SKY MOTION HOLDINGS LTD v. CHINA CREATE CAPITAL LTD

HCA 1151/2019

[2021] HKCFI 54

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1151 OF 2019

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REASONS FOR DECISION

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1.  There were 2 summonses before me in the hearing on 5 January 2021, namely, (a) the plaintiff (“P”)’s summons for summary judgment on liability; and (b) the defendant (“D”)’s summons for leave to amend the Defence. At the end of the hearing, I granted unconditional leave to defend to D and ordered that costs of P’s summons be costs in the cause of these proceedings, with a certificate for 2 counsel. I also granted leave to D to amend the Defence in the manner as shown in the draft Amended Defence annexed to D’s summons and ordered that costs of and occasioned by the amendments be to P in any event, to be taxed if not agreed. These are my reasons for the decision.

The parties’ respective cases

2.  At the material times, Ms Wang Bingqin (“WBQ”) was the sole shareholder and the sole director of P.

3.  D was and is controlled by Mr Zhang Wei (“Zhang”) and his wife Ms Wang Tao (“WT”).  At the material times, Ms Huang Xuli (“Huang”) was WT’s assistant.

4.  P’s case is that in or around 2017, one Ms Cheuk Hiu Nam (“Cheuk”) introduced D’s controllers, Zhang and WT, to WBQ, the then sole shareholder and the sole director of P.  Since then, P and D had several dealings with each other.

5.  P’s claim in these proceedings is based upon a written agreement entitled “借款协议” signed by P and D on 25 October 2018 (“the Agreement”).  According to the Agreement:

(1)  P is obliged to pay a sum of HK$343,912,270 by 25 October 2018 (“the Payment Obligation”) to the bank account(s) specified by D.

(2)  Upon P’s discharge of the Payment Obligation, D is obliged to transfer to P (“the Transfer Obligation”) the following notes (“the Subject Notes”) and shares (“the Subject Shares”):

(a)  US$35m 12% Senior Secured Notes due 2020 (stock code: 5190) by 2 November 2018;

(b)  5.45m shares of Jiayuan International Group Limited (Stock Code: 2768) (“Jiayuan”) by 2 November 2018; and

(c)  85.76m shares of Jiayuan by 23 November 2018.

6.  Clause 2(4) of the Agreement provides:

“[P]保证相关借款金额于2018年10月25日支付至[D]指定账户，如果未及时到账，[P] 应2018年10月26日起，按千分之五／日的标准向[D]支付赔偿金，同时[D]会将 [the Transfer Obligation] 顺延至对应的工作日。”

7.  P’s case is that it has fully discharged the Payment Obligation.  However, in breach of the Agreement, D has only partially but not fully performed the Transfer Obligation.  P’s case as pleaded in the Amended Statement of Claim is as follows:

“C. [P’s] Full Performance of the Agreement

7. On 25 October 2018 (i.e. the date of the Agreement), Ms. Huang Xuli (“Huang”), the assistant of [WT] at the time, provided [WBQ] of [P] with the details of the bank accounts designated by [D] in accordance with clause 2(4) of the Agreement (“D’s Designated Accounts”).

8. Pursuant to [D’s] instructions given through Huang, [P] were to transfer to [D] and/or its designated parties HK$455,662,270 in total, which included the Sum of HK$343,912,270 under the Agreement. The remaining HK$111,750,000 was for the repayment of certain loans granted by [D] to [P] prior to the Agreement.

9. The details of the account holders of D’s Designated Accounts and the sums to be transferred to the respective D’s Designated Accounts were as follows: -

Name of Account Holders	Amount
Ai Yangxu	HK$20,000,000
Silver Power Enterprise Limited	HK$20,000,000
New Merit Group Limited	HK$110,000,000
Blooming Balance Limited	HK$40,000,000
Cai Lintan	HK$40,000,000
Shi Sujun	HK$32,500,000
Lin Lifen	HK$40,000,000
China Create Capital Limited (i.e. the Defendant)	HK$153,162,270
Total	HK$455,662,270

10.  In full performance of the Agreement on the part of [P], the Sum had been transferred to D’s Designated Accounts on or before 25 October 2018 in accordance with [D’s] instructions.

11.  In the premises, [D] has since 25 October 2018, or alternatively since 2 November 2018 and/or 23 November 2018 respectively (being the respective dates of transfer of the Subject Notes and the Subject Shares pursuant to the Agreement), been holding the Subject Notes and/or the Subject Shares on constructive trust in favour of [P].

Particulars

(1)  The Agreement is a valid, binding, and specifically enforceable contract which the Plaintiff has fully performed;

(2)  Upon receipt of the Sum in full, [D] was, and still is, under a mandatory and unconditional personal obligation to transfer, inter alia, the Subject Notes and the Subject Shares to the Plaintiff on or before 2 and 23 November 2018 respectively.

D.  [D’s] Breach of the Agreement / Constructive Trust

12.  On or around 31 October 2018, in part performance of the Agreement, [D] transferred 3,450,000 ordinary shares in Jiayuan International (of the 5,450,000 shares due on 2 November 2018 pursuant to the Agreement) to the Plaintiff.

13.  On 2 November 2018, in breach of clauses 2(1) and 2(2) of the Agreement, [D] failed to transfer the Subject Notes and 2,000,000 ordinary shares in Jiayuan International (or any part thereof) to [P].

14.  On or around 8 November 2018, [D] transferred 2,000,000 ordinary shares in Jiayuan International due on 2 November 2018 to [P]. Despite repeated demands by [P], [D] still failed and/or refused to transfer the Subject Notes (or any part thereof) to [P] in breach of the Agreement.

15.  On 23 November 2018, in further breach of the Agreement, [D] wrongfully failed and/or refused to transfer the Subject Shares (or any part thereof) to [P].

16.  Since November 2018, [P] repeatedly demanded [D] to transfer the Subject Shares and the Subject Notes to [P].  Despite [P’s] repeated demands, in breach of the Agreement, [D] still wrongfully fails and/or refuses to transfer the Subject Shares and the Subject Notes (or any part thereof) to [P].

17.  Further, in paragraph 42 of the affirmation of [WT] filed on 16 August 2019 in these proceedings, she deposed that on a date or dates unbeknownst to [P], [D] disposed of the Subject Notes and the Subject Shares (or part thereof) in breach of trust.”

8.  On 24 June 2019, P obtained an ex parte Mareva and proprietary injunction from DHCJ Leung to freeze D’s assets up to the value of HK$343,912,270.  On 25 September 2019, after a contested inter partes hearing before Coleman J, P obtained an order continuing the injunction until the trial herein or a further order made by the court with some variations (“the Injunction Ruling”[1]).  One of the variations is that the amount being frozen by the injunction has been increased to HK$500,000,000.

9.  In the Amended Statement of Claim, P claims for specific performance of the Agreement, alternatively damages.  In P’s application for summary judgment, Mr Patrick Chong (together with Mr Michael Ng), counsel for P, has made it clear that P is no longer making any proprietary claim or seeking specific performance of the Agreement, for D has confirmed that it no longer holds the Subject Notes and the Subject Shares.

10.  For the purpose of considering P’s summons and D’s summons, I have taken the matters set out in the draft Amended Defence into account on de bene esse basis.  Mr Chong has no objection to this approach.

11.  D denies that apart from the Agreement, P and D have any other dealings.  D has raised various defences to P’s claim, namely:

(1)  P has not yet made full payment under the Agreement, and hence the Transfer Obligation has not yet arisen (the “no full payment” defence).

(2)  According to P’s case, the instructions given by D through Huang to P as pleaded in [8] of the Amended Statement of Claim are contained in a Fund Arrangement Table.  The authenticity of the Fund Arrangement table is disputed by D.

(3)  Without prejudice to the above, Huang does not have the authority to send the Fund Arrangement Table on behalf of D to P.

(4)  There is an oral agreement reached by Cheuk on behalf of P and WT on behalf of D in early November 2018, by which the original timetable in the Agreement for the performance of the Transfer Obligation has been postponed.

(5)  There is another oral agreement reached by Cheuk on behalf of P and WT on behalf of D on 4 November 2018, by which the Agreement has been amended.

(6)  Under the Agreement, D is required to pay interest to P if D has failed to discharge the Transfer Obligation on time.  It is D’s case that the interest rate imposed is too high and the interest clause is a penalty clause, and hence that clause should not be enforceable.

12.  I would focus on the “no full payment” defence.  For the reasons set out below, I am of the view that the “no full payment” defence is an arguable defence.  D is saying that P has only paid HK$153,162,270 to D pursuant to the Agreement.  The sum paid to D is less than half of the consideration specified in the Agreement.  As a result, D is not obliged to perform the Transfer Obligation in accordance with the original timetable set out in the Agreement. 

The principles

13.  The principles concerning applications under Order 14 have been succinctly summarized by DHCJ Wilson Chan (as he then was) in Li Chuen Kwai v Po Lam Construction Development Ltd[2].  In that case, the learned judge said:

“11. As far as the plaintiff’s claim is concerned:

(1) An application for summary judgment must be supported by an affidavit verifying the facts on which the claim is based [Order 14, rule 2(1), Rules of the High Court].

(2) The Statement of Claim must be good and complete in itself; any defect or omission in the Statement of Claim cannot be corrected or supplemented by the plaintiff’s affidavit. If the defect is one of substance, the application for summary judgment will be dismissed [see: Hong Kong Civil Procedure 2014 at Practice Note 14/1/5].

(3) This means that an Order 14 application has to proceed on the case as pleaded, and it is those facts (as pleaded) which have to be verified on affidavit.

(4) Where the assertions in the plaintiff’s affirmation constitute a material deviation from the plaintiff’s pleaded case, the plaintiff will have failed to verify his claim as pleaded, and summary judgment should not be granted [Lin Jan v Long Xiaobo, HCA 1516/2012 (Judgment dated 4/09/2013)].

(5) Equally, summary judgment will not be granted where the plaintiff’s affidavit evidence is materially different from and inherently inconsistent with his/her case in the Statement of Claim [see: Sin Yuk Hung v Sin Tung San, HCA 474/2013 (Judgment dated 18/12/2013)].

12. As far as the defendant’s defence is concerned:

(1) The defendant shoulders the burden to satisfy the court that he has a real or bona fide defence (ie that there are triable issues), or that there ought for some reason to be a trial of the plaintiff’s claim.

(2) However, a complete defence need not be shown. The defence set up need only show that there is a triable issue or question or that for some other reason there ought to be a trial; and leave to defend ought to be given unless there is clearly no defence in law and no possibility of a real defence on the question of fact.

(3) Although the mere assertion in an affidavit does not, ipso facto, provide leave to defend, the court will not embark upon a mini trial of the action on paper and leave to defend will be granted unless the defence raised is so incredible or so contradicted by contemporaneous documents or circumstances that it becomes clear that the defence is a sham.

(4) The test is not whether the defendant’s assertions are to be believed, rather it is whether those assertions are believable, ie capable of being believed. If so, the defendant must have leave to defend.

(5)  Whether the defendant’s assertions are believable is a question that should be answered not by taking those assertions in isolation bur rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute.”

14.  Order 14 proceedings are only for clear and obvious cases. The reminder given by Roger JA (as he then was) in Ng Lung Sang Anita v Lam Yuk Lan[3] should always be borne in mind:

“Those advising clients ought to be very cautious before commencing O86 and O14 proceedings. They are there only for clear and obvious cases. The old adage that if you have to sit down, it is not a case for O14 is equally applicable today as it was when it was first coined.”

The “no full payment” defence

15.  Among the 8 sums set out in the table in [9] of the Amended Statement of Claim (“the Table”), by [20] and [21] of the Affirmation of WBQ dated 26 March 2020, P has clarified that the HK$20,000,000 to Ai Yangxu was transferred on 23 October 2018 and that sum does not concern the Agreement.  In respect of the 7 remaining sums, D says that only the HK$153,162,270 transferred to D’s account is the payment made to D pursuant to the Agreement.

16.  Mr Chong submits that the “no full payment’ defence is contradicted by (a) the contemporaneous and circumstantial evidence and (b) D’s own evidence and part performance of the Agreement.  Mr Chong argues that:

(1)  P’s transfer of the sum of HK$455,622,270 on 25 October 2018 is supported by contemporaneous banking records.  This was more than the sum specified in the Agreement, and the transfer was in strict accordance with the Fund Arrangement Table given by D through Huang.

(2)  Further, after the transfer of HK$455,622,27, D had all along treated the sum specified in the Agreement as having been fully paid.  On 31 October 2018 and 8 November 2018, D partly performed the Agreement by transferring a total of 5.45 million Jiayuan shares to P.  Such conduct plainly shows that the sum specified in the Agreement had indeed been fully paid. Otherwise, D would not have partly performed the Agreement, given that no obligation would have arisen in the absence of full payment.

(3)  WT never complained about any lack of full payment.  If full payment really had not been made, D would have had raised this with P.

(4)  The above should be considered against the background that on 24 October 2018 and 25 October 2018 (the date when the Agreement was signed after 3:45pm):

(a)  P had repeatedly told D that the money was ready to be transferred and wanted to sign the Agreement as soon as possible.

(b)  Under the Agreement, P was required to pay hefty interest if there was any delay in payment.

(c)  At the time, D and WT desperately wanted the money as soon as possible.

(5)  It is therefore inconceivable that P had not transferred the money in full to D and that on the other hand D would not repeatedly chase after P for the full payment.

(6)  Instead, D simply acknowledged the liability to transfer the Subject Shares and the Subject Notes, and never for once made any protests upon demands.  For instance:

(a)  On 30 October 2018, Cheuk urged WT to transfer the Subject Shares and the Subject Notes to P.  In response, WT confirmed that D was working on it (“已经在办”).  WT therefore did not make any protest that P had not made payment in full.

(b)  On 1 November 2018, Cheuk urged WT again to transfer the shares/notes.  In response, WT told Cheuk that she could rest assured that WT was making sure the transfers would be made (“ok我已经盯着办了 你放心”).

17.  Mr Clark Wang, counsel for D, submits that the “no full payment” defence is an arguable defence.  Mr Wang submits:

(1)  No combination of any sums in the Table could add up to the amount of HK$343,912,270.  Further, in respect of the remaining amount, ie the HK$111,750,000 mentioned in [8] of the Amended Statement of Claim, no particulars have been provided by P notwithstanding that D has made a request for such particulars.  P claims that the remaining $111,750,000 is “for the repayment of certain loans granted by [D] to [P] prior to the Agreement”[4] or “concerned other dealings between [P] and [D]”[5]. However, no particulars concerning these other dealings have been provided, let alone evidence.  In particular, it has not been explained by P:

(a)  who were the parties to these loans;

(b)  when were these loans incurred;

(c)  what were the terms of each loan; and

(d)  what was the outstanding amount payable under each loan.

(2)  It is D’s case that apart from the Agreement, there has never been any other dealings between P and D.  WT as the sole shareholder and the sole director of D at all material times does not even know many of the recipients such as Silver Power Enterprise Ltd, Shi Suijun and Cai Lintan.  Company search also shows that none of the recipient companies has any relationship with D.

(3)  WT explained that from D’s perspective, there was already partial payment, the adjournment of the original timetable was the agreed theme throughout the subsequent negotiations, and the subsequent transfer of Jiayuan shares were out of repeated requests from Cheuk.  According to the Agreement, the original timetable for the performance of the Transfer Obligation would be automatically postponed as a result of no full payment from P as scheduled.  Even though only partial payment was made, the deferment of the timetable means that there was not much financial prejudice to D and there has already been at least a substantial sum of money paid.  From a commercial point of view, there is no need for D to push P.  It is therefore understandable that during the subsequent conversations, WT and Cheuk were more concerned with subsequent arrangements than the Agreement itself.

(4)  On the other hand, no complaint has been made by P to D in respect of the alleged breaches either.  Even though WBQ alleges that she personally chased Huang for performance of the Agreement, such allegation is unsustainable for the following reasons:

(a)  No particulars have been provided.

(b)  The allegation is inconsistent with P’s own pleading.  In P’s Further and Better Particulars of the Amended Statement of Claim (“the FBP”), it is averred that the demands were made during face to face meetings on several occasions between Cheuk and WT at Conrad Hotel in Hong Kong from in or around November 2018 until in or around April 2019.

(c)  Despite clear pattern of communications between the parties through WeChat messages and WhatsApp messages, no complaint can be found in writing or through any kind of message at all.

18.  Mr Chong refers to some whatsapp messages from Cheuk to Huang in late October and in November 2018, showing that Cheuk did ask D to transfer the Subject Shares to P.  Mr Chong says that these are complaints made by P concerning D’s breach of the Agreement. Mr Wang submits although there have been some requests from Cheuk concerning the transfer of shares, there has never been any complaint from P alleging that D has breached the Agreement.

19.  Having considered the evidence adduced by the parties and the submissions made by Mr Chong and Mr Wang respectively, I am of the view that the “no full payment” defence put forward by D is an arguable defence.

(1)  P says that apart from the Agreement, there are some other dealings between P and D.  This is the reason for paying the HK$111,750,000 pleaded in [8] of the Amended Statement of Claim.  These other dealings are denied by D.  Bearing in mind that the sum involved in these other dealings is a very substantial sum, if P’s case on this point is true, there must be documentary evidence in support of these other dealings.  However, as to these other dealings, P has chosen not to provide any particulars, let alone evidence.

(2)  Mr Chong submits that the other dealings are irrelevant in these proceedings and P should not trouble the court by producing documents concerning the other dealings in these proceedings.  With respect, I am unable to accept the submission made by Mr Chong.  The existence or the non-existence of the other dealings is a contested issue in these proceedings, and the answer on this issue would have a direct impact on the strength of the parties’ respective cases.  Further, as submitted by Mr Wang, even if the other dealings exist, the total amount involved in the other dealings would also be a material issue.  If the total involved in the other dealings is more than HK$117,750,000, by paying HK$455,622,270 to D, P may have only paid off the total owed to D in the other dealings and part of the sum (not the full sum) specified in the Agreement.

(3)  Mr Chong submits that in [16] of WT’s Affirmation dated 16 August 2019, WT has admitted that she knows New Merit Group Limited (“NM”), Blooming Balance Limited (“BB”) and Lin Lifen (“LL”).  Mr Chong submits that these are D’s friends, and the payments to NM, BB, and LL should be treated as payments to D under the Agreement.  I am unable to accept these submissions.

(a)  WT in the same paragraph of her affirmation denied that she had ever given any instruction to P to transfer any sum to NM, BB and LL.  There is no admission from WT that D has instructed P to pay parts of the sum specified in the Agreement to NM, BB and LL.

(b)  It is P’s case that the HK$455,622,270 paid to D is the sum specified in the Agreement plus the amounts payable to D in some other dealings.  There is no plea in P’s pleadings saying that the sums paid to NM, BB and Lin Lifen are solely for the Agreement and not for the other dealings.  There is also no evidence on this point.

(4)  Taking all the aforesaid into account, I am driven to the conclusion that D’s denial of the existence of the other dealings is believable.

(5)  While the non-existence of the other dealings is believable, whether P’s case is true would become a triable issue.  If the other dealings in fact do not exist as alleged by D, applying common and commercial sense, there would be no reason for P to pay D HK$455,662,270, when the payable sum specified in the Agreement is only HK$343,912,270.  It is arguable that the actual amount paid by P to D under the Agreement may only be HK$153,162,270 as alleged by D, and all the other amounts as shown in the Table are not related to D and the Agreement.

(6)  Mr Chong submits that D’s conduct and part performance of the Agreement constitute circumstantial evidence showing that full payment has already been made by P.  Mr Wang has made a reply to these submissions.  I am persuaded by Mr Wang’s submissions.

(7)  In particular, I have to mention that as to the alleged complaints made by P to D concerning D’s breach of the Agreement, P is bound by its own pleading, ie the FBP.  “Summary judgment, if it is to be given, is to be given on the pleaded case.”[6] In its application for summary judgment, P is not entitled to put forward a case which is inconsistent with the FBP[7].

(8)  With all the aforesaid in mind, in my view, it cannot be said that it is clear and obvious that full payment must have been made by P.

20.  I note that P has successfully obtained a Mareva injunction against D.  That means P has shown a good arguable case against D[8].  However, it is trite that the existence of a good arguable defence does not necessarily negate a good arguable case[9].  In this case, although P has a good arguable case against D, I am of the view that D also has an arguable defence to P’s claim.  The controversies in these proceedings have to be resolved at trial and cannot be resolved summarily.

21.  Since I have concluded that the “no full payment” defence is an arguable defence and this case would proceed to trial, I refrain from making any comments on the other defences put forward by D.  I am of the view that D should be given unconditional leave to defend. While unconditional leave to defend is given, the usual costs order is that costs be in the cause[10]. Since a substantial amount is at stake in these proceedings, it would be appropriate for me to grant a certificate for 2 counsel.

22.  Since this case would proceed to trial and the proceedings are still at an early stage, there is no reason to refuse D’s application for leave to amend the Defence.  Mr Chong has agreed that leave to amend the Defence should be given to D in these circumstances.  In accordance with the normal practice, costs of and occasioned by that application should be to P in any event.

Disposition

23.  For the reasons set out in the above, I made the order as set out in [1] above.  I thank all counsel for the assistance rendered to the court.