CHIN CHOI WAN v. HONG KONG LONG SHAN PHARMACEUTICAL LTD AND OTHERS

HCA 3185/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3185 OF 2003

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J U D G M E N T

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1. The Plaintiff ("Chin") claims $1.75 million with interest thereon as due and owing from the 1st Defendant ("Long Shan") on a convertible note ("the Note") dated 30 January 2003. Chin claims the same amount from the 2nd and 3rd Defendants (collectively, "the Leungs") as guarantors of the Note under a Note Instrument ("the Instrument") dated 30 January 2003. Chin obtained summary judgment against the Defendant from Master Au-Yeung on 6 January 2004. The Defendants now appeal against that judgment.

2. By 2 letters dated 13 January 2003 (collectively, "the Mandates") Vinco Capital Limited ("Vinco") set out the terms whereby it would act as Long Shan's consultant, arranger and lead underwriter in respect of Long Shan's proposed listing ("IPO") on the Stock Exchange's Growth Enterprise Market ("GEM") board. Long Shan accepted those terms by signing them on 14 and 21 January 2003 respectively.

3. The Note which was subject to the terms of the Instrument was one of a number of convertible notes issued by Long Shan at Vinco's recommendation as a means of funding the IPO. By these convertible notes, in consideration of providing financing to Long Shan, investors received a promise to repay the principal on a certain maturity date, interest on the principal sum at a specified rate, and an option to convert the Note into Long Shan shares once listed on the GEM. The Note was to mature after 6 months from the date of signing of the Instrument (31 July 2003) unless either the option to convert the Note was exercised or the Note's maturity date was extended pursuant to the Instrument beforehand. The Instrument also contained a section wherein the Leungs irrevocably and unconditionally guaranteed all amounts due and payable under the convertible notes issued by Long Shan (including the Note).

4. By cheque ("the Cheque") dated 28 January 2003 made in favour of Vinco, Chin says that she paid $1.75 million to Long Shan. The IPO having failed to materialise, by letter dated 18 August 2003 Chin's solicitors (Messrs King & Company) demanded repayment of the principal advanced together with interest from Long Shan.

5. Mr Kenneth Chow (appearing for the Defendants) submits that there are a number of arguable defences arising out of the facts and evidence before the Court.

6. First, Mr Chow says that there is no evidence that Chin actually advanced $1.75 million to Long Shan as opposed to Vinco. Vinco paid $3,804,601.13 ("Sum X") to Long Shan, apparently as the amount remaining after deduction of various fees and expenses from the monies received from convertible noteholders (including Chin). But, Mr Chow suggests, it is unclear whether any monies paid by Chin to Vinco formed part of Sum X. While Mr Chow accepts that Vinco was Long Shan's agent for the purpose of finding investors to subscribe to the convertible notes, he says that there is no evidence that Vinco was authorised to receive on Long Shan's behalf monies advanced by individual noteholders.

7. I do not accept Mr Chow's argument. By the Mandates Vinco was plainly authorised to act as Long Shan's agent for receipt of monies paid in consideration for the issue of convertible notes. I refer in particular to the provisions in the Mandates specifying that Long Shan would receive the funds advanced by individual noteholders in a single drawdown. Those provisions imply that Vinco was actually being authorised by Long Shan to collect payments from the individual noteholders and then make the amalgamated funds available to Long Shan in a single tranche. Chin clearly paid Vinco by the Cheque and Vinco received the payment as Long Shan's agent. Whether Vinco properly accounted for the Cheque to Long Shan thereafter is purely a matter between Long Shan and Vinco as principal and agent and has no relevance to Chin's claim against Long Shan. I add that, if Long Shan feels aggrieved because by Sum X Long Shan received substantially less than $5 million from Vinco, Long Shan's remedy would be against Vinco for an account in respect of alleged acts in breach of fiduciary obligation.

8. Further, I should say that I do not regard the Mandates as merely inchoate agreements. It is true that one 13 January 2003 letter refers to its terms being "indicative". But those terms were accepted by Long Shan upon signing an express acceptance of such terms on 14 January 2003.

9. Second, Mr Chow suggests that Vinco acted not just as agent for Long Shan in relation to the issue of the Note, but also as agent for Chin and the other noteholders. Insofar as Vinco failed to explain the import of the Notes and Instrument (including the Guarantee) to the Defendants before they signed any documents, the Defendants must be presumed to have signed under Vinco's undue influence. This is because, as consultant, Vinco would have stood (Mr Chow says) in a fiduciary position towards the Defendants and the Defendants would have reposed trust and confidence in Vinco. Asked what evidence there was of Vinco's agency for the Chin, Mr Chow pointed to the fact that Chin paid the Cheque to Vinco and Vinco paid interest to Chin on the monies provided under the Note.

10. Again, I disagree with Mr Chow. In my view there is no evidence that Vinco was Chin's agent. That payment was made to Vinco and that Vinco looked after the servicing of the debt by paying interest to Chin on Long Shan's behalf, cannot be indicative of any alleged agency relationship. This is especially so where, as I have concluded, it was envisaged that Vinco would receive (and Vinco was authorised to receive) payments from individual noteholders and consolidate them into one drawdown amount for Long Shan. I note also that one of the 13 January 2003 appears to have envisaged payment of a handling fee to Vinco by Long Shan for administering the servicing of the debts arising from the convertible notes. This to my mind would be consistent with Vinco's payment of interest to Chin on Long Shan's behalf.

11. Third, Mr Chow says that the loan and guarantee security are rendered unenforceable by the Money Lenders Ordinance (Cap.163) ("MLO"). However, the loan is exempt from the operation of the MLO by reason of s.24(5) thereof since Long Shan has a paid up share capital of more than $1,000,000. I do not think that it makes a difference that the loans here are coupled with an option to convert monies due into Long Shan shares. Guarantees of exempted loans are, in my judgment, likewise exempted from the MLO for the reasons which I have previously set out in Chow Kin Ming v Always Fortune Ltd HCA 906/2003, 5 January 2004 (at §§17-35). Therefore, I think that Mr Chow's argument based on the MLO against the enforceability of the Leungs' guarantees are not valid.

12. In any event, Mr Chow's submission that the loan and guarantee are rendered unenforceable under the MLO because they amount to charging interest of some 80%, depends on combining the interest claimed by Chin pursuant to the Instrument with the monies deducted by Vinco from the $5 million raised by the issue of convertible notes. It is only when one adds the interest claimed by Chin with the amounts deducted by Vinco that one obtains a putative interest of some 80%. If one only regards the interest claimed by Chin, Mr Chow's argument encounters difficulty.

13. I do not see why the Plaintiff's claimed interest should be added together with Vinco's deductions as Mr Chow submits. There is no evidence, for instance, of collusion between Chin and Vinco. Again, if Long Shan believes that too much has been deducted by Vinco from the $5 million raised out of the convertible notes, Long Shan's remedy is against Vinco. The deductions by Vinco do not provide a defence against Chin's claims. Thus, as far as Chin's action against the Defendants is concerned, one can only look at the interest claimed by Chin under the Instrument.

14. For the foregoing reasons, I dismiss the Defendants' appeal.