ALICE ZHANG (alias CHEN XINGPENG) v. SUN XUFENG AND OTHERS

HCA 881/2018

[2019] HKCFI 2415

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 881 OF 2018

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REASONS FOR DECISION

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1.  This is the application dated 16 November 2018 made by Alice Zhang (“the plaintiff”) for summary judgment against Or Yi Tung (“the 3^rd defendant”) in this action brought against, inter alia, the 3^rd defendant. It relates to a deed of guarantee and indemnity dated 28 April 2017 executed by the 3^rd defendant as security for repayment of monies due to the plaintiff under a loan of RMB 60 million granted by the plaintiff to a PRC company (前海無界 (深圳) 跨境電子商務有限公司) (“the borrower”) pursuant to a written loan agreement dated 28 April 2017 (“the loan agreement”). At the conclusion of the hearing, summary judgment was granted for the reasons set out below.

BACKGROUND FACTS

2.  As security for the loan granted, each of the three defendants to this action executed a deed of guarantee and indemnity in similar terms in favour of the plaintiff up to the amount of RMB 70 million together with costs and expenses.  The deed (clause 19) expressly provided that the laws of Hong Kong apply although the loan agreement itself is governed by PRC law.

3.  The monies were advanced to the borrower in May and June 2017.  The borrower defaulted and as at 19 March 2018, the outstanding indebtedness including interest was in excess of RMB 66 million.

4.  The plaintiff’s demands dated 12 January 2018 sent to the borrower and the defendants for repayment went unmet.

5.  Pursuant to the loan agreement, the plaintiff served a notice of arbitration at the Shenzhen Arbitration Commission (“SAC”) claiming repayment of the loan and interest.

6.  Meanwhile, the borrower applied to the Shenzhen Intermediate People’s Court of Guangdong Province for a declaration that the loan agreement was not effective and that there was no valid arbitration agreement.  The PRC court in its ruling of 20 June 2018 dismissed the borrower’s application.

7.  The arbitration proceeded and on 26 October 2018, the SAC rendered its arbitral award in the plaintiff’s favour, inter alia, holding the 2^nd and 3^rd defendants jointly liable for debts of the 1^st defendant under the loan agreement.

8.  When the defendants failed to make payment under their respective guarantees and indemnities notwithstanding service on them of letters dated 23 March 2018 demanding repayment, the plaintiff commenced the present proceedings.

9.  Since their commencement, the 2^nd defendant has absconded and 1^st defendant has consented to judgment being entered against him.

THE DEED OF GUARANTEE AND INDEMNITY (“THE DEED”)

10.  For present purposes, (B) and (C) of the preamble should be noted: (B) stated that one of the conditions precedent under which the plaintiff agreed to grant the borrower a loan or credit of RMB 60 million was that the 3^rd defendant agreed to provide a guarantee to the plaintiff in full in respect of the borrower’s debt under the loan agreement, and agreed to execute the deed of guarantee, and (C)stated that the 3^rd defendant confirmed his agreement “to all the terms and conditions under the loan agreement”.

11.  In the operative part of the deed, it suffices to highlight, inter alia, the 3^rd defendant “unconditionally and irrevocably” agreed and undertook to immediately repay to the plaintiff all the sums of money and liabilities owed by the borrower to the plaintiff (“the indebtedness”), irrespective of whether such indebtedness was incurred as the principal debtor or the guarantor even if such loan might be invalid (clause 1); the 3^rd defendant agreed to be also liable as the principal obligor of the outstanding indebtedness and not merely as guarantor (clause 2); the security to be a continuing security (clause 4); the deed was enforceable without first sanctioning or enforcing other guarantees or security (clause 6); and all payment under the deed would not be subject to any conditions or deductions (clause 8).

LEGAL PRINCIPLES

12.  The principles to be applied are well-established and are non- controversial.  The party resisting summary judgment has to show that a bona fide defence exists and bears the evidential burden of establishing triable issues, condescending upon particulars.

13.  Factually, it has to be determined whether what the defendant says is believable rather than whether its version of events is to be believed.  As a matter of law, even if what the defendant says is believable, it has to be determined whether it amounts to an arguable defence in law: see per Ma J (as he then was) in Schindler Lifts (Hong Kong) Ltd v Ocean Joy Investments Ltd [2003] 1 HKC 438 at §10.

THE DEFENCES

14.  Mr C C Ho, counsel for the 3^rd defendant, put forward two defences and submitted that they raise two triable issues, namely that (A) in substance, the loan agreement is in fact an investment agreement and not a loan agreement; and (B) the 3^rd defendant executed a guarantee in reliance upon the representation made by the plaintiff and the 2^nd defendant that the shares of a PRC company referred to as “YX” (as to which see further §§20 and 21 below) would be allotted to the borrower.

(A)  Whether agreement was for investment as opposed to a loan

15.  The 3^rd defendant’s case is that the monies advanced by the plaintiff was an investment rather than a loan because it was said that three of its provisions, namely, Articles 5, 6 and 13, are “contradictory” to the operation of a true loan:

  (1)  Article 5 gave the plaintiff an “additional” return on top of entitlement to interest in the form of 1% of the borrower’s revenue stream payable monthly, irrespective of any profit or loss.

  (2)  Article 6 gave the plaintiff the right of supervision over the fund and its application.

  (3)  Article 13 was in the following terms:

“ Debt-to-equity: [The plaintiff] is entitled to choose to convert the Loan to shares of the company directly operated by ‘water droplet platform’ within three days following the expiration of one year after signing of this contract. [The plaintiff] has the right to assign the shares at the discount of 60% of the value of the company directly operated by ‘water droplet platform’ as at the due date of the Loan assessed by a third party approved by both parties. If [the borrower] refuses this arrangement, [the borrower] or the guarantors shall repay double principal to [the plaintiff].”

16.  As earlier noted, the loan agreement is governed by PRC law.  In fact, on the borrower’s application, the PRC court (see §6 above) had already considered and rejected the very same grounds of challenge, and, in its ruling of 20 June 2018, it upheld the validity of the loan agreement.  Further, the SAC has delivered an arbitral award also upholding the validity and enforceability of the loan agreement.

17.  When analysed, the true nature of the agreement under which the monies were advanced to the borrower is not and cannot in my view operate as a separate and independent defence to the plaintiff’s claim.

18.  Whether or not it is an investment agreement is neither here nor there given that it is clear from the deed that the 3^rd defendant’s obligation thereunder was that of a principal debtor.  In such case, the validity or otherwise of the loan agreement is irrelevant and has no impact on the 3^rd defendant’s liability to indemnify the plaintiff.  The co-extensiveness principle regarding guarantees has no application: see Shenzhen Development Bank Co Ltd v New Century Int’l (Holdings) Ltd HCA 2976/2001, unreported, DHCJ Lam (as he then was), 31 July 2002 at §§41 and 44.   

19.  Rather the 3^rd defendant is really merely invoking article 13 in aid of the defence of misrepresentation which is the only defence that is relevant for present purposes and to which I now turn.

(B)  Misrepresentation

20.  This was first raised by the 3^rd defendant in her defence filed on 2 August 2018.  It alleged that:

  (i)  a PRC company referred to as “YX” operates a platform in the PRC referred to as “SD” on the internet for electronic commerce;

  (ii)  the plaintiff and the borrower (a PRC company incorporated in 2016) are investors in SD; and

  (iii)  the 3^rd defendant signed the deed based on a representation.

21.  §9 of the 3^rd defendant’s defence raised alternative defences of misrepresentation and alternatively breach of warranty .  The misrepresentation defence was based on the following matters:

  (i)  the 2^nd defendant and the plaintiff represented to the 3^rd defendant that on the 3^rd defendant signing the deed, the borrower would be allotted 10% of the shares in YX; and

  (ii)  the 2^nd defendant was never allotted the shares as represented by the 2^nd defendant and the plaintiff.

22.  The alternative plea of breach of warranty was based on a warranty given by the plaintiff to the 3^rd defendant collateral to the deed that the borrower would be allotted 10% of the shares in YX and that the allotment was never made. This plea was not pursued at the hearing.

23.  On its face, the misrepresentation defence as pleaded makes little sense: the connection or relationship between the plaintiff and YX is nowhere apparent.  As there is nothing to show that the plaintiff was in a position to allot shares in YX, it is not credible that such a representation would have been given.

24.  On 25 February 2019, the 3^rd defendant filed her affirmation in opposition to the Order 14 summons.  It is stated in §3 that (i) the 2^nd defendant is the owner of YX; (ii) the 3^rd defendant has no equity interest in YX; (iii) it was the 3^rd defendant’s intention that “in due course” she would become one of the equity owners of SD, either through shares in YX allotted to her personally or to corporate vehicles.  In the context, the “corporate vehicles” referred to must be referable those which the 3^rd defendant controlled/owned.

25.  The 3^rd defendant came to know the plaintiff’s husband (“Zhang”) who had expressed an interest in investing in SD through the 1^st defendant.  Then in §8 it was stated that the 1^st defendant and the 3^rd defendant intended the borrower to play some minor role in concerts being organised through SD for the summer of 2017 but that Zhang who wished to control the venture through the borrower proposed that he would use his wife’s name to advance funds to the borrower in the form of a loan and he would through his wife (the plaintiff) have an option to acquire the shares of YX.

26.  In §9, it was said that Zhang further proposed that each of the defendants enter into an unlimited guarantee for the loan whereupon the 3^rd defendant stated that she did not agree because neither the borrower nor the 3^rd defendant would acquire any equity in YX or SD.  It was said that at that juncture that “the 2^nd defendant and Zhang represented that in due course 10% shares in YX would be allotted to [the borrower]”.

27.  It is apparent that they are glaring inconsistencies between the 3^rd defendant’s pleaded defence and her affirmation in the following respects:

(i) the maker of the representation:

(a) defence: the 2^nd defendant and the plaintiff;

(b) affirmation: the 2^nd defendant and Zhang.

(ii) when the allotment of 10% shares in YX is to be made:

(a) defence: on signing the deed;

(b) affirmation: in due course.

(iii) the party to make the allotment of 10% shares in YX:

(a) defence: the 2^nd defendant;

(b) affirmation: unstated.

28.  At the hearing, the 3^rd defendant sought to distance herself from her pleading.  However, her affirmation made six months later made no mention of any ‘error’ made in the defence nor of any intention to amend the pleading.  In those circumstances, this factor has to be taken into account when evaluating the credibility of the defence advanced.

29.  Those matters aside, there is no evidence as to (i) who controls/owns the borrower; (ii) the 3^rd defendant’s connection/interest if any in the borrower such that she would be prejudiced by the failure to make the allotment; and (iii) how or why the plaintiff who was not even a shareholder of YX would be in a position to cause or effect the transfer of 10% of YX shares.

30.  As regards the last point made in the preceding paragraph, counsel for the 3^rd defendant relied on article 13 of the loan agreement (as to which see §15 above).  It was submitted that the effect of that article is that the plaintiff had the option during the three-day period immediately following the maturity of the loan to convert the loan into shares at a discount of 60% of the value of the shares as at the due date of the loan independently assessed.

31.  However, the company whose shares formed the subject matter of the option is the company “directly operated” by the “water droplet platform” [1].  Assuming that the “water droplet platform” corresponds to and means SD, there is no evidence of the identity of the company being referred to.  Nowhere in the defence or affirmation was the name of the company being operated by SD named/identified.  Although Mr Ho appeared to assume that it meant YX, according to §2 of the pleaded defence, YX is the operator of the platform but the option is over shares in the company directly operated by SD.  There is no evidence before the court that SD “directly operated” YX.

32.  In short, I cannot see how the defence of misrepresentation can even get off the ground given the lack of clarity and the many shortcomings of the alleged representation identified above.

33.  It should be mentioned that Ms Frances Lok, counsel for the plaintiff, submitted that, in any event, if the plaintiff did make the statement as alleged in the defence, it is nothing more than an honest statement of what will happen in the future.  That is quite different from a statement of fact.  It is simply a prediction, not a representation: see Cartwright on Misrepresentation, Mistake and Non-disclosure (2017 edition) at 3-43.

34.  For the reasons set out above, summary judgment was granted.

35.  The plaintiff sought an order for costs to be paid by the 3^rd defendant on an indemnity basis as provided in the deed to which there was no objection.  Accordingly, costs with certificate for counsel were ordered to be paid on an indemnity basis, such costs to be summarily assessed.