DUTFIELD INTERNATIONAL GROUP CO LTD v. NINE DRAGON INVESTMENT LTD AND OTHERS

HCCL 11/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTIONNO 11 OF 2013

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R E A S O N S   F O R   D E C I S I O N

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1.  The plaintiff in this action applied for summary judgment against the 1^st and 3^rd defendants on the basis of a loan agreement and a guarantee both dated 4 January 2010. The writ was issued on 12 April 2013. The statement of claim was served on 8 May. The Order 14 summons was issued on 21 June. At the end of the hearing of the application on 26 September I granted unconditional leave to defend. These are my reasons for doing so.

2.  In order to understand the arguments raised by the defendants, it is necessary to know the background and the events alleged by the defendants that gave rise to two earlier loans in 2009. 

3.  On 27 July 2009, a company called Billion Trend Holdings Limited (“Billion Trend”), which is controlled by the 3^rd defendant Mr Gao Hunter (“Gao”), entered into an agreement to purchase from a third party the property known as Neich Tower at 128 Gloucester Road, Hong Kong, at the price of $668 million.  A deposit of $66 million was paid to the vendor.  The sale and purchase was to be completed on 30 September 2009.

4.  By 19 August 2009, a bank had been found which had committed in writing to offer banking facilities in the amount of $448 million to finance the purchase of the building.  Gao needed additional finance in the sum of approximately $190 million for the purchase.

5.  Gao says that he had discussed the purchase of Neich Tower with a close business associate and friend called Luo Xian Ping (“Luo”), and that Luo had encouraged him to proceed, telling him that he (Luo) would be able to raise sufficient money for Gao to finance the purchase and also to find a buyer for the property later. In particular, Luo told Gao that he could obtain finance for Gao from, among others, one Ivy Chan.  Later, Luo told Gao that Ivy Chan could arrange the entire amount of financing of $190 million in Hong Kong currency.

6.  By late September 2009, the firm of Hong Kong solicitors Messrs S H Chan & Co had been engaged to act for Gao.  The solicitor who had actual conduct of the matter was a consultant of that firm, Alfred Law (“Law”).  It is now common ground that Law was and is the husband of Ivy Chan, but according to the defendants, they did not know this then.

7.  Ivy Chan did manage to procure financing in the amount of $190 million.  The lender was a company called Dadra Inc (“Dadra”), a company said to be owned by one Tony Cheung, with whom Ivy Chan was familiar.  It is evident from the contemporaneous documents that the borrower was originally to be Harvest Superior Limited (“Harvest Superior”), a company wholly owned by Gao which in turn wholly owned Billion Trend, the purchaser of the building.  At the last minute, Nine Dragon Investment Limited (“Nine Dragon”), the 1^st defendant herein, was substituted.

8.  The reason for substituting Nine Dragon appears to be that, as a company intended to have an issued and paid-up capital of $1 million, any loan made to it would by virtue of s 24(5) of the Money Lenders Ordinance (Cap 163) be exempt from the prohibition in s 24(1) against lending at an effective rate of interest that exceeds 60% per annum. Neither Harvest Superior nor Billion Trend, being BVI companies with an issued capital of US$1, attracted such exemption.

9.  Nine Dragon appears to have been a shelf company provided by the lender’s solicitors to Gao.  There is in evidence a written instruction dated 25 September 2009 signed by Gao to his assistant Wang Song (“Wang”) to form Nine Dragon with a paid-up capital of not less than $1 million. 

10.  The return of allotments suggests, however, that it was only on 29 September 2009 that the new shares were allotted and paid up.  Further, Gao says that he did not receive the corporate documents of Nine Dragon from the lender’s solicitors until 27 October 2009 and that Nine Dragon did not have any bank account to receive any funds for the subscription of the new shares.

11.  In the event, a loan agreement was signed between Dadra and Nine Dragon on 25 September 2009 for a loan of $190 million for a term of 40 days.  Under that agreement, Nine Dragon had to pay the lender interest at the rate of 3.5% per month (or 4.2% per month upon default in the payment of principal or interest) and an arrangement fee at the rate also of 3.5% per month.

12.  Separately, an arrangement fee of $12.6 million had to be paid by Gao’s group to Dutfield International Consultants Limited (“Dutfield Consultants”), a company that belonged to Ivy Chan.

13.  The loan proceeds were advanced by Dadra in two tranches on 25 and 29 September 2009 respectively.  A sum of $6.5 million was deducted from the loan proceeds and paid by Dadra directly to Dutfield Consultants as part payment of its arrangement fee by Gao or Nine Dragon.

14.  With the bank financing and financing from Dadra, the purchase of the Neich Tower was completed on 30 September 2009.

15.  Gao says that despite his earlier assurance, Luo was unable to find a buyer to whom Billion Trend could on-sell the building within a short time.  Gao therefore had to ask for an extension of the loan.  Ivy Chan agreed to procure an extension, but asked Gao to settle the balance of the earlier arrangement fee in the sum of $6.1 million ($12.6 million less $6.5 million) and demanded a new arrangement fee of $15.2 million.

16.  Gao says that he had no alternative but to agree.  As demanded, he personally remitted $6.1 million to Dutfield Consultants on 27 October 2009.  On the same day, a further loan agreement was entered into between Nine Dragon and Dadra for a loan of $190 million repayable on 4 May 2010, in effect therefore extending the 40-day loan for 6 months from 4 November 2009.  Interest was to be charged at 5% per month on the whole amount of $190 million.

17.  As Gao had not paid the arrangement fee of $15.2 million for the extended loan, Ivy Chan began to chase him for payment in November 2009. 

18.  Towards the end of 2009, Luo told Gao that as no buyer could still be found for the building, Gao would be required to repay the loan to Dadra immediately, unless he sought help from Ivy Chan and provided additional security including his house on the Peak and 300 million shares in China Bio-Medical Regeneration Technology Ltd, a company whose shares are listed on the GEM board of the stock exchange of Hong Kong.  Gao then asked whether, if he were to provide additional security, a further loan of RMB 30 million could be advanced to him.  Luo told Gao that it could be done provided he sign an agreement with Ivy Chan and pay her the previous outstanding arrangement fee of $15.2 million.

19.  As a result, on 4 January 2010, Nine Dragon entered into a loan agreement with the plaintiff herein, Dutfield International Group Company Limited, which was a company owned wholly or substantially by Ivy Chan.  The loan was not for RMB 30 million but for $57 million instead, and was for a period of two months. No interest was specified in the agreement for the two-month term.  Default interest thereafter would be charged at 4% per month. 

20.  Gao signed a guarantee.  Other security documents were executed including a share charge over 300 million shares in China Bio-Medical (executed by the 5th defendant) and a second mortgage on the house on the Peak (which was owned by the 2nd defendant which in turn was a company held by Gao and the 4th defendant).

21.  According to the defendants, no money was directly advanced by the plaintiff to Nine Dragon pursuant to the loan agreement or at all, and that they did not know how the sum of $57 million was constituted until a breakdown was supplied by the plaintiff through Luo in September 2012.

22.  The breakdown is as follows:

(1) $34 million, being the equivalent of RMB 30 million paid to Shenzhen Century Epitech;

(2) $6.8 million, being 2 months’ interest payable to the plaintiff at 10% per month on the loan of $34 million;

(3) $15.2 million, for the arrangement fee for the extended loan of $190 million; and

(4) $1 million, for interest for delay in paying the $15.2 million arrangement fee.

23.  Nine Dragon did not repay the $57 million loan in two months or at all. The plaintiff says that, as at 3 April 2013, the interest outstanding amounted to $84,360,000. 

24.  On 26 November 2012, 300 million of the shares held by the 5th defendant in China Bio-Medical were sold at the average price of $0.17 per share, for a total sum of $51 million.  Gao says that this shows that the 300 million shares charged in favour of the plaintiff had been disposed of, and that the plaintiff should give credit for $51 million.

25.  Against the above background and alleged facts, none of which (with one exception, namely, whether Gao was aware of the relationship between Ivy Chan and Law) was said by Mr CY Li, SC to be incapable of belief, and based on the arguments of counsel, I was satisfied that there are at least the following areas that warrant investigation at trial.

26.  On the plaintiff’s own case, the loan in question is a transaction between the plaintiff and Nine Dragon.  It is now not in dispute that Law acted as solicitor for Nine Dragon albeit apparently in his personal capacity rather than as a consultant of S H Chan & Co.  On this basis he has arguably placed himself in a position of conflict of interests and duty.  On the one hand he had a duty to Nine Dragon to act in its best interests and to give it proper legal advice; on the other hand his wife, whose interests he would naturally be inclined to favour, was effectively on the other side of the transaction.

27.  Initially Law’s position on affirmation was that he was not involved in advising or acting for Gao or Nine Dragon in connection with the loan agreement with the plaintiff at all.  After the defendants put in evidence of his personal debit notes for fees for preparing the loan documentation, however, Law said that what happened was that he had on 3 January 2010 advised he could not act for Nine Dragon in that matter because his wife’s company was the lender, that he advised Gao to obtain independent legal advice and that it was at Gao’s request that Law agreed to act in his personal capacity for Gao and Nine Dragon.

28.  Gao denied that there was any such meeting or advice given by Law.  Indeed, Gao produced records from the Immigration Department of Hong Kong showing that he was not in Hong Kong between 31 December 2009 and 5 January 2010. 

29.  This factual dispute is plainly not something I can determine based on conflicting affidavit evidence. I cannot at this stage conclude it is incapable of belief that Gao did not know Law’s relationship with Ivy Chan and that Law did not give the advice as alleged on 3 January 2010.  In any event, it is arguable that, as the defendants submit, even if Law’s latest account is taken at face value, the loan may still be impugned in law.

30.  Relying on Newgate Stud Co v Penfold [2008] 1 BCLC 46 at §§240 and 242, Mr Yu SC submitted that although the loan was not a transaction with Law himself or his own company but with his wife’s company, such a personal relationship was sufficient to give rise to a significant risk that Law had been compromised by a desire to favour his wife, so that the burden lies on the plaintiff to show that Nine Dragon had been given full information and that the transaction was demonstrably in the best interests of Nine Dragon. 

31.  Alternatively, Mr Yu SC submitted that the loan was tainted with undue influence, given that Law as the solicitor of Nine Dragon was presumed to have influence over his client and the transaction was one that called for explanation.

32.  What information was given by Law to Gao and whether the loan transaction was in Gao and Nine Dragon’s best interests are also, in my view, triable issues.

33.  Further, even if one assumes that it is plain that the loan agreement itself could not be impugned, the loan agreement is merely an agreement.  It is not proof that the loan had actually been advanced.  On the evidence, there are in my view triable issues whether each of the four components referred to above in the breakdown of the alleged loan amount of $57 million has been advanced or is recoverable.

34.  The sum of $15.2 million was represented by a cheque drawn by Ivy Chan in favour of her own company Dutfield Consultants.  Wang Song signed on a photocopy of the cheque acknowledging, notionally, that Nine Dragon had received the amount, though he did not state from whom it was received.  There is evidence that this was done as an accounting arrangement.

35.  In effect, what may have been intended by the plaintiff is this.  Ivy Chan wrote a cheque for $15.2 million.  This was treated as money advanced by the plaintiff to Nine Dragon. Nine Dragon was deemed to have received it and borrowed the amount, which it then used to pay Dutfield Consultants for the outstanding arrangement fee relating to the second loan from Dadra.  In the end, no cash passed through Nine Dragon.

36.  The problem with this component of the breakdown of the loan is this.  The first loan from Dadra was arguably not an exempted loan under the Money Lenders Ordinance because Nine Dragon did not have a paid-up capital of $1 million on 25 September 2009 when the first Dadra loan agreement was entered into or when the first tranche of that loan was advanced on 25 September 2009.  Nine Dragon only allotted new shares on 29 September 2009 to enlarge its issued and paid up capital.  The first Dadra loan was therefore arguably illegal under the Money Lenders Ordinance (especially s 24), since the effective rate of interest exceeded 60% per annum.  The second loan from Dadra, being in substance an extension of the first loan, was therefore also arguably illegal: Spector v Ageda [1973] Ch 30, 42, 45.  On this basis, it seems to me a matter for trial whether the arrangement fee of $15.2 million was also tainted with illegality.  In the light of s 27 of the Money Lenders Ordinance, which concerns remuneration and reward for procuring, negotiating or obtaining any loan, the question may depend in part on the precise relationship between Ivy Chan and Dadra and whether she was acting as agent for or in concert with Dadra, which is very much in dispute.

37.  The same problem of illegality also applies to the sum of $1 million which was supposed to be interest for the delay in paying the $15.2 million arrangement fee.  An additional problem with this sum of $1 million is that Gao denies that there was any agreement for this amount of interest.  Nor is there any documentary support for any agreed obligation on the part of Nine Dragon to pay this amount.  Again, it appears that the sum was not paid out to Nine Dragon, but treated as having been notionally lent to Nine Dragon for payment to Dutfield Consultants.  In this instance, however, there is not even a cheque drawn by Ivy Chan or the plaintiff to Dutfield Consultants for $1 million.  Mr Li SC, recognising his difficulties, said he “would not press” this claim for the purposes of the application for summary judgment.

38.  Thirdly, the sum of $6.8 million, said to be 2 months’ interest on the loan of $34 million, was again not an actual amount of cash advanced to Nine Dragon on 4 January 2010, but seems to have been treated as an amount borrowed from the plaintiff on 4 January and immediately paid back to the plaintiff as interest on $34 million for the next two months.  It was equivalent to a very high rate of interest at 10% per month.  Moreover, having gone towards making up the principal sum of $57 million, it would attract further interest at 4% per month after 3 March 2010, giving rise to interest upon interest.

39.  Ivy Chan said there was a “prior agreement” on this component before the written loan agreement was entered into.  Gao criticised her for being vague here and implicitly denied any such prior agreement.  In the circumstances it seems to me whether there was the alleged or any prior agreement to justify treating such sum as having actually been lent to Nine Dragon is a matter for trial.

40.  Finally, the sum of $34 million is said to represent the sum of RMB 30 million paid to a Mainland company of Gao called Shenzhen Century Epitech.  The defendants accept that there were actual funds received by Shenzhen Century Epitech.  They however point out that the money was remitted by a company called Shenzhen Ming Hua and contend that it has not been shown that the money was remitted on account of the plaintiff as a loan to Nine Dragon pursuant to the loan agreement in question.  They further argue that in the absence of confirmation from Shenzhen Ming Hua that it agrees with the plaintiff’s contention, Shenzhen Century Epitech may have to pay Shenzhen Ming Hua again even after Nine Dragon had paid the plaintiff.

41.  It is of note that despite that the issue has been raised in the evidence, nothing has been obtained from Shenzhen Ming Hua to clarify what its position is.  I consider that in all the circumstances of this case, an issue has been raised whether the amount advanced by Shenzhen Ming Hua is attributable to the plaintiff, which requires further investigation.

42.  Moreover, even if Nine Dragon was under an obligation to repay $34 million to the plaintiff (such as by way of restitution), there is the question of whether the proceeds of sale of the 300 million charged shares in China Bio-Medical, which amounted to about $51 million, more than off-set the amount to be repaid.  In this regard, Ivy Chan suggested in her second affirmation that she was not aware of the disposal of the sale of the shares and that she had subsequently found out that the shares were sold to discharge some loans owed to Luo and another.  This evidence is difficult to understand because Ivy Chan’s company was the chargee of the 300 million shares whose consent would ordinarily be required before any sale could be effected.  I am persuaded that this again is an area that raises triable issues.

43.  It was for these reasons that I granted unconditional leave to the 1^st and 3^rd defendants to defend the action.

(Godfrey Lam) Judge of the Court of First Instance High Court