st Plaintiff, or as he may direct. By recital (f), Mr. Wong has irrevocably agreed to transfer the shares to Mr. Lam, or as he may direct as security for the loans upon following terms and conditions. There are then set out a number of terms and conditions which enable Mr. Wong to repay and redeem the shares; give Tabor the right in certain circumstances to foreclose sell or dispose of the shares; and more particularly by Clause 7, Tabor is given the exclusive right to exercise such voting and other rights vested in the holder of the shares in such manner as it should in its absolute discretion, think fit. There are then other provisions relating to the security provided. Letters were written to the 3 original creditors to support that security agreement.

11. I mention in passing that by a notice or letter of the 18th November, the Plaintiffs and Mr. Zie gave the 1st Defendant notice to repay in 7 days. That notice expired at mid-night last night the 27th November.

12. The dispute is who has the right to vote the shares now held as collateral by the 2nd, 3rd and 4th Defendants. The 2nd Plaintiff says that he has the right to vote those shares and asks for orders accordingly. The 1st Defendant has asked the Defendants to execute proxies in his favour. It is his contention that he is entitled to vote the shares although he does not ask for an order. He contends that the gnu Plaintiff does not have the right to vote for reasons upon which I will enlarge.

13. This matter is of such urgency because the annual general meeting of the company. is, be held on the 30th November. The shares represent 41% of the issued share capital of the company, and in practice, amount to a controlling interest. Without going into the details the Defendants were put, into difficulties by both the 2nd Plaintiff and the 1st Defendant asking for proxies in their favour. Matters came to ahead on 23rd November and so on Friday, the 24th November the Plaintiffs took action and served too summonses, one originating summons and one summons to dispense with usual procedures, so that the originating summons could be heard and determined.

14. On Saturday, the 25th November, the parties came before me. Mr. Poon for the 1st Defendant asked for time to give advice in his client and for full service of documents to be made upon him so that the 1st Defendant could, if so advised, file evidence. Consequently, although the Plaintiffs wanted the matter heard as soon as possible, I made orders to enable the necessary procedural steps to be dispensed with on condition that a full set of` the documents in the proceedings were first served forthwith. I made directions that the Defendants should serve any affidavits or draft affidavits which they proposed to use by 3 p.m. on Sunday the 26th November and that the Plaintiffs should file any reply, if so advised, by 10 a.m. on the 27th. when I say 'file' I mean serve in draft if necessary. I marked the hearing of this matter not before mid-day yesterday the 27th. The hearing took place yesterday and submissions were completed at about 7 p.m. last evening.

15. The urgency of the matter is that if proxies are to be given, they have to be given by 3 p.m. this afternoon. Although it appears that the Capel usually send a representative to vote at the meeting as the time for proxy expired at 3 p.m. today, it is necessary. for this decision to be made before 3 p.m. so that the other parties, if they so wish, can give proxies.

16. So far as the evidence in the case is concerned, that consists of affidavits. There have been no applications from any of the parties, that any oral evidence should be called or any witness should appear for cross-examination. I mention that matter because it is one of the submissions of the 1st Defendant by counsel that he has not filed full evidence, but he has filed enough evidence for his purposes. I must make it clear that there has been no application before me for the filing of further evidence by the 1st Defendant nor for any further adjournment of the case and, of course, I must try this matter on the evidence before me.

Mortimer J.: So far as the other Defendants are concerned, the 3rd Defendant has not appeared, the 2nd and 4th Defendants have appeared and have indicated that they will vote the shares as they may be directed by the court.

17. The 2nd Defendant Capel has filed evidence saying that it is its normal practice to follow any instructions given by beneficial owners. It is not disputed in this hearing that a mortgagee of shares has the right to vote those shares and also it is not disputed that the right to vote shares may be the subject of agreement between relevant parties. Mortgagees have the right to vote so that they may use their vote (if they think fit) to protect their security. This is seldom of importance, but in an individual case it may be very important. It follows that the 1st mortgagee will have the right to vote. If there are other mortgagees and the earlier mortgagees in time are redeemed the right to vote will then pass to them because they also have an interest in protecting their security.

18. Capel have deposed that they hold that snares as mortgagee and that it is not disputed. There is no evidence from the 3rd Defendant but I have been told and it is not challenged that they also hold their shares as mortgagee. The position of those two Defendants is to be contrasted with that of the 4th Defendant.

19. I should add that a letter dated the 27th November received from the Liu Chong Hing Bank by solicitors for the Plaintiffs has been rightly put before me by Mr. Mills-Owens. The letter does not address the question whether the Liu Chong Hing Bank Limited is the mortgagee, but clearly claims the right to vote the shares and says it is not their intention to entertain the Plaintiffs' request for a proxy.

20. So far as Capel and Liu Chong Hing Bank are concerned, it is not in dispute that they hole as mortgagees. They have the right to vote the shares they hold as collateral in such manner as they think fit. Of course, that must include the right to refrain froze voting if they so choose, and the right to issue proxies to anyone whom they wish.

21. This leaves the 4th Defendant, the Standard Chartered Bank. These shares are not subject to a charge or mortgage. The 4th Defendant has appeared by counsel. He does not contend on their behalf that they have the right to vote those shares and the matter is left that they are content to follow any direction the court may give. So far as the shares held by the Standard Chartered Bank are concerned, prima facie, the Plaintiffs' case appears formidable.

22. Tabor is the mortgagee of these shares. The Bank is not. In the clearest agreement between the parties in the loan document arid the security document (particularly Clause 7 of the security document) Tabor has, as against the 1st Defendant, the voting rights in the shares and this agreement relates to the security given by the 1st Defendant for the loan advanced or taken over by the 2nd Plaintiff. It is not in dispute that the 1st Defendant entered these agreements although he indicates in his affirmation that the documents were hurriedly summarized to him in Cantonese. But he contends that those agreements are no longer effective and that the Plaintiff is not entitled to exercise its right to vote.

23. The basis of that contention is to be found in Mr. Wong's affidavit. His case is that the loan agreement and the security document were entered into as an interim arrangement between the parties because of pressure which was being exerted upon the 1st Defendant in relation to the loans; and that those 2 documents interrupted the blow (I am trying to use a neutral term) of an oral agreement made between the parties to cater for his indebtedness to the 2nd, 3rd and 4th Defendants and his shareholding.  He says at paragraph 15:-

"In a series of discussions among Mr. Zie, the 1st Plaintiff and me, it was orally agreed amongst us that we should form a company ("the company") in September 1989 in which I would have 45% interest and Mr. Zie and the 1st Plaintiff would nave 55%. An option would be granted to me by the 1st Plaintiff and Mr. Zie to buy from them the equivalent of 10% of the total issued shareholdings of the company within 2 years from its formation. The purpose of the Company was to ensure that the snares deposited with the Creditors to remain under our control. It was agreed amongst us that all my indebtedness to the creditors would be transferred to the Company once it has been formed."

 

He goes on to say,

"It was agreed that all major decisions of the Company would only be made with the concurrence of both parties," and by that, he explains he means himself on one side, and Mr. Zie and the 1st Plaintiff on the other.

24. That agreement having been made, he continues in paragraph 16:-

"Before the implementation of this agreement, the pressure of the Creditors on me became intense and it was likely that any one of the creditors would foreclose on the shares mortgaged to them. As it would take a bit of time to negotiate the transfer of my indebtedness to the Company Mr. Zie proposed as an interim measure that the 1st Plaintiff would first bail me out by assuming my indebtedness pending the implementation of our agreement. Relying on the representations of Mr. Zie and the 1st Plaintiff that upon the formation of the Company in September, they would ensure the indebtedness, and hence the right to redeem the mortgaged shares, transferred to the Company in which I had 45 percent interest, I accepted the offer of the 1st Plaintiff to take over my indebtedness."

25. That is the agreement upon which the 1st Defendant relies and he supports the credibility of iris contention by referring to a number of matters. Those matters are set out in his affidavit and 1 do not repeat them for reasons which will appear. on the other side a number of matters were relied upon as adverse to his credibility. I do not feel it necessary to refer to those either. It is not open to me to resolve any factual issues oh affidavits and it is in relation to that matter that Mr. Tam submits that this case should not be determined finally upon the voting rights and I should refuse to hear it because the issues cannot be determined on affidavit evidence. He submits that as an oral agreement is contended for on affidavit I cannot decide that question therefore I cannot decide this matter. He submits that the effect or the oral agreement is that the agreement of the 10th of August and the security document were subject to the oral agreement and were only interim measures. Also that, the Plaintiffs had agreed to implement the oral agreement by September and that time was of the essence. By the end of September, therefore, the Plaintiffs (particularly the 1st Plaintiff) was in breach of the oral agreement, was not entitled to rely on the security document made in favour of the 2nd Plaintiff and was not entitled, therefore, to vote the shares. The time now has passed ashen that agreement ought to have been come into existence and it is submitted further, that the 1st Defendant is entitled - or arguably entitled - to specific performance of that oral agreement and if specifically performed, it would relate back to the time when it ought to have been performed. Therefore, the Plaintiffs are not entitled to the order sought.

26. My approach to this matter must be this: I must accent the facts set out in the 1st Defendant's affidavit if they are at all credible, then I Must consider whether on those facts the Plaintiff can still rely upon the security document and the loan agreement giving the 2nd Plaintiff the right to vote. It seems to me that the agreement and the security document cannot be severed, either those documents remain effective or they are at an end. My approach must be rather like order 14 proceedings; does the Defendant raise an arguable case. It he raises an arguable case on the afffidavit, then it seems to me that I must refuse the Plaintiffs' application and allow the parties to pursue any other remedies that they may think, or be advised, are open to them.

27. Let me turn to tae Defendants' contentions in more detail. That the agreement contended for - made before the written agreements and made orally - was that the 1st Defendant's debts were to be transferred to a new company once formed. That all the shares held by Capel and the 2 Banks were to be redeemed. How that was to be done is not specified but one assumes the Gents to the Bank would be repaid once the shares were redeemed, that they would then be transferred to the new company and held by the new company.  As to the shareholding in the new company that would be held 45% to the 1st Defendant, 55% to Mr Zie and the 1st Plaintiff with the option that the 1st Defendant would be aisle to buy a further 10% of the company over the next 2 years; and that all major decisions would be taken jointly; and all that would be Gone by September 1989.

28. Paragraph 16 sets out that the reasons far the loan agreement and the security document were pressure of creditors and the time necessary to negotiate the transfer of indebtedness to the company, it is to be noted in passing that these, agreements are inconsistent with the survival of. the oral agreement. I mention, for example, the draw down under the loan being extended to the 30th November, and the detailed provisions which stretch far into the future although, apparently, those agreements, if the oral agreement was effective, would only last some 3 weeks or at the most 7 or 8 weeks. The Defendant says that the oral agreement which preceded the new agreements in writing ought to have been executed by September and that he is entitled to specific performance of the oral agreement. I have been told, although I have not seen it that there is a draft writ and statement of claim in existence.

29. I have mentioned that the Defendant's contention is that if specific performance were granted at some time in the future that would put an end to the security document and the obligations under it as from September 1989. It is on that basis that I am asked to say that it is arguable that Section 7 of the security document is of no effect and, therefore, that the Plaintiffs should not have the voting rights.

30. There is no dispute between the parties that the oral agreement contended for was never implemented. Mr. Wong deals with this in  paragraph 20, he says:-

"On about 10th October, 1989, seeing that the 1st Plaintiff did not take any step to implement further our agreement, I asked Mr. Zie when the company would be formed. Mr. Zie prevaricated by saying something to the effect that he and the 1st Plaintiff were busy dealing with the authorities regarding the relisting of the shares and refused to give me any commitment."

Mr. Wong goes on to say that he thought that they had no intention of carrying out the agreement and had tricked him into signing the Loan and Security Agreement with the aim of taking control of Jademan and he decided to call for the proxies of the shares mortgaged and to stop paying any money to the 1st Plaintiff. I note and take fully into account the 1st Defendant's reaction to his conclusion that this agreement was not going to be carried out and had not peen carried out in September. It would be. difficult, if not impossible, for the Defendant to contend having regard to his evidence that he was insisting upon time being of the essence. In my judgment, it is not arguable here that time was of the essence of the oral agreement if established.

31. Turning further to the agreement, on the evidence before me it cannot be said that the agreement would, with certainty have been implemented even if attempts have been made to implement it. Part of the agreement was the redeeming of the shares, therefore, the creditors would have to be repaid. It does not appear that there was any agreement as to the manner in which this was to be achieved. It was said by or. Zie. (according to Mr. Wong) that the transfer of the indebtedness to the company would be a question of negotiation. If implemented - assuming that hurdle could be cleared - the snares would have been held by the hew company and the decision about the voting would have to be taken jointly, Mr. Wong on one side, and Mr. Zie and Mr. Lam oh the other.

32. Those matters, further underline the conclusion which I have already reached that it cannot lie argued on Mr. Wong's evidence that time was of the essence of this oral agreement if it were established. This is further supported by the nature of the loan agreement and the security document themselves as the terms are inconsistent with a new arrangement being made in September. I note further the absence of any contention in October by the Defendant that the agreement ought to have already been implimented.

33. I turn how to the question whether it is arguable that the Defendant could get specific performance of this agreement. In my judgment the answer to that is 'no'. I do not think it is arguable that this agreement would be specifically performed by order of the court. If an agreement is to be specifically performed, one must know exactly what terms are to be enforced and the evidence does not fully indicate these.

34. I could and without making it part of my decision, that there is serious doubt on the Defendant's evidence as to whether there was a concluded oral agreement at all or whether there were simply proposals between the parties. Even if contrary to my judgment an oral agreement was made, it is not arguable that the terms were to be implimented by September. At the most, the 1st Defendant would be entitled here to a remedy in damages, but I have already expressed my doubts even about that.

35. In these circumstances, is it arguable that the loan agreement and security document are no longer effective any, have been replaced by a previous oral agreement that has not been brought into effect. My judgment is that it is quite clear oh the evidence that the loan agreement and the security agreement have not been replaced by any further agreement. It is not arguable that they have been replaced. They remain effective until they are so replaced. Indeed, it would be astonishing if a clear signed agreement to secure this debt was displaced by this oral inexact agreement contended for. In my judgment, the security document and Section 7 is now effective whatever may happen in the future.

36. I turn to one final submission. It is contended by the 1st Defendant that the agreement and security document fall to the ground as illegal and unenforceable because the 2nd Plaintiff is an unlicensed money lender. I read paragraph 30, the 1st Defendant says this:-

"Lastly,I wish to say that the 2nd Plaintiff, being the lender to me is an unlicenced money lender and as such the alleged Loan Agreement and Security Agreement, as advisers by my legal advisers, are illegal and unenforceable.  My legal advisers are unable to search the objects for which the 2nd Plaintiff was established, the 2nd Plaintiff being a Liberian company. In the light of the Plaintiffs' failure in producing the 2nd Plaintiff's Memorandum of Association or consititution, I verily believe that the 2nd Plainitff has no capacity to make the alleged loan to me and the same is ultra vires its objects."

37. That paragraph is one of best examples I have seen of a bald assertion. But treating it at its race value, is it arguable on the evidence before me that this loan agreement and security document fail on this ground?

38. I turn to the Money Lenders Ordinance. 'Money lender' is defined in Section 2:-

"Money Lender means every person whose business (Whether or hot 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."

and goes on in (a) s (b) to say certain people are not included.

39. I turn to Section 23:-

"No Money Lender shall be entitled to recover in any court any money lent by him or any interest in respect thereof or to enforce any agreement made or security taken in respect of any loan made by him unless he satisfies the court by the production of his licence, or otherwise, that at the date of the loan or the making of the agreement or the taxing of the security (as the case may be) he was licensed: provided that if the court is satisfied that in all the circumstances it would be inequitable if a money lender who did not satisfy it that he was licensed at the relevant time was thereby not entitled to so recover such money or interest or to enforce such agreement or security the court may order that the money lender is entitled to recover such money or interest or to enforce such agreement or security to such extent; and subject to such modirications or exceptions, as the court considers equitable."

40. And finally, I refer to Schedule 1 part 2, Clause 5:-

"A loan made by a company or fires or individual whose ordinary business did not primarily or mainly involve the lending of money in the. ordinary course of business," - is an exempted loan.

 

41. It seems to me that looking at call those provisions and looking at the evidence in this case. and the whole background, it is certainly not arguable that this loan is caught by the provisions of the Money Lending Ordinance.  What is more, even it were caught, it would seem to me to be quite inequitable to preclude the gnu Plaintiff from recovering.

42. Now in those circumstances, so far as the Standard Chartered Bank snares are concerned, by the security document, the right to vote those shares is held by the 2nd Plaintiff.   So far as the 2nd and 3rd Defendants are concerned, they have the right to vote tale shares they hold. As between the 2nd Plaintiff and the 1st Defendant, in the absence of the mortgagees of the 2nd and 3rd Defendant, then, of course, the 2nd Plaintiff would have the right to vote those shares, but does not in fact do so because of the mortgages held by the 2nd and 3rd Defendants.

43. I shall hear counsel as to any orders to which they may be entitled on that judgment.