LU MING HUI v. HO YU KUEN

CACV 121/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 121 OF 2010

(ON APPEAL FROM HCA NO. 472 OF 2009)

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BETWEEN

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J U D G M E N T

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Hon Le Pichon JA:

1.  This was an appeal by the defendant from an order of Sakhrani J of 18 May 2010 granting the plaintiff summary judgment on his claim under a promissory note for $5,772,800. At the conclusion of the hearing, judgment was reserved which we now give.

Introduction

2.  The plaintiff’s claim is based on a promissory note (“the note”) made and issued by the defendant on 25 January 2007 with a maturity date of 25 July 2007.  The note evidenced a loan made by the plaintiff to the defendant on the date of the note to enable the defendant to make payment of $5,772,000 for the purchase of 131,200,000 shares of Rontex International Ltd (“the shares”) under an agreement (“the sale and purchase agreement”) made between the plaintiff and defendant of even date.  The defendant did not make payment on the maturity date.  The plaintiff instituted proceedings in 2009 and sought summary judgment which the judge granted.

3.  Although this was not mentioned in the reasons for judgment subsequently handed down, on the same day as the judgment, the parties reached an agreement which was incorporated into the order under the rubric ‘consent order’.  Although there appears to be some dispute as to the circumstances in which the funds came to be available, the effect was the payment of an amount equal to the sum claimed to the plaintiff’s solicitors to be held by them as stakeholders pending this appeal.  It became clear at the close of the opening submissions of Mr Barlow SC, who appeared for the defendant, that the sum would be available for payment into court should leave to defend be granted.  The thrust of Mr Barlow’s submissions was that while the defence may be said to be unlikely, it is not unbelievable and, therefore, conditional leave to defend should be given.

Background

4.  The plaintiff is and has since 2002 been the registered owner of the shares which represents 8% of the issued share capital of Rontex.  He resides in Taiwan.  He is the brother-in-law of Madam Chou Mei (“Madam Chou”) whose husband Ronald Cheung (“Mr Cheung”) was at all material times Rontex’s chairman.  Rontex is a company listed on the Stock Exchange of Hong Kong.

5.  Mr Cheung and Madam Chou were the executive directors of Rontex and the sole directors and shareholders of Star Master International Ltd (“Star Master”) which held a controlling block of Rontex shares.  According to the defendant, in October 2006, Star Master held 976.5 million Rontex shares representing approximately 60% of its issued share capital.

6.  The defendant is a businessman involved in acquiring businesses and corporate restructuring through his corporate business vehicles including Global International Petrochemicals Ltd (“GIPL”), a Canadian company which appears to have a HK subsidiary (“GIPL-HK”).  Chan Ching Kee (“Mr Chan”) and Kennis Chung (“Ms Chung”) are the defendant’s business associates.

7.  As recorded by the judge, the defendant raised two defences:

(1)   that the parties did not intend the promissory note to carry any legal effect; and

(2)   that there was an agreement whereby the claim was discharged.

8.  The judge rejected the first defence on the basis that the defendant sought to contradict the note by parol evidence which he held was inadmissible and, in any event, he considered the defendant’s assertions unbelievable.  The judge also rejected the second defence.

This appeal

The first defence

9.  In broad outline, it was said that the plaintiff held the shares as nominee for Madam Chou, that the sale and purchase agreement and the note were sham documents and were never intended to be enforced, that the defendant was offered the shares for free by Madam Chou in recognition of the assistance he had rendered in seeking to restructure Rontex (which was said to be in financial difficulties) and as an incentive for the defendant and his team to stay on and continue to help Rontex through its financial problems.

10.  Quite apart from inadmissibility issue, the judge found the defence unbelievable for the reasons stated in §§24-29 of his Reasons for Judgment:

“24. would observe that in any event the defendant’s assertions are in my view unbelievable.  The defendant asserts at paragraph 17 of his affirmation that Chou and her husband offered to transfer the shares to him free of payment as a reward to his team for all the past work undertaken to help Rontex through its financial problems and as an incentive for him and his team to stay on and that he agreed to their proposal.  However, at paragraph 18 of his affirmation the defendant asserts that Chan suggested to him that there should be some documentation to show the conveyance of the shares to the defendant rather than just to take the same for free and Chan approached a solicitor in Messrs Hastings & Co. (“Hastings”) :

“ … to design the necessary documentation and it was he who prepared the [sale and purchase agreement] between the Plaintiff and I ……… recording a purported sale of [the shares] from the Plaintiff to me at a consideration of HK$5,772,800 payable by way of promissory note.”

25.       The defendant went on to say at paragraph 20 of his affirmation that Chan prepared the promissory note “which on its face recorded a purported loan” made by the plaintiff to the defendant.

26.       A transaction in which the parties intended not to create those legal rights and obligations that they then give the appearance of creating is a sham transaction (Hong Kong Legal Dictionary, page 908).

27.       In my view it is incredible that the defendant, who is a sophisticated businessman involved for many years in corporate restructures, Chan, who for many years was an investment banker, and a solicitor would enter into a sham transaction by the making of the sale and purchase agreement and the promissory note.  There is no plausible reason given as to why the alleged sham transaction was created.

28.       I would also observe that there was also a bought and sold note in respect of which stamp duty was paid evidencing the sale of the shares by the defendant from the plaintiff for the total consideration of HK$5,772,800.

29.       There was uncontradicted evidence of a shareholding disclosure made disclosing the purchase of the shares by the defendant at the consideration of HK$0.044 per share.  131,200,000 shares at HK$0.044 per share comes to HK$5,772,800.  There was also uncontradicted evidence showing that after the transfer of the shares to the defendant, the defendant disposed of most, if not all, of the shares.”

11.  On this appeal, Mr Barlow relied on a raft of documents, most of which were seemingly complicated corporate documents pre-dating the note.  Before turning to those documents, the defendant’s case needs to be stated in greater detail.  As pleaded and as deposed to by the defendant in §7 of his affirmation, his case was that in September/October 2006, he had agreed to help Rontex solve its financial problems by lining up potential investors including himself or his companies to invest in and acquire Rontex subject to 2 main conditions, namely that Mr Chan and Ms Chung would be appointed directors of Rontex and that Mr Cheung and Madam Chou would deposit all Rontex shares held and/or controlled by them (including the shares which the defendant was informed was held by the plaintiff as Madam Chou’s nominee) with a firm of solicitors in Hong Kong to be held in escrow by the firm as guardians.  In §8 of his affirmation, the defendant explained that:

“At that time I insisted to Cheung and Chou that the Cheung & Chou Shares and the Lu Shares must be held in escrow because we needed time to review the business operations of Rontex and to structure the acquisition/investment in Rontex and find potential buyers. We would not be interested in the deal and could not do our restructuring job properly if there was a risk that Cheung and Chou would/could dispose of shares under their control without restrictions after we had extended time and effort to improve the value of Rontex as a going concern.”

In other words, according to the defendant, the purpose of the escrow arrangements was to ensure that the controlling block of shares would be ringfenced or as Mr Barlow put it, “they had to be out of play” during the restructuring exercise.

12.  Mr Barlow drew attention to an e-mail sent from Mr Chan to the defendant on 22 September 2006 which, in pertinent part, read:

“Legal counsel found. Pink Lady is using legal counsel referred by us. Escrow Agreement is being drafted. Ivy [Ms Chou] had been told that she had to throw in her 8% to be held in escrow. She has agreed to it. The 8% is in the name of a Taiwanese friend and kept at HSBC nominee ...” (emphasis added)

A month or so later, on 24 October 2006, the plaintiff entered into a Primary Engagement Agreement made with Star Master and GIPL.  On the same day, he entered into an Escrow Agreement with YL Yeung & Co to whom he also  gave a letter of “irrevocable instruction”.  Mr Cheung, Madam Chou and Star Master had entered into a similar Escrow Agreement with Hastings & Co. on 19 September 2006, over a month before the Primary Engagement Agreement.  Prima facie, these documents appear to lend support to the defendant’s case as stated in §11 above.

13.  On closer consideration, it transpires that the obligation that the plaintiff undertook by the Primary Engagement Agreement was to use his best endeavours to procure Rontex to sign a formal engagement agreement (the “Engagement Agreement”) with GIPL in connection with the “Assignment”.  He also gave a personal undertaking to maintain the shares with the custodian for a period of 3 months.  The “Assignment” was defined in recital (3), viz.

“to engage GIPL as the financial consultant to Rontex in connection with possible re-structuring of Rontex’s corporation, business and daily operations, including raising debt financings from the N. American markets to fund Rontex’s working capital requirements.”

But it is evident from section C of the Primary Engagement Agreement that the extent of the scope of work to be undertaken by GIPL was to be “separately agreed” and “duly stipulated in full” in the Engagement Agreement which was yet to come into existence (if at all).  As no Engagement Agreement ever came into being within three months, the Primary Engagement Agreement automatically determined under the provisions of section H, that is to say, on 24 January 2007, the day prior to the execution of the sale and purchase agreement and the note.

14.  Furthermore, contrary to the defendant’s case, the elaborate escrow arrangements do not appear to afford the defendant or his company GIPL ‘security’ against the risk of disposal.  In fact it is difficult to see what comfort (if any) the defendant possibly could have derived from them.  Under clause 4.2 of the Escrow Agreement the plaintiff was entitled to require the return of all or any part of the shares from the custodian.  The “irrevocable instruction” took matters no further since that was confined to the duties described in §2 of that letter only.  The custodian’s obligation was limited to notifying GIPL in the event of any withdrawal by the plaintiff.  In other words, this was after the proverbial horse had bolted if, as the defendant has suggested, the purpose was to keep the shares “out of play”.

15.  Far from supporting the defendant’s case, each of those documents (other than the internal e-mail) clearly stated or referred to the plaintiff being legally and beneficially entitled to the shares.  If, according to the defendant, he believed (because he had been told by Mr Cheung and Madam Chou) that the plaintiff was a ‘mere nominee’ for Madam Chou, he has not given any explanation as to why he, being a seasoned and sophisticated financial consultant involved in corporate restructuring should knowingly be (or allow his company to be) party to documents that stated otherwise and which he knew to be untrue.

16.  Reliance was also placed on a Joint Venture Preliminary Agreement (“the JV Agreement”) dated 14 January 2007 made between the defendant and Mr Cheung and Madam Chou.  It is to be noted that the attachments to it which would have clarified the defendant’s plan for disposing of Rontex’s shares are not before the court.  The JV Agreement (to which the plaintiff was not party) was made only 10 days before the sale and purchase agreement and the note, by which time the prospective transaction with the Mainland investor whom the defendant apparently had lined up to acquire Rontex had come to naught, with the latter’s arrest in December 2006.

17.  By the JV Agreement, the defendant, inter alia, undertook to inject $1500 million into Rontex over a period of three years.  That does not sit comfortably with the scenario painted by the defendant and which founds his defence, namely, of an unremunerated and, perhaps disgruntled corporate financial consultant who had to be offered a gift of the shares as a reward for past services and as an incentive to stay on to help ‘restructure’ Rontex, the scope of the ‘restructuring’ work to be undertaken remaining entirely at large and undefined.

18.  While Mr Cheung and Madam Chou agreed to “make available” to the defendant Star Master’s holding as well as the shares, the plaintiff was stated as owning the shares.  The JV Agreement provided for 30% of the Rontex shares made available to be disposed of in the stock market over three years and the profits shared in the proportions stated in the JV Agreement.  An arrangement that led to the disposal of the shares would not have been inconsistent with the plaintiff’s case which was that he wanted the shares sold.

19.  In my view, not only do the corporate documents not undermine the judge’s reasoning in rejecting the first defence, they positively contradict the defendant’s case in material respects and render it unbelievable.

The second defence

20.  This defence is described in §26 of the defendant’s affirmation.  It reads:

“In about February 2007, Chou told me that she was in need of money …  She said she wanted to make profit by taking advantage of the rising Rontex share price.  She said that if I did not help her to make money from it, she threatened that she would not vote for the acquisition of majority shareholding by GIPL in the board meeting of Rontex (“the Acquisition”).  Eventually, I agreed to procure warrants for 120 million Rontex shares to be issued to her two nominees on the understanding (and accepted by her) that:-

(1)       after such exercise, Chou would vote for the Acquisition and neither Chou nor her nominee, i.e. the Plaintiff, would have any claim whatsoever in respect of the Lu Shares against me in the future; and

(2)       Chou and I would share any profits … arising out of the exercise of the warrants equally.”

21.  The judge considered that that understanding was inconsistent with and contradicted the defendant’s case that the shares had been given to him for free.  In my view, that reasoning is unassailable.

22.  Further, it is to be noted that the “Acquisition” referred to was stated in no uncertain terms to be the acquisition of the majority shareholding by GIPL.  That assertion is flatly contradicted by the JV Agreement itself.  According to the recitals, by the date of the JV Agreement, due diligence conducted by Mr Chan and Ms Chung (who had been directors of Rontex since 25 October 2006) into, inter alia, the share ownership structure of Rontex had been completed.  That due diligence was said to have been carried out with a view to Evergreen E. E. Ltd (“Evergreen”), allegedly GIPL’s acquisition vehicle, investing into Rontex pursuant to an Escrow Agreement dated 15 September 2006 (which was referred to as “the Acquisition Agreement”).  According to recital (7), their reports concluded that

“Rontex was not an appropriate candidate for an Acquisition by GIPL as Rontex’s business and operations carried certain inherent risks that did not match GIPL’s acquisition risk profile.”

It was for that reason that Evergreen apparently had referred Mr Cheung and Madam Chou to the defendant.  Recital (8) reads:

“Due to the discontinuation of the Acquisition, Evergreen referred [Mr Cheung and Madam Chou] to [the defendant] as Evergreen was of the view that Rontex could potentially be a good joint venture partner of [the defendant] as Rontex’s future business prospectus represented a good investment candidate and this company would enhance the quality of the investment portfolio of [the defendant].”

That any referral was needed simply defies belief.

23.  It should be mentioned that contrary to what is recited in the JV Agreement, Evergreen was not party to the Acquisition Agreement but GIPL-HK was.  Further GIPL-HK’s rights under the Acquisition Agreement were secondary rights, contingent on the collapse of the prior rights of Evergreen under a Memorandum of Understanding (granting it an exclusivity period of 3 months) made prior to and extant on 15 September 2006.  Until the JV Agreement, there had been no suggestion that Evergreen was a corporate vehicle of the defendant, much less GIPL’s “acquisition vehicle”.  These errors are inexplicable and incredible.  They serve to underline the fact that even formal documents emanating from the defendant cannot be relied on as telling the truth.

24.  For all those reasons, I consider the second defence equally unbelievable.

25.  Mr Barlow placed great emphasis on the judgment of Deputy High Court Judge Burrell in Securities and Futures Commission v Cheung Keng Ching & Others, HCMP 1869/2008, unreported, 18 March 2010 which was decided after the judge’s decision in the present case.  It was said that this court should not give credence to anything said by Madam Chou since in that subsequent case she was found guilty of misconduct, misfeasance and/or defalcations in various transactions relating to Rontex and in respect of which she has been disqualified from being, inter alia, a director of Rontex or any other corporation and is prohibited from taking part in their management.  As to this, it is unnecessary to say more since, in reaching my conclusion on this appeal, I have relied solely on documents exhibited to the affirmations filed.

Order

26.  I would dismiss this appeal.  I would also order that there be an order nisi of costs in favour of the plaintiff.

Hon Stone J:

27.  I agree with the judgment of Le Pichon JA and with the orders proposed.

Hon Le Pichon JA:

28.  Accordingly, there will be an order in terms of §26 above.