MAGNIFICENT MELODY LTD v. CHAN JOHN LOONG FAI AND OTHERS

HCMP 1485/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1485 OF 2012

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J U D G M E N T

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1. The plaintiff is a company registered in the British Virgin Islands and is controlled by a Mr George Chu a practising barrister. Lanco International Holdings Limited is a Hong Kong registered company of which the 1^st defendant Mr John Chan is the major shareholder (2.1 million shares out of an issued share capital of 3 million shares) and the controlling director. The 2^nd defendant is another director (and a minor shareholder) but has not participated in these proceedings.

2. Lanco was involved in a joint venture aluminium project on the mainland. It needed some capital. Mr Chu and Mr Chan knew each other of old. As a result of an approach by the latter to the former a loan of 4.8m USD was forthcoming from a company called On Sky Enterprise (HK) Limited, with which Mr Chu had a family connection.

3. An agreement was drawn up dated 20 June 2008 which reflected the consideration to be paid to the plaintiff for its assistance in securing the facility for the loan. That agreement was signed by the directors of the 3^rd defendant company – the two defendants and two other directors on behalf of Lanco, and on behalf of the company.

4. It provided for a transfer of 150,000 shares being 5 per cent of the issued capital to the plaintiff company (at a nominal cost of 1$ US) Furthermore for the 5 year duration of the contract, a “director service fee” of 220,000 USD was to be paid to the plaintiff commencing on or before 31 July 2008. This fee was to be reduced at a later date in the event of earlier repayment of the loan. There were other terms with which we are not concerned in this hearing.

5. Following that, a loan agreement was signed on the 11 July 2008. Apart from the lender and the borrower, the same four directors were party to it. Apart from details the concerning the loan of 4.8m USD there was a provision in paragraph 8.3 for payment of a sum of 120,000 USD to Mr George Chu “for the services provided by him in the coordination of all necessary arrangements for the loan.” In the result the 3^rd defendant drew down a net loan of 4.8m USD.

6. On or about the 25 July 2008, the 3^rd defendant paid the first annual “director service fee” of 220,000 USD to the plaintiff.

7. Some five months or so later the 3^rd defendant decided that it needed another loan and in late December 2008, the 1^st defendant, Mr Johnny Chan, approached Mr George Chu again. A loan of 2 million Canadian dollars was required and arranged with the same company.

8. The agreement followed a similar pattern. On 20 January 2009 an agreement was signed by the same four directors of Lanco and the company itself, as well as the plaintiff company. This time a further 50,000shares in Lanco out of its issued capital were to be given to the plaintiff, at a nominal consideration. A further annual payment of 73,000 USD for two years was to be paid to the plaintiff for “future service, including legal and other general business counsel” as a “director service fee”. The first payment was due on the 15^th February 2009.

9. The loan agreement dated 22 January 2009 was between the same parties as the agreement of July the previous year, and signed by the same parties although the directors of Lanco appear to have signed at different times. Nothing turns on that. The usual details and terms concerning the loan are set out together with a provision in paragraph 8.2 for payment of the sum of 50,000 CAD to Mr Chu “for the services provided by him in the coordination of all necessary arrangements for the loan”. There is also a provision (§5.3) for payment of 100,000CAD to the lending company as compensation for the fact that the loan monies had been idle for a period of time during the completion of all arrangements. In the event Lanco drew down a net figure of 1.85million CAD.

10. The 3^rd defendant’s board by resolutions, accepted the transfer by Mr John Chan of 150,000 of his shares to the plaintiff in July 2008, confirming Mr Chan’s personal promise of those shares in an e-mail to Mr George Chu in June 2008.

11. In the following year, 2009, the 1^st defendant completed the transfer forms and bought and sold notes in respect of the total of the 200,000 shares and sent them to the plaintiff. They had been duly stamped and duty paid.

12. The 3^rd defendant made no further payment of the “director service fees”. In 2012 it went into receivership. The loans have not been repaid. The shareholdings on the face of it transferred by the 1^st defendant have not been registered by Lanco. The plaintiff commenced proceedings against the defendants. The two actions have been consolidated, a sensible course. It is not really necessary for me to consider the nature of the two actions but because the defendant has raised some argument on the procedural course I shall identify them shortly.

13. On the 17 July 2012 the plaintiff issued an originating summons against the three defendants (as respondents) seeking rectification of Lanco’s register by recording the plaintiff (applicant) as holder of the 200,000 shares.

14. On the 6 July 2012 the plaintiff had issued a writ indorsed with a Statement of Claim against the 3^rd defendant, Lanco.

15. Eventually the two matters came before Deputy High Court Judge Le Pichon on 26 October 2012 for what appears from the transcript to be a directions hearing. It was adjourned but the parties quickly consented to consolidation of the two actions which was embodied in an order made by the Judge on 1 November 2013. Eventually the plaintiff took out a summons for summary judgment which came before Anthony Chan, J on the 29 May 2013. By reason of the 1^st defendant’s enforced absence in the PRC it was adjourned for three months. It has now come before me.

16. Only the 1^st defendant has taken part in these proceedings. The 2^nd defendant was absent, and the 3^rd defendant is in receivership. The receivers have written stating that they did not propose to participate in the hearing.

17. Mr Leo Remedios who appeared for the 1^st defendant suggested initially that in the directions hearing before Deputy Judge Madam Le Pichon, she had found against the plaintiff on the matter of summary judgement. In my view she did no such thing. Ultimately she adjourned the matter for it to come back before her in a week’s time when directions would be given and it would be converted into a writ action. Sensibly the parties agreed to consolidation and it did not come back before the Judge (other than to make a formal order on the consent summons.)

18. Then the plaintiff took out the summons for summary judgement. Mr Remedios said that this was either the plaintiff having a second bite at the cherry or an attempt to revive a tactic which he had abandoned. I do not accept this argument. There had been no previous finding by the judge and certainly no abandonment by the plaintiff. The action having simply moved on to “a consolidated basis” which allowed the plaintiff to make a formal application in the overall context.

19. His next argument was in effect that the plaintiff’s remedies were against the company, not the 1^st defendant. But the plaintiff sought its remedy in the form of the rectification of the share register to record the holding of 200,000 shares by the plaintiff, against all defendants.

20. The 1^st defendant who had provided stamped transfer forms and bought and sold notes in respect of the shares, had to all intents and purposes held out to the plaintiff that the shares had been properly transferred to him and all other formalities completed. Mr Chan was the majority shareholder, with or without the 200,000 shares in question. He had been the prime mover throughout. He had the power to require Lanco to register the shareholding. He had promised the shares out of his own holding. The company had already approved the transfer of the initial 150,000 shares. The plaintiff has properly formulated its claim against him as well as against the company Lanco.

21. Mr Remedios then turned his direction to the matter of “economic duress” which he had set out fully in his skeleton argument which I had read. He had a number of hurdles to overcome.

22. It may well be that the plaintiff and/or Mr George Chu, were handsomely rewarded for the services for which the defendants expressed themselves to be so grateful in both agreements- “we are grateful for the assistance rendered.” But the joint venture on the mainland for which the loan was required may have been somewhat speculative and risky, I do not know. It may also have been somewhat difficult to get a loan on the open market on more favourable terms. Lanco may have run into solvency problems. They certainly needed a second loan within six months of the first.

23. Directors’ services and a shareholding may have been some form of supervision of the 3^rd defendant as it progressed with the joint venture. If real problems ensued the loan might not be repaid and the shareholding might be worthless. The only guaranteed benefit to the plaintiff, or Mr George Chu, was the commission paid “upfront”, to use a colloquial commercial expression.

24. As stated earlier the company is now in receivership, its shares are currently without value, and the loans have not been repaid.

25. On paragraphs 18, 19, 23 and 29 of the affirmation of the 1^st defendant he refers to matters which, on the face of it, appear to constitute his “economic duress” argument. There may have been some hard-nosed commercial reality in Mr George Chu’s pressure on the defendants to make up their minds quickly as to whether they wanted to proceed with the loan or loans, or not:

“George Chu told me that if we did not accept his revised demand we would have to go and find another funder to lend us the money.”

“We believed that if we did not accept his demand he would not doubt take steps to sabotage the execution of the loan agreement… We had reluctantly agreed to accede to George Chu’s demand.”

26. Whatever force that argument may have had if the fact of the first loan and circumstances stood on their own, it was in my view wholly dissipated by the fact that five or six months later the defendants came to ask for another loan and they incorporated the same benefits in principle for the plaintiff as in the first agreement- the expression of gratitude appears in the preamble to that in exactly the same words. Paragraph 26 of the affirmation contains – “I discussed with the other shareholders of Lanco and we considered that we had no alternative but to accede to George Chu’s demands.”

27. Those were agreements concluded at arms length. Although a later paragraph speaks of “expressed or implied threats to sabotage the loans” I consider that to be hyperbole introduced “post facto” to try and bolster the argument. As if the second loan, five or six months later, had not already terminated the validity of the defendants’ argument, one sentence in a letter from the defendants’ solicitors, Messrs Zeke Mok & Lo in January 2012 puts an end to it – “We are instructed by the said Mr Chan… who was at the time and still is the director of Lanco, that he has very limited, if not no recollection of the matter (the transfer of 150,000 shares in Lanco from Mr Johnny Chan, and the appointment of the plaintiff as a director of Lanco).” It was an odd letter in its entirety in view of the 1^st defendant’s contentions.

28. Very realistically, Mr Remedios conceded that in relation to these two aspects there was really nothing he could add by way of explanation.

29. His final argument concerned an aspect of the consideration for the loan, specifically the alleged “past” consideration. It does not matter whether any aspect of the consideration is antecedent or part of the written contract, and to be paid or given subsequently. In this case we have both. No aspect is hidden or uncertain. The contract finally signed, reflected future provision of part of the consideration with full knowledge of what was to be paid by way of commission when the loans were drawn down. All three aspects of the consideration provided either immediate payment (the commission) or future provision (the directors’ fees and share transfers).

30. The defendants have no answer to the plaintiff’s claims under the respective agreements and judgement will be entered for the plaintiff in terms of the prayer in the consolidated Statement of Claim.

31. The defendants will pay the plaintiff’s costs to be taxed if not agreed. Although a nisi order, I anticipate that there cannot be any resistance to this.