ACUTE RESULT HOLDINGS LTD v. LIONCAP GLOBAL MANAGEMENT LTD

HCA 820/2018 & HCA 2918/2018

(Heard together)

[2019] HKCFI 1580

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 820 OF 2018

________________________

________________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2918 OF 2018

________________________

D E C I S I O N

________________________

1.  This is an application by the plaintiff in HCA 2918/2018 against the defendants, Lioncap Asia Limited (“Lioncap Asia”) and Lioncap Global Management Limited (“Lioncap Global”) for judgment in default of defence pursuant to Rules of the High Court, O 19 r 7, by summons dated 4 March 2019.

2.  The facts can be stated very briefly.  The plaintiff owned certain shares in Cabeen Fashion Limited, a company listed on the Hong Kong Stock Exchange.  Pursuant to a financing transaction, the plaintiff entered into a share pledge agreement in late 2016 with Lioncap Global agreeing to pledge 134 million shares in Cabeen as security for a loan from Lioncap Asia.  This was the “First Tranche of Shares”.

3.  The shares were placed with China Merchant Securities (HK) Company Limited as custodian.

4.  There were subsequent agreements that varied the number of shares pledged as security.  By April 2017, 47,080,000 shares remained.  This has been called the “Remaining First Tranche Shares”.

5.  In around July 2017, another 21 million shares were provided by the plaintiff to the defendants as security.  This has been called the “Second Tranche of Shares”.

6.  By November 2017, of the 21 million shares, only 2,259,209 shares remained, which had since been returned to the plaintiff.  The remaining 18,740,791 shares have not been returned, which have been called the “Missing Second Tranche Shares”.

7.  The plaintiff discovered that some of the shares pledged had, without its knowledge or consent, been transferred out of the custodian accounts and disposed of.  There were also dividends paid on the shares which Lioncap Global had not released to the plaintiff.  In addition, the plaintiff found out that Lioncap Global had been sued by another party in a separate action for similar allegations for wrongful transfer out and disposal of pledged shares.  Accordingly, the plaintiff commenced an action in HCA 820/2018 in April 2018, against Lioncap Global.

8.  On 10 July 2018, on the plaintiff’s application against Lioncap Global for default judgment in HCA 820/2018, Deputy Judge Saunders gave judgment for the plaintiff (see [2018] HKCFI 1634) in terms of:  (1) a declaration that the plaintiff is the beneficial owner of the Missing Second Tranche Shares and that they are not subject to any security in favour of Lioncap Global; (2) a declaration that the plaintiff is entitled at its election to an assessment of damages or alternatively an account of profits in relation to the Remaining First Tranche Shares and the Missing Second Tranche Shares; (3) in relation to the Remaining First Tranche Shares, accounts and inquiries as to their whereabouts, injunctions and accrued dividends in the sum of $2,259,840; and (4) in relation to the Missing Second Tranche Shares, accounts and inquiries as to their whereabouts and an order to procure their transfer back to the plaintiff.

9.  In December 2018, the plaintiff issued a new action, HCA 2918/2018, against Lioncap Asia and Lioncap Global, concerning the agreements for the financing transaction in late 2016 to April 2017, as well as the agreements between the plaintiff and the defendants for a separate financing transaction to secure a loan to one Mr Wu Chao‑hao, whereby 10 million shares in Cabeen were pledged to Lioncap Global.  The gist of the new action is to complain that both groups of agreements were vitiated by misrepresentation, or were repudiated by the defendants by breach, or were unenforceable under the Money Lenders Ordinance (Cap 163).

10.  These are alternative bases for the plaintiff’s action and, at this hearing, Mr Maurellet SC, who appeared for the plaintiff together with Mr Ng, indicated that the plaintiff is content to rely simply on misrepresentation claim if the court considers that cause of action to be established.  The representation alleged is essentially that it was the defendants’ intention that the shares pledged would not be sold or otherwise dealt with in the absence of an event of default.  The plaintiff relied on it and entered into the agreements in question and transferred the shares to the custodian.  It is pleaded that, contrary to the representation, the defendants had in fact always intended to sell or deal with the shares pledged in the absence of any event of default, and that the representation had been made fraudulently or recklessly. 

11.  It is of course well established that a representation as to a person’s present intention is capable of constituting a representation as to an existing fact.  In the absence of any defence filed by the defendants, I consider that what is pleaded in the statement of claim entitles the plaintiff to say that the agreements were voidable for misrepresentation and to rescind them ab initio provided there does not exist any bar to rescission.  In that connection, counsel have very properly drawn attention to the fact that the plaintiff has previously obtained judgment in HCA 820/2018 and to the question whether that judgment may be a bar to rescission.

12.  While the relief granted in that action, as referred to above, is not necessarily incompatible with the claims in the present action, it is right to say that the basis of claim in the previous action was breach of the Share Pledge Agreement and its Supplemental Agreement, and that the action could be said to have been brought to enforce the obligations of Lioncap Global to account for the shares under those agreements.  As such, that judgment does seem to me inconsistent with the claim for rescission now pursued, because one cannot both seek to enforce the direct obligations under a contract and to rescind that contract ab initio which seeks to restore the parties to a position as if the contract had not been entered into.

13.  I am satisfied, however, that the part of the judgment in HCA 820/2018 relating to the Remaining First Tranche Shares can be set aside, as has been applied for by the plaintiff by summons in that action.  As the Privy Council held in Balgobin v South West RHA[2013] 1 AC 582, a plaintiff can apply to have a default judgment set aside or withdrawn where it did not amount to an unequivocal election.  I think the plaintiff should be allowed to apply for the prior judgment to be set aside to the extent necessary in this case.  As stated in the plaintiff’s affirmation, it was not aware of the full factual position or of its right to rescind at the time of seeking default judgment then (see Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2007] 1 HKLRD 55,§119); and the relief sought in the first action was actually not in itself incompatible with a rescission of the agreements.

14.  For these reasons I shall set aside the relevant part of the judgment in HCA 820/2018 and enter default judgment in the plaintiff’s favour on the above basis along the lines already discussed with counsel.  Essentially, there will be restitutio in integrum in the sense that the defendants should return to the plaintiff the shares, the dividends received and the interest received, together with interest at a commercial rate of prime plus 1% per annum on the money to be returned, while the plaintiff is to return such part of the principal sum of the loan as it has received, together with interest, again at a commercial rate of prime plus 1 % per annum.

15.  An order should be drawn up accordingly for the court’s approval.