CHINA MINSHENG BANKING CORP. LTD (SHENZHEN BRANCH) v. DICHAIN HOLDINGS LTD

 CACV 155/2008 & CACV 156/2008

CACV 155/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 155 OF 2008

(ON APPEAL FROM HCA NO. 2401 OF 2006)

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JUDGMENT

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Hon Tang VP:

Introduction

1.  As the result of an arbitration award by China International Economic and Trade Arbitration Commission South China Sub-Commission (“CIETAC”) on 30 April 2007, DiChain Holdings Limited (DiChain Holdings”) was ordered to pay to China Minsheng Banking Corp. Ltd (Shenzhen Branch) (“the Bank”) the sum of RMB18,619,830.41 or its equivalent in Hong Kong dollars, namely, HK$19,032,843.11.  On 18 May 2007, in HCCT 34/2007, the Bank obtained an order from A Cheung J to enforce the arbitral award which provided that DiChain Holdings might apply to set aside that order within 14 days (“the enforcement order”).  By a summons dated 1 June 2007, DiChain Holdings applied to set aside the enforcement order.  That was heard and dismissed with costs by A Cheung J on 28 June 2007.

The Charging Order Nisi

2.  On 25 May 2007, the Bank applied for a charging order in respect of 19,647,377 shares in Pearl Oriental Innovation Ltd (“Pearl Oriental”), a listed company with the Stock Code of “632”.  According to the 3^rd affirmation of Tang Tsz Pun filed in support of the charging order, DiChain Holdings was the beneficial owner of 19,647,377 shares in China Merchants DiChain (Asia) Ltd (“DiChain Asia”).  On 31 May 2007, Mr Registrar C Chan granted a Charging Order Nisi in relation to the said shares.  In the Charging Order: Notice to Show Cause, DiChain Holdings was ordered to show cause on 4 July 2007.

3.  By a letter dated 7 June 2007, Messrs Christine M. Koo & Ip (“CMKI”) acting on behalf of the Bank, informed Pearl Oriental of the Charging Order Nisi. 

4.  In the ensuing correspondence with Pearl Oriental’s solicitors Messrs Lau, Kwong & Hung (“LKH”), it appeared that in HCA 2401/2006, brought by Pearl Oriental and Orient Day Developments Limited (“Orient Day”) against DiChain Holdings, Pearl Oriental and Orient Day claimed, inter alia, that by virtue of a Subscription Agreement dated 22 February 2006 (“the Subscription Agreement”), 20 million shares in Pearl Oriental were “under contract to be pledged” to Pearl Oriental.  The parties to the Subscription Agreement were DiChain Asia now known as Pearl Oriental as Party A, Orient Day as Party B, and DiChain as the warrantor.

5.  It is common ground that at all material times, DBS Vickers Holdings (HK) Ltd (“DBS”) held a total of 20,000,000 shares, of which 19,647,378 were held on behalf of DiChain Holdings, and 352,622 on behalf of DiChain Holdings’ holding company, Farsight Holdings Ltd (“Farsight”). 

6.  Since neither the Bank nor Pearl Oriental and Orient Day would accept the other’s claim to priority over the shares on 26 June 2007, Pearl Oriental and Orient Day took out an intervener summons returnable to be heard on 4 July 2007 at the hearing to show cause.  Evidence was filed on their behalf showing cause why the charging order should not be made absolute.

The July 4 Hearing

7.  On 4 July 2007, the Bank, Pearl Oriental and Orient Day and DiChain Holdings appeared before Mr. Registrar C. Chan.  Messrs Lau, Chan & Ko (“LCK”), solicitors for DiChain Holdings, informed the court that they would file a notice to cease to act as soon as practicable.

8.  By consent, Mr. Registrar Chan ordered, inter alia, that (“Mr. Registrar Chan’s Order”):

“1. Leave be granted to (Pearl Oriental and Orient Day) to be joined as the 1^st and 2^nd Applicants in the charging order application proceedings;

……

4.  The pleadings and evidence filed by the parties in HCA 2401/2006 and HCMP 2128/2006 shall be made available to the Bank within 14 days (thereof);

……

6.  The (Bank) is to set down the following issue to be tried within 21 days of the filing of the last affidavit, namely, whether (DiChain Holdings) has created any security interest over the shares referred to in clause 6(b) of the Subscription Agreement dated 22 February 2006 in favour of (Pearl Oriental and Orient Day) pursuant to clause 6 thereof; and if so, whether the (Bank) should take subject to the said interest of (Pearl Oriental and Orient Day); (“the Issue”)

7.  The (Bank’s) application for the said Charging Order Nisi to be made absolute be adjourned sine die with liberty to apply until and after (the Issue) be adjudicated.”

Subsequent Events

9.  By letter dated 25 August 2007, CMKI invited LKH to fix a date for the show cause hearing where the Issue would be decided.

10.  LKH in reply claimed that it was “inappropriate” to fix a hearing date. It further suggested that either the Bank should withdraw the request to fix the hearing date.

11.  On 30 August 2007, CMKI wrote to the Registrar informing the court of LKH’s refusal to fix the hearing date.

12.  By an affirmation filed on 10 September 2007, Pearl Oriental and Orient Day through LKH indicated that the Issue should only be heard if in HCA 2401/2006 it should be concluded that Pearl Oriental and Orient Day had security interest over the shares; and that in the meantime the Bank’s application for the Charging Order Nisi to be made absolute should be adjourned.

13.  On 14 September 2007, after hearing submissions made by the parties, Madam Registrar Au-Yeung ordered that the show cause hearing be set down as directed in para. 6 of Mr Registrar Chan’s Order.

14.  The show cause hearing was then fixed to be heard before Master A Ho on 18 January 2008.

Summary Judgment in HCA 2401/2006

15.  Without any prior notice to CMKI or the Bank, Pearl Oriental and Orient Day proceeded to apply for and obtained summary judgment against DiChain Holdings on 13 December 2007 from Master Lung (“the summary judgment”).  The summary judgment ordered, inter alia, that DiChain to deliver 19,647,378 shares to Pearl Oriental.  It also made declarations to the effect Pearl Oriental was entitled:

“to hold 20 million consolidated shares … with a power of sale … until”

certain guarantee has been terminated or cancelled and that under certain circumstances, the same shares or part of them might be sold by Pearl Oriental by way of compensation.

16.  DiChain Holdings did not attend the hearing before Master Lung.  Leave had been given to LCK on 17 October 2007 to cease to act for DiChain Holdings.

17.  Master Lung was not informed of the existence of the Charging Order Nisi nor of the show cause hearing scheduled to be heard on 18 January 2008.

18.  The Bank was only informed of the summary judgment on 4 January 2008.

The Bank’s Intervener Summons

19.  By a summons dated 7 January 2008, the Bank applied to be joined as an intervener in HCA 2401/2006 and sought various consequential directions.

20.  On 7 January 2008, Master J Wong granted leave to the Bank to be joined as an intervener in HCA 2401/2006 together with an interim stay of execution of the summary judgment, and adjourned the rest of the summons to the show cause hearing on 18 January 2008 before Master A Ho.

21.  The Bank as intervener in HCA 2401/2006 appealed the order of Master Lung by a Notice of Appeal dated 5 February 2008.  On 1 April 2008, Master A Ho ordered that the show cause hearing as well as the Bank’s appeal from the summary judgment be heard together before the same judge on 15^th April 2008.

Yam J

22.  The matter was duly heard by Yam J on 15 April 2008.  On the same day, the learned judge made the following orders:

(1) in relation to HCA 2401/2006, he set aside the summary judgment obtained by Pearl Oriental and Orient Day against DiChain Holdings with costs on an indemnity basis; and

(2) in HCCT 34/2007, Yam J ordered that charging order nisi granted by Mr Registrar C Chan be made absolute in favour of the Bank with costs on a party and party basis.

The Appeal

23.  This is the appeal by Pearl Oriental and Orient Day.  CACV 155/2008 is the appeal from HCA 2401/2006, and CACV 156/2008 is the appeal from HCCT 34/2007.

24.  Pearl Oriental and Orient Day’s claim to the shares depended on the Subscription Agreement, in particular, clause 6 thereof. 

25.  Under the shares Subscription Agreement, Pearl Oriental agreed to issue and Orient Day agreed to subscribe 4,000,000,000 shares in Pearl Oriental at HK$0.01 each, totalling HK$40,000,000.  It was in that context that the warranty under clause 6 was given.

Clause 6

26.  Clause 6 provided that:

Warrantor (‘DiChain’) warrants Party B (‘Orient Day’)

“a. the Warrantor shall procure an agreement to be reached between [Pearl Oriental] and the lending banks for the cancellation of the liability to repay in respect of all [Pearl Oriental]’s guarantees for loan(s) (if any) within one year after the Completion Date of this Agreement.

b.  the Warrantor agrees to entrust 1,000,000,000 shares of [Pearl Oriental] (those) held under the name of Farsight Holdings Ltd included, (‘shares in custody’) free from all and any encumbrance to the custody of the solicitors appointed by [Pearl Oriental] until the compliance of (a) of this clause.

……

d.  if [Pearl Oriental] suffers any loss(es) due to any breach of the above warranties by the Warrantor, [Pearl Oriental] shall have the right to sell or transfer, all or any part thereof, the shares in custody and to recover compensation ([Pearl Oriental]) is entitled to for the economic loss(es) including costs and expenses arising thereform.”

27.  It will be noted that clause 6(b) referred to 1,000,000,000 shares.  Because of consolidation, that has become 20,000,000 shares. 

28.  Pearl Oriental and Orient Day’s case is that by clause 6, the shares had been pledged to Orient Day.  Alternatively, there was an equitable charge of those shares in favour of either Pearl Oriental or Orient Day.

Pledge

29.  Mr Samuel Chan, appearing for the Bank, submitted that even if, contrary to his submission, clause 6 could be construed as an agreement to pledge the shares in favour of Pearl Oriental, there had been no valid pledge because there had been no delivery of the shares either actual or constructive:

“In order to complete a pledge it is essential that there should be delivery of possession to the pledge.”  Snell’s Equity, 31^st ed., para. 41-02.

30.  In Official Assignee of Madras v. Mercantile Bank of India Ltd [1935] AC 53 at 58, Lord Wright giving the judgment of the Privy Council said:

“… At the common law a pledge could not be created except by a delivery of possession of the thing pledged, either actual or constructive. It involved a bailment ... If, however, the goods were in the custody of a third person, who held for the bailor so that in law his possession was that of the bailor, the pledge could be effected by a change of the possession of the third party, that is by an order to him from the pledgor to hold for the pledgee, the change being perfected by the third party attorning to the pledgee, that is acknowledging that he thereupon held for him; there was thus a change of possession and a constructive delivery ...”

31.  Mr Simon Yip, for Pearl Oriental and Orient Day, however, submitted that delivery was not required and he relied on the judgment of Buckley LJ in Swiss Bank v. Lloyds Bank [1982] AC 584 at 595, in the Court of Appeal where he said:

“It follows that whether a particular transaction gives rise to an equitable charge of this nature must depend upon the intention of the parties ascertained from what they have done in the then existing circumstances. The intention may be expressed or it may be inferred. If the debtor undertakes to segregate a particular fund or asset and to pay the debt out of that fund or asset, the inference may be drawn, in the absence of any contra indication, that the parties’ intention is that the creditor should have such a proprietary interest in the segregated fund or asset as will enable him to realise out of it the amount owed to him by the debtor: compare In re Nanwa Gold Mines Ltd [1955] 1 W.L.R. 1080 and contrast Moseley v. Cressey’s Co. (1865) L.R. 1 Eq. 405 where there was no obligation to segregate the deposits. But notwithstanding that the matter depends upon the intention of the parties, if upon the true construction of the relevant documents in the light of any admissible evidence as to surrounding circumstances the parties have entered into a transaction the legal effect of which is to give rise to an equitable charge in favour of one of them over property of the other, the fact that they may not have realised this consequence will not mean that there is no charge. They must be presumed to intend the consequence of their acts.”

32.  Buckley LJ was dealing with an equitable charge and not a pledge so his dictum provided no support for Mr Yip’s submission. 

33.  Mr Yip also relied on an oral agreement pleaded in the amended statement of claim in HCA 2401/2006 that:

“13.   On or about 18^th April 2006, it was mutually agreed by Mr. Fan Di (then Chairman of the Defendant) acting for and on behalf of the Defendant and Mr. Zhou Li Yang (Director) and Mr. Eddie Yu (then Company Secretary and Financial Controller) of the 1^st Plaintiff that the 1,000 million shares (now 20 million consolidated shares) would be deposited with DBS without the need of withdrawing physical share certificates by the Defendant and the Defendant should sign a Deed of Share Charge for such an arrangement.”

34.  Here, there was no evidence DiChain Holdings had given any direction to DBS requiring DBS to deliver the shares to or to hold them account of Pearl Oriental / Orient Day.  Nor was there any evidence whatsoever of any acknowledgment or attornment by DBS in favour of them.  On the contrary, the correspondence exchanged between CMKI, LKH and the solicitors for DBS, clearly showed that DBS had never regarded itself as holding the shares to the order or direction of Pearl Oriental / Orient Day.  Indeed, as was accepted by Mr Simon Yip, who appeared on behalf of the plaintiffs, in the relevant correspondence, it was never asserted on behalf of the appellants that DBS had attorned to them.

35.  The alleged oral agreement, even if established, does not in law amount to delivery of the shares.

36.  So the appellants’ case based on a pledge must fail. 

Equitable charge

37.  I turn to consider Mr Yip’s submission that clause 6 had created an equitable charge in favour of either Pearl Oriental or Orient Day.  He relied in particular on clause 6(d) which, it will be noted, purported to confer a power of sale on Pearl Oriental.  Mr Chan submitted that it is important to note that the warranty was given to Orient Day but that the power of sale was purportedly given to Pearl Oriental.  He submitted that this would at most have conferred a contractual right on Pearl Oriental, it would not have given Pearl Oriental an equitable charge over the shares.  As for Orient Day, it had no enforceable right against DiChain Holdings in relation to these shares at all.  There is force in this submission but there is a shorter answer.  Clause 6(d) cannot be considered in isolation.  It has to be read with the rest of clause 6.  Read together, I believe, what the parties had intended to create was a pledge of the shares in favour of Pearl Oriental, coupled with an express power of sale in favour of Pearl Oriental.  In other words, Pearl Oriental were meant to have a power of sale over the shares to be deposited by DiChain Holdings with solicitors appointed by Pearl Oriental.  It was never the intention of the parties that there should be an equitable charge.  Here, the dictum of Buckley LJ referred to in para. 31 above is apposite.

38.  For the above reasons, I respectfully agree with Yam J that the Charing Order Nisi should be made absolute, and I would dismiss CACV 156/2008 with costs, to be taxed on the party and party basis if not agreed.

The summary judgment:  CACV 155/2008

39.  With respect, I also agree with Yam J that the summary judgment be set aside.  It is obvious that the Bank, as chargee under the charging order nisi, had an interest in 19,647,377 shares.  The summary judgment would have adversely affected the Bank’s interest as chargee.  Pearl Oriental and Orient Day should never have obtained the summary judgment without informing the court of the charging order nisi, Mr Registrar Chan’s order, the order of Madam Registrar Au-Yeung of 14 September 2007 and the fact that the show cause hearing had been fixed for hearing.  If Master Lung had been aware of any of these matters I am sure he would have refused summary judgment unless notice of the hearing had been given to the Bank.

40.  In the circumstances, the order of Yam J that Pearl Oriental and Orient Day should pay the costs of the Bank in setting aside the summary judgment on an indemnity basis was perfectly justified.

41.  I would dismiss CACV 155/2008 with costs.  I would also make an order nisi that such costs be paid on an indemnity basis.

Hon Barma J:

42.  I agree.