THE BANK OF EAST ASIA, LTD v. SUPER GLOW INTERNATIONAL LTD AND ANOTHER

HCMP 3109/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3109 OF 2016

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D E C I S I O N

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Introduction

1.  This is an application of the Bank of East Asia Limited (“the Bank”) for summary determination of the mortgagee action commenced by its Originating Summons dated 9 November 2016 (“the OS”) pursuant to O.28 r.4, Rules of the High Court, Cap.4A (“RHC”). The subject matter of these proceedings is a second legal charge dated 14 June 2013 (“the Second Legal Charge”).

2.  The Second Legal Charge was executed by the Bank as Lender, Super Glow International Limited (“SG”) as Mortgagor and Hong Kong Tun’s Paper Limited (“HKTP”) as Borrower. The property mortgaged under the Second Legal Charge is known as Workshops A and B, 7/F, Sui Ying Industrial Building,1 Yuk Yat Street, Tokwawan, Kowloon (“the Mortgaged Property”).

3.  By the OS, the Bank seeks an order that SG and HKTP, jointly and severally, do:

a.   pay the Bank the sums of HK$40,793,166.80 and US$1,581,000.00 (the “Outstanding Sums”);

b.   pay interest on the Outstanding Sums; and

c.   give the Bank vacant possession of the Mortgaged Property (by SG only).

4.  Both SG and HKTP oppose this application and do not accept the enforceability of the Second Legal Charge by reason of their allegation of non est factum. Ms Leung, appearing for them, argues that there is at least a triable issue as to the validity of the Second Legal Charge, which can only be resolved by a trial. She invites this court to order that these proceedings be continued as if they had been begun by Writ under O.28 r.8, RHC.

Applicable legal principles

5.  The following governing principles were expounded by Fok J (as he then was) in Billion Wealth Group Limited v Strategic Media International Limited, unreported, HCMP 2586/2009, 3 May 2010.

“4. And it is trite that on a summary judgment application, the court simply has to determine two questions: firstly, whether what the defendant says is believable as opposed to whether its version of events is to be believed; and secondly, if it is, whether what the defendant says amounts to an arguable defence in law.

5. Whether a party’s assertions are believable is a question to be answered not by taking the assertions in isolation but by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute: per Deputy Judge To (as he then was) in Ip Kam Wah v Fair City Group Ltd [2005] 4 HKLRD 168 at §8.”

Background facts

6.  Mr Tang, for the Bank, gives an excellent summary of the undisputed background facts leading to the execution of the Second Legal Charge in his skeleton submissions and Ms Leung confirms with this court its accuracy. I shall gratefully adopt the summary as follows:

a.   In or around March 2013, SG and HKTP respectively applied to the Bank for credit facilities.

b.   SG applied for an instalment loan to finance its acquisition of the Mortgaged Property (the “SG Facilities”).

c.   HKTP applied for general banking facilities up to the limit of HK$50,000,000 (the “HKTP Facilities”).

d.   At the material time, Cheng Tun Hum was the sole director and a 60% shareholder of SG. The remaining 40% shareholding was held by Cheng Pak Hung, Pang Cheung Kee, Li Kin Man and Lo Fung Lan (the “SG Minority Shareholders”) as to 10% each.

e.   In respect of HKTP, Cheng Tun Hum was at all material times the sole shareholder and a director. Cheng Tun Sang was the other director.

f.   In or around April 2013, the HKTP Facilities were approved by the Bank on the terms set out in a facility letter dated 24 April 2013 (the “April 2013 Facility Letter”). A copy of the April 2013 Facility Letter was counter-signed by Cheng Tun Hum and Cheng Tun Sang as directors of HKTP and by Cheng Tun Hum as sole director of SG.

h.   Schedule 2 of the April 2013 Facility Letter specifically required, as a condition precedent and security for the HKTP Facilities, the execution by SG of an all monies legal charge in respect of the Mortgaged Property in favour of the Bank.

i.   In May 2013, at the request of Cheng Tun Hum, a firm of solicitors, Messrs Ho and Wong (“Ho and Wong”), was instructed to prepare the security documents required for the SG Facilities and the HKTP Facilities.

j.   On 10 June 2013, Ho and Wong informed the Bank that, as security for the HKTP Facilities, the Second Legal Charge had been duly executed on behalf of SG and HKTP. The Second Legal Charge was signed by Cheng Tun Hum (on behalf of SG and HKTP) and Cheng Tun Sang (on behalf of HKTP), and was affixed with the common seals of both SG and HKTP.

k.   In addition to the Second Legal Charge, the following documents were executed:

1.1.   the minutes of an extraordinary general meeting of SG’s shareholders dated 10 June 2013 (the “EGM Minutes”), which were signed by Cheng Tun Hum and each of the SG Minority Shareholders;

1.2.   the written resolutions of the sole director of SG dated 10 June 2013 (the “SG Director Resolutions”), which were signed by Cheng Tun Hum and which:

(i)   stated that it was in SG’s commercial interest for the HKTP Facilities to be obtained from the Bank;

(ii)   approved the HKTP Facilities, as well as the Second Legal Charge;

(iii)   authorised Cheng Tun Hum as sole director to execute the Second Legal Charge and other incidental documents as required by the Bank;

1.3.   the written resolutions of the sole shareholder of HKTP dated 10 June 2013 (the “HKTP Shareholder Resolutions”), which were signed by Cheng Tun Hum and which approved both the HKTP Facilities and the Second Legal Charge; and

1.4.   the written resolutions of the directors of HKTP dated 10 June 2013 (the “HKTP Director Resolutions”), which were signed by Cheng Tun Hum and Cheng Tun Sang and which approved the HKTP Facilities and the Second Legal Charge.

l.   Following the execution of the Second Legal Charge in June 2013, HKTP Facilities were made available for use by HKTP.

m.   The terms of the HKTP Facilities were subsequently revised on eight different occasions between 11 July 2013 and 12 January 2016. On each occasion, a new facility letter setting out the revised terms was issued to HKTP. The 8 facility letters, each counter-signed by Cheng Tun Hum as the sole director of SG and a director of HKTP, all refer to the provision of an ‘all monies’ legal charge executed by SG in respect of the Mortgaged Property as a condition precedent to the utilisation of the HKTP Facilities.

n.   Events of default under Clause 7 of the Second Legal Charge have occurred by reason of:

1.1.   HKTP’s defaults in repayment of the overdue amounts under the January 2016 Facility Letter, despite the Bank’s written demands by letters dated 2 February 2016, 26 February 2016, 1 March 2016 and 11 March 2016, letter from the Bank’s then solicitors, Messrs. Yuen & Solicitors, dated 19 April 2016 and Linklaters’ letter dated 14 September 2016:see Clauses 7.1 and 7.2;

1.2.   the making on 13 April 2016 and continuation on 22 April 2016 of an injunction order by G. Lam J in HCA 956 of 2016 which prohibited, and continues to prohibit, HKTP from, inter alia, disposing of, dealing with or diminishing in any way the value of its assets in Hong Kong, whether in its own name or otherwise, up to the value of HK$17,994,386.67: see Clause 7.8;

1.3.   the fact as confirmed by Cheng Tun Hum to the Bank in or around August 2016 that the Mortgaged Property had been rented out to a number of tenants under various short-term leases, which was created without the prior consent of the Bank in breach of Clause 9.14 of the Second Legal Charge and constitute a further event of default under Clause 7 of the Second Legal Charge.

1.4.   a breach or omission to observe any of the covenants or obligations of the Second Legal Charge on the part of SG or HKTP: see Clause 7.4.

The Bank’s case

7.  Under the title “Power of Lender in event of default”, Clause 8.2 contains 9 provisions (Clauses 8.2.1 to 8.2.9). They include the right of the Bank to take possession of the Mortgaged Property and to realize it.

8.  Based on the foregoing matters which are not in disputed, the Bank contends that under Clause 8.2 of the Second Legal Charge, owing to the events of default, the Bank is, as a matter of contract, entitled to the relief claimed in this action.

9.  The case of the Bank is well evidenced by contemporaneous documents and I agree with Mr Tang that more than a prima facie case is made out. I do not accept Ms Leung’s submission that the sheer volume of the documentary evidence is suggestive of the inappropriateness of summary disposal of the OS. The burden is on the defence to show by way of evidence that they have a defence or defences to the claim.   

 The purported defence

10.  Now I turn to the evidence filed on behalf of SG and HKTP to see whether there is a valid defence. Despite all the vitiating matters alleged in the affirmations such as unilateral mistake and illegality, Ms Leung confirms with this court that the only defence is non est factum.

11.  First, Ms Leung highlights that there are factual disputes relating to the circumstances under which the Second Legal Charge was executed in the office of Ho and Wong on 10 June 2013. The execution was handled and indeed witnessed by Mr Tse who was a clerk in the employment of Ho and Wong. His affirmation evidence is contradicted by those filed by the defence.   

12.  The allegation of the defence is that Mr Tse only spent no more than 15 minutes with each of the signatories without explaining to any one of them in full the contents of the Second Legal Charge and other bank documents. Due to his lack of adequate explanation, both Cheng Tun Hum and Cheng Tun Sang alleged that they did not understand the meaning and effect of those documents. Worse still, they thought erroneously that they were merely executing a first legal charge over the Mortgaged Property in favour of the Bank as security to obtain the SG Facilities for the purchase of the Mortgaged Property only.

13.  Cheng Tun Hum avers that it had never occurred to him that the Mortgaged Property of SG would be charged to secure the HKTP Facilities. He makes it clear that SG has no dealing with HKTP whatsoever. This is also a matter on which Ms Leung places particular emphasis during the hearing.

14.  Ms Leung submits that there are clearly factual disputes concerning the circumstances under which the Second Legal Charge was executed emerging from the evidence filed by the parties. Therefore, summary determination of the OS is inappropriate and the matter should be allowed to go to trial as if it were begun by writ.

15.  In spite of the allegations made by the defence, I am of the view that they are patently incredible in light of those incontrovertible background facts and the evidence of Mr Tse. Accordingly, I come to the conclusion that the defence of non est factum cannot get off the ground. My reasons are as follows:

a.   First and foremost, SG and HKTP are clearly related. The latter is solely owned by Cheng Tun Hum and he is the majority shareholder of the former. It makes perfect commercial sense that SG allowed the Mortgaged Property to be charged for the purpose of the HKTP Facilities.  In fact, Cheng Tun Hum and Cheng Tun Sang on behalf of HKTP signed a corporate guarantee dated 10 June 2013 in favour of the Bank as security in connection with the SG Facilities. The allegation that SG had never asked HKTP to provide the corporate guarantee is neither here nor there. There is no allegation of invalidity of the corporate guarantee. The primary argument of Ms Leung must be rejected.

b.   Very close to the signature of Cheng Tun Hum appended to the Second Legal Charge was the signature of Cheng Tun Sang. Cheng Tun Sang held no position in SG at the material time.  His attendance was not required at all if the Second Legal Charge did not concern HKTP.  Both of them signed the Second Legal Charge as the directors of HKTP. I cannot accept that Cheng Tun Hum genuinely thought the document that he signed with Cheung Tun Sang had nothing to do with HKTP. 

c.   The Second Legal Charge was actually approved by the EGM Minutes, SG Director Resolutions, HKTP Shareholder Resolutions and HKTP Directors Resolutions. All these documents bore the signatures of the relevant individuals including the four SG Minority Shareholders. Now all these signatories allege that they had limited knowledge of English and did not understand the nature and effect of those documents. Their collective misapprehension was too much of a coincidence. I also note that some of them were experienced in commercial matters. I am unable to accept their assertions.

d.   In particular, as pointed out by Mr Tang, Cheng Tun Hum is an experienced businessman having previously executed commercial documents to obtain various banking facilities for his businesses from other banking institutions. It is unbelievable that he would go to the office of Ho and Wong to execute several commercial documents without any idea of their nature and effect.

e.   Furthermore, Mr Tang helpfully draws my attention to the fact that between 11 July 2013 and 12 January 2016, Cheng Tun Hum on behalf of SG and HKTP countersigned a total of 8 facility letters to amend the terms of the HKTP Facilities. Each of these facility letters contained a provision relating to the legal charge over the Mortgaged Property by SG as a condition precedent and security for the continued availability of the HKTP Facilities. There is no allegation that he signed these facility letters without knowing their contents. Cheng Tun Hum must know that the Mortgaged Property has all along been charged for the HKTP Facilities. He could not have thought that the Bank would allow the HKTP Facilities to be granted without any security over the Mortgaged Property.

16.  In the circumstances, I find as a matter of fact that Cheng Tun Hum and Cheng Tun Sang had full knowledge of the nature and effect of the Second Legal Charge irrespective of whether Mr Tse actually explained to them the contents of the document in detail. In any event, they, being of full age and ordinary understanding must be held to the terms of the Second Legal Charge, which they had chosen to sign, in the absence of any recognised legal basis for concluding that their apparent consent had been vitiated.  Whether they did not know its contents is wholly immaterial: Ming Shiu Chung & Ors. v Ming Shiu Sum & Ors. (2006) 9 HKCFAR 334 per Ribeiro PJ at §§83-86. The purported defence of non est factum is a non-starter.

17.  This being my finding, I need not deal with the allegation of the defence that at a meeting on 19 February 2016 Mr Tse admitted to Mr Li and Ms Lo that he did not have a copy of the Second Legal Charge at that time and he had not previously informed them of the existence of the Second Legal Charge. For completeness, I reject this allegation. There is no reason why Mr Tse would make the alleged admission.

18.  I am also unable to accept Ms Leung’s submission that the non-possession of the Second Legal Charge and the related documents at that meeting on 19 February 2016 on the part of Mr Tse should cast doubt on his professed ability to explain the contents of the Second Legal Charge to Cheng Tun Hum and Cheng Tun Sang on 10 June 2013. I fail to see the causal link at all.

Conclusion and order

19.  Given the foregoing analysis, I come to the conclusion that the purported defence is unmeritorious despite all the factual allegations raised in their affirmations. The Bank must be entitled to judgement.

20.  The Bank provides this court with a breakdown of the interest payable by SG and HKTP and a draft order after the hearing. Despite invitation, the defence legal representatives have not made any comment on them. I have gone through those documents and I am satisfied with the calculation of interest. I make an order in terms of the draft order except the proposed costs order.

21.  I agree that the Bank must be entitled to its costs of the OS on an indemnity basis, as provided by the Second Legal Charge and the HKTP Facilities. I make a costs order nisi in this term. I am not inclined to make a summary assessment of costs though.

22.  It remains for me thank both Mr Tang and Ms Leung for their helpful and succinct submissions.