LO MING CHI CHARLES AND ANOTHER v. FULLPOWER INVESTMENT HOLDINGS CORP. AND ANOTHER

HCA 1937/2014

[2021] HKCFI 3073

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1937 OF 2014

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BETWEEN

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J U D G M E N T

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1.  These proceedings were commenced by Peace Broad Holdings Limited (“Lender”) against the Defendants, Fullpower Investment Holdings Corp (“Fullpower”) and Felix Wong Sin Hua (“Wong”), as a simple claim based on a Loan Agreement dated 26 April 2013 (“Loan Agreement”) and made between the Lender and the Defendants, for the Defendants’ repayment of the outstanding loan of $8,047,441 and outstanding interest. Fullpower was the named borrower under the Loan Agreement, and Wong was the named guarantor. The Loan Agreement provided for the principal loan of $40 million (“Loan”) to be advanced by the Lender to Fullpower, repayment of which Loan was guaranteed by Wong, with a maturity date of 31 December 2013 (“Due Date”). There is no dispute that in breach of the Loan Agreement, Fullpower had failed to repay the Loan on the Due Date, and further, failed to pay the 2^nd and 3^rd installments of interest when they fell due on 26 July 2013 and 31 December 2013.

2.  The Loan was secured by 2 share charges, one over 28.6 million shares comprising 4.5% of the shareholding in Cheong Ming Investments Limited (“CM”) (“CM Charge”), and one over 16,667 shares comprising 33.33% of the shareholding in Fullpower (“Fullpower Charge”), both charges having been executed by Wong in favour of the Lender. CM is a company listed on the Hong Kong Stock Exchange, and at the material time the Lender was CM’s indirect wholly-owned subsidiary. Upon execution of the CM Charge and the Fullpower Charge, the certificates of the CM Shares together with instruments of transfer executed in blank and a power of attorney in favour of the Lender were deposited with the Lender.

3.  Upon the failure by Fullpower and Wong on demand being served to make payment of the Loan, the Lender became entitled to and did enforce its right under the CM Charge, in June and July 2014, to sell the 28.6 million shares in CM (“CM Shares”) on the market, and received from the sale a sum of $22,744,802.34, and dividends of $14,281,380, totaling $37,026,182.34. The amount realized was insufficient to cover the Loan and the interest accrued under the Loan Agreement, and a balance of $8,047,440.68 remained outstanding. These proceedings were instituted for recovery of this amount, together with further interest, and costs.

4.  The proceedings were instituted in September 2014, in the name of Charles Lo Ming Chi (“CL”) as 1^st Plaintiff, and the Lender as 2^nd Plaintiff (the Lender having been joined by an amendment made to the Writ on 12 May 2015). The Lender’s rights, title and interests in the Loan, the CM Charge and the Fullpower Charge had been assigned by the Lender to CL by virtue of a Deed of Assignment made on 30 April 2014 (“Assignment”). This was permissible under clause 20 of the Loan Agreement and clause 23 of the relevant charges. Notice of the Assignment had been given by the Lender to the Defendants on 1 May 2014, pursuant to and as provided for under clause 20.4 of the Loan Agreement. The said clause provides that from the date of such written notice, Fullpower and Wong were to assume all their obligations under the Loan Agreement to CL as the assignee.

5.  By way of defence, the Defendants claimed that the Assignment was invalid, but this was not pursued at trial.

6.  The defence relied upon, and as pleaded, is that there was an oral agreement (“Oral Agreement”) made between the Lender and Wong, at a meeting held on 16 April 2014 at a coffee shop in the lobby of Jardine House (“Meeting”), between Wong (acting for himself and Fullpower) and Mei Leung (“ML”) acting on behalf of the Lender and CM, whereby it was agreed that “payment of a sum of $33 million by (Fullpower) would fully discharge the Loan and all outstanding sums in relation to the Loan”. The Re-Re-Amended Defence goes on to plead that Wong was told at the Meeting, that the Lui family (comprising Brian Lui (“BL”) who was the Chairman of CM and a director of Fullpower, and his 2 brothers who were the only executive directors of CM) would lend $5 million to Fullpower, such that Fullpower only had to pay $28 million by way of discharge of the Loan. ML who attended the Meeting is the wife of BL, and also the Chairman of Optima Capital Limited (“Optima”), the financial adviser of CM.

7.  The Defendants claim that by virtue of the Oral Agreement, the Lender is estopped from demanding or claiming payment of the Loan for any amount exceeding $33 million. The Defendants claim that they had changed their position to their detriment, in reliance on the Oral Agreement, by incurring costs in obtaining and holding up funds to make payment of the $33 million agreed.

8.  If the Lender was entitled to enforce the CM Charge and to sell the CM Shares, the Defendants claim that the Plaintiffs had acted in breach of their duties as chargees, in causing the CM Shares to be sold at $20,804,100, which was below the best price reasonably obtainable and below the fair value of the CM Shares, and at a gross undervalue. They seek to set off against any liability under the Loan Agreement damages sustained by them as a result of the breach of duties on the part of the Plaintiffs.

9.  The issues for determination at trial were whether the Oral Agreement was made, as alleged; whether the Oral Agreement was valid, if made; whether the Plaintiffs were estopped from seeking payment of the outstanding balance of the Loan by virtue of the Oral Agreement; and whether the Plaintiffs were in breach of duties by selling the CM Shares at undervalue.

10.  The Court is the finder of facts, but the finding of facts in any case cannot be equated with the ascertainment of the truth. The whole truth is seldom disclosed by witnesses. In a case such as the present, where the core issue in dispute is the existence or otherwise of an oral agreement, and where the evidence of the protagonists are polarized as to whether the Meeting took place at all, the task of the Court as the finder of facts is to decide these disputed facts on a balance of probabilities, on the basis of such evidence as is available and presented, weighing the inherent probabilities and improbabilities of the parties’ respective assertions, and checking such assertions against the parties’ conduct, such contemporaneous documents as are available, and the undisputed or undisputable facts. Demeanour of the witnesses can be taken into consideration, but the courts have recognized that demeanour is merely, and mostly concerned with, “whether the witness appears to be telling the truth as he now believes it to be” (per Lord Pearce in Onassis v Vergottis [1968] 2 Lloyd’s Rep 403 at 431). Often, the parties’ presentation of the evidence is not complete, the witnesses are not forthright on all aspects of the case and the Court is seldom given the entire picture.

The Oral Agreement

11.  The Meeting and the Oral Agreement have to be considered against the background of events at the material time, and an important and undisputed event is that on 26 February 2014, the Lui family (who held shares in CM and whose members were on the board of CM) and a company controlled by the family, Harmony Link Corporation (“Harmony”), had entered into an agreement to sell their 53.25% stake in CM to Manureen Holdings Ltd (“MHL”) (“Share Sale Agreement”). At all material times, the Lender was an indirect wholly-owned subsidiary of CM. Completion under the Share Sale Agreement was conditional upon the Loan, then already outstanding, being repaid to the Lender in full, or the Loan being disposed of, on or before 31 March 2014. It was for that reason that the Lender entered into negotiations with Wong in late March 2014, to restructure the Loan which had already fallen into default.

12.  The parties do not dispute that on 20 March 2014, a proposal was made (“March Proposal”) for Fullpower to make immediate repayment of $28 million of the Loan within 3 days, with the balance to be repaid on or before 31 December 2014, and for the CM Charge was to be released in respect of 9767 or 9167 CM Shares. Negotiations on the March Proposal continued, and the solicitors of both parties worked on a draft supplemental agreement to document the terms.

13.  The Defendants maintain in their evidence that on 21 March 2014, the Lender had made 2 counter-proposals to them, as evidenced by emails exchanged between Barnabas Tsang of the Lender, and the Defendants’ solicitor. The first offer was for Fullpower to repay the principal Loan in full by 31 March 2014, with overdue interest and legal fees waived, and both the CM Charge and the Fullpower Charge to be released. The second offer was for immediate partial repayment of $28 million and overdue interest of approximately $2.6 million by 31 March 2014, a conditional release of the CM Charge, and a new loan agreement to be entered into between Fullpower and the Lender for the remaining balance of $12 million, to be secured on the Fullpower Charge.

14.  It is also not in dispute that on about 31 March 2014, MHL agreed to vary the completion conditions under the Share Sale Agreement, to allow the Share Sale to proceed even if the Lender should only receive partial (instead of full) repayment of the Loan prior to completion. As a result of the variation, completion under the Share Sale Agreement could take place if:

(1) On or before 10 April 2014, the Lender and Fullpower were to enter into a legally binding agreement for partial repayment of the Loan, of not less than $20 million in cash, with the outstanding balance to be repaid on or before the 31 December 2014 (“Option 1”); or

(2) On or before 30 April 2014, CM disposed of all the shares in the Lender (including all its assets which would include the Loan) to a third party, at a consideration of not less than $20 million (so that the Lender would cease to be a subsidiary of CM) (“Option 2”); or

(3) On or before 30 April 2014, the Lender disposed of the Loan to a third party at a consideration of not less than $20 million (“Option 3”).

15.  It is the Defendants’ case, and they highlight the fact, that the Lui family were therefore driven to conclude the Share Sale Agreement and eager to resolve the Loan problem, and that it was a great incentive for the Lender to enter into the Oral Agreement with the Defendants, since it could enable the Lui family to complete their sale to MHL, as it would fulfill Option 1 for completion to take place.

16.  On the face of the contemporaneous documents produced, it can be seen that on 1 April 2014, Optima (which was CM’s financial adviser on the Share Sale Agreement) submitted a draft announcement to the Securities Futures Commission (“SFC”) in connection with the sale of a majority stake in CM to MHL, and explained the terms of the supplemental agreement proposed to be entered into between the Lender, Fullpower and Wong (“Proposed Supplemental Agreement”), along the lines of the March Proposal. On the evidence of BL and ML, the SFC took the view that the Proposed Supplemental Agreement contained conditions which were favorable to Fullpower as a shareholder of CM, namely an extension of the repayment date of the Loan, and the proposed release of the CM Charge of which the market value of the collateral is not proportionate to the proposed amount of the partial repayment of $28 million. As such favorable conditions were not extended to other shareholders of CM, it would in the view of SFC constitute a “special deal” under Rule 25 of the Codes on Takeovers and Mergers and Share Buybacks, and would require the approval of the independent shareholders, with the independent financial adviser publicly stating that in its opinion the terms of the transaction proposed are fair and reasonable, and the consent of the Executive was also required (“Rule 25 Requirements”). This is evidenced by the communications exchanged in writing between Optima and the SFC on 1 April 2014, 2 April 2014 and 3 April 2014 and the amendments made to the draft announcement to be issued by CM.

17.  On the Plaintiffs’ case, the Rule 25 Requirements and their effect on the Share Sale Agreement made it commercially impossible for the Lender and the Defendants to proceed with the Proposed Supplemental Agreement. ML’s evidence is that as the SFC regarded the March Proposal and any favourable treatment of Fullpower’s repayment of the Loan (either in part, or by instalments) to be a special deal, SFC would require MHL to increase the price for its acquisition of the CM Shares by way of general offer, and MHL would not find that acceptable. On the evidence of BL, the decision of not proceeding with the Proposed Supplemental Agreement was communicated to the lawyers of Fullpower in April 2014, and CM was left with exploring Option 2 and Option 3 only.

18.  The Share Sale Agreement had been publicly announced by CM. The repayment of the Loan, and the disposal of CM’s shareholding in the Lender and/or of the Loan by 30 April 2014, as conditions for completion under the Share Sale Agreement, were all disclosed in CM’s public announcement of 3 April 2014. The partial repayment of the Loan by installments was stated in the announcement of 3 April 2014 to constitute a special deal, and that CM would have to comply with all applicable requirements under the Takeovers Code. On the evidence of ML, this was included on the insistence of the SFC, although CM had initially proposed to state in the announcement that having consulted the Executive of the SFC, who had indicated that the proposed amendments to the terms of the Loan constitute a special deal, CM did not intend to proceed with the proposed amendments to the terms of the Loan.

19.  It is against such background that Wong’s claim of the Oral Agreement having been made and concluded on 16 April 2014 has to be examined.

20.  On Wong’s evidence, after the March Proposal and the Lender’s counter-offers were made in March 2014, he had been in discussion with BL and ML from early to mid-April 2014 with regard to repayment of the Loan. Wong claims that on 16 April 2014, he had the Meeting with ML, and it was ML who suggested that CM and the Vendor would accept Fullpower’s payment of $33 million in full discharge of the Loan and all outstanding sums in relation to the Loan. According to Wong, ML had immediately called BL on the phone, and had passed the telephone to him, and BL had confirmed ML’s suggestion. Wong was also told by BL that BL/the Lui family would lend $5 million to Fullpower/Wong for such repayment, such that Fullpower would only have to pay $28 million as originally proposed (referring to the March Proposal which had been made). On Wong’s evidence, he had happily accepted the deal on the spot.

21.  Although Wong acknowledged in his evidence that ML had told him on around 17 - 28 April 2014 that they were waiting for SFC approval for the repayment proposal in the Oral Agreement, and that ML had further proposed that they should find a third party to “take up the Loan”, Wong denies that he had been told in April 2014 of the SFC’s view that the Proposed Supplemental Agreement constituted a special deal.

22.  According to Wong, it was on or after 23 April 2014 that he was suddenly informed by ML that the Lui family had decided to find a friend to “take up” the entire Loan instead. He also learned from CM’s announcement on 30 April 2014 that CM had assigned the Loan, the CM Charge and the Fullpower Charge to CL (the 1^st Plaintiff). Wong does not dispute that there was no concluded Supplemental Agreement (only a proposed agreement), but he claims that the Plaintiffs are estopped, by virtue of the Oral Agreement, from seeking payment of anything more than $28 million from Fullpower and him. It is also pertinent that what Wong claims as the Oral Agreement is not an agreement for the sale or assignment of the Loan (as may fall within Option 3 agreed between CM and MHL), but an agreement for repayment of the Loan (to fall within Option 1).

23.  Having considered the evidence of the witnesses, and the contemporaneous documents which I find more telling than the self-serving assertions of the witnesses, I am not satisfied that there was an Oral Agreement concluded, for the reasons set out below.

24.  It is inherently improbable and commercially unlikely that the Lender, and BL and ML on its behalf, would agree to the Oral Agreement allegedly made on 16 April 2014.

25.  I can accept the submissions made on behalf of the Defendants, that BL, ML and the Lender must have had good reasons to want the Share Sale Agreement to be successfully completed. For that reason, the Defendants submit that BL, ML and the Lender must have been eager to secure fulfilment of the conditions imposed by MHL, and to attain an agreement either for the Loan to be paid in full, or to be sold, or for the shareholding in the Lender to be sold, before the time stipulated in the Share Sale Agreement and the variation thereof involving the 3 options for completion. Even ML agreed in her testimony that Optima and CM very much wanted the Share Sale to go through and that she was doing her best to make that happen. That is all understandable.

26.  However, the evidence is that first, the alleged Oral Agreement was said by Wong to have been made only on 16 April 2014. The deadline for the agreement to be concluded under Option 1 had already lapsed. Whether Wong himself knew of such a deadline is not material. What is material is the knowledge of BL and ML – they knew, and to them, the Oral Agreement came too late on 16 April 2014, and there could have been no reason for CM and the Lender to agree to it if it was for the purpose of securing completion of the Share Sale by compliance with the conditions imposed.

27.  Further, the more convincing evidence is that the SFC had made it clear to CM, Optima and MHL, from the first notice given to SFC of the intended agreement to permit Fullpower to make partial repayment of $28 million by 30 April 2014, with payment of the balance by 31 December 2014, that the transaction was considered to be a special deal conferring favorable conditions on Fullpower not otherwise extended to other shareholders of CM. The Oral Agreement was still for payment of $33 million, to be in full discharge of the Loan, and would involve a write-off of $7 million of the principal Loan and of accrued interest. There was no reason for BL, ML, or CM to expect that the SFC would change its view of such a transaction being a special deal, to be approved by the SFC without the Rule 25 Requirements being complied with. Rather than facilitating the Share Sale and enabling completion under the Share Sale Agreement, the Oral Agreement would create hindrances to the completion. ML explained in her evidence that the Oral Agreement meant that a general offer would have to be made by MHL, offering $0.30 more in the price for each share to be acquired, and requiring MHL to raise an additional and substantial amount to pay for the CM Shares to be acquired. She did not consider that MHL would agree to this and in her view, there was no point to even raise such a deal for MHL to consider.

28.  ML’s evidence is that since SFC had indicated its view on 1 or 2 April 2014 on the Proposed Supplemental Agreement as a special deal (as recorded in the fax message dated 2 April 2014 from Optima to the SFC), by mid-April 2014, she did not have any idea in her mind as to negotiating Option 1 further with MHL. Her evidence is firm and credible, and inherently more probable.

29.  As the Plaintiffs have emphasized, the terms of the alleged Oral Agreement are even more favorable to Fullpower than either the March Proposal made by Wong, which was rejected by Lender then, or the Proposed Supplemental Agreement. It involved writing off $7 million of the principal Loan, and accrued interest (of over $2 million). None of the earlier proposals had involved writing off any part of the Loan. As Counsel for the Plaintiffs submitted, it was simply inherently improbable and incredible for BL and ML to have agreed, on 16 April 2014, to the terms of the Oral Agreement. If they had been keen to procure a deal with Wong/Fullpower in mid-April 2014, and even if Option 1 was still an open solution to propose to MHL, BL and ML should as a matter of commercial common sense have preferred to revive and accept the March Proposal, or adhered to the terms of the Proposed Supplemental Agreement instead. It is unbelievable that ML would have (on Wong’s case) proposed at the Meeting, and agreed to, terms that were significantly less favorable to the Plaintiffs than under the Proposed Supplemental Agreement.

30.  It was suggested to ML that by mid-April, CM/the Lender had not been able to find any buyer of the shares of the Lender or of the Loan, and that they would have no alternative but to propose the Oral Agreement to Wong. However, ML was firm in her evidence that she had already fully considered the capabilities of CM achieving the necessary goals within the agreed timeline, and the likelihood of their complying with the conditions imposed, which were not in her view at the time unattainable as demonstrated by the fact that they did manage to fulfil the agreed requirements by 30 April 2014.

31.  Counsel for the Defendants further put to ML that the Lender could have negotiated a better deal with Wong, and tried again in April 2014 to persuade the SFC to accept such better deal. I agree with Counsel for the Plaintiffs, that this misses the entire point because the better deal there was for Fullpower in relation to the repayment of the Loan, the more favorable would be the treatment afforded to Fullpower, and the more likely it was for the deal to be considered to be a special deal. As ML explained, the SFC had made it clear that any revision to the Loan Agreement favorable to Fullpower would constitute a special deal, unless Fullpower made immediate and full repayment of the Loan and interest thereon under the Loan Agreement. On these premises, the alleged Oral Agreement would no doubt have constituted a special deal.

32.  I accept as credible the evidence of BL and ML, that it was unlikely for MHL to have agreed to further vary the completion conditions of the Share Sale Agreement, even if CM/the Lender should be prepared to accept the Oral Agreement, as the special deal issue created by the Oral Agreement would mean that MHL would need not only the financial resources but also the time required to increase the price of the general offer to be made to all the shareholders of CM. As ML explained, MHL had wanted to achieve completion quickly. It had already agreed reluctantly to postpone the deadline for completion from 31 March 2014 to 30 April 2014, and to ML, it was unlikely that MHL would be prepared to reopen and negotiate further with CM the terms of the treatment of the Loan. On ML’s evidence, she had considered that it was futile to attempt to seek further time from MHL, and that to revisit the Loan Agreement and the terms of the Oral Agreement with MHL would simply mean that the Share Sale would fall through.

33.  In my judgment, Wong’s evidence on the Oral Agreement and its terms had been vague, and was ever shifting.

34.  As Counsel for the Plaintiffs highlighted, not only was the Oral Agreement not mentioned in any of the contemporaneous documents and correspondence exchanged between the parties and their solicitors, but the correspondence contradicted the existence of such Oral Agreement. When the Plaintiffs demanded for the Defendants’ payment of the outstanding Loan in June 2014, the Defendants’ solicitors had made no mention of the fact that the parties had orally agreed on a discharge of the Loan by payment of $33 million (or $28 million, less the loan from the Lui family). In the letter dated 30 July 2014, the Defendants’ solicitors referred only to the original and aborted March Proposal, which involved the Defendants’ immediate payment of $28 million. In their earlier letter of 20 June 2014, the solicitors referred to the Defendants having been in active discussion with the Lender on a “repayment proposal”, and of an agreement “in principle” having been reached, but no terms or details were mentioned at all of such agreement in principle. If there had, indeed, been an Oral Agreement concluded, for the Defendants’ payment of $33 million with $5 million to be advanced by the Lui family, it would have been obvious, natural and simple for the Defendants’ solicitors to have so stated in their letter of 20 June 2014, on receipt of the Plaintiffs’ demand for full payment of the outstanding loan. The only mention made, of the “in principle” agreement for a repayment proposal was not even suggested to be final, since the letter of 20 June 2014 from the Defendants’ solicitors went on to state that the Defendants were still willing to discuss feasible repayment terms, and were open to suggestions from the Plaintiffs. There was certainly no claim in the letter that the Lender and/or the Lui family were in breach of, or had resiled from, any concluded agreement for discharge of the Loan, and/or for the loan of $5 million to be advanced. It is highly incredible for the letter to be silent on these matters, if the Oral Agreement had indeed been made. From the letter, it is plain that Wong and Fullpower themselves had not regarded that any Oral Agreement as alleged had been reached, or that there had been any final and concluded agreement made as to when and how the Loan was to be repaid.

35.  In his original witness statement, Wong only stated that ML had suggested that the Lender would accept $33 million in full discharge of the Loan and all outstanding sums thereon, with the Lui family lending $5 million to the Defendants. No mention was made in the statement as to how and when the $5 million was to the repaid. In the course of cross-examination, Wong confirmed that there had been no discussion at all at the Meeting, as to the details of the alleged loan of $5 million.

36.  Nor was any mention made in Wong’s statement, of how the CM Charge and Fullpower Charge were to be disposed of - particularly when there would still be an outstanding $5 million from the Defendants. As Counsel for the Plaintiffs pointed out, in the earlier discussions on the March Proposal and on the Proposed Supplemental Agreement, the CM Charge and the Fullpower Charge had been the subject matter of specific discussion and agreement. In the March Proposal which involved immediate partial repayment of $28 million and payment of the balance by 31 December 2014, the CM Charge was to be released in full, and the Fullpower Charge was to be partially released. As reflected in the 1 April 2014 fax from Optima to the SFC, the Proposed Supplemental Agreement which involved partial repayment of $28 million by 30 April 2014 and a final repayment on 31 December 2014, the CM Charge was to be released upon receipt of the first repayment. How the CM Charge was to be dealt with, and when the CM Shares were to be released, must have been material considerations for the Oral Agreement, but Wong made no mention of any discussion or term having been agreed in relation to the CM Charge.

37.  It is clear that Wong’s evidence on the Oral Agreement is roving and moulded to his specific purposes. In denying that the Oral Agreement was more favorable to him than the March Proposal and the Proposed Supplemental Agreement, Wong claimed that it was not more favorable, because he had the CM Shares and they were worth more than $40 million, and further, that they were to be sold at the general offer price. This was asserted by Wong for the first time, in the course of cross-examination and in response to a question from the Court, that this had been discussed and agreed at the Meeting. However, how the CM Charge was raised, how the sale of the CM Shares at the general offer price related to the terms of repayment of the Loan, and how that would render the Oral Agreement less favorable, was not explained and is difficult to comprehend.

38.  Whilst it may be true that Wong was not personally involved in the discussions and negotiations between Optima/CM/the Lender and the SFC on the Proposed Supplemental Agreement as a special deal, I reject his evidence that he had not been informed of this as being a hurdle to the Proposed Supplemental Agreement. His evidence as to when he found out, that the SFC regarded the Proposed Supplemental Agreement as a special deal, was vague and evasive to the extreme. His solicitors had been in discussion and negotiation with the solicitors for the Plaintiffs on the Proposed Supplemental Agreement, albeit not directly involved in the latter’s correspondence with the SFC. Wong’s answers in cross-examination, as to when he came to know of the SFC’s view on the Proposed Supplemental Agreement, and why it could not be pursued because of the special deal issue, roved from: “a bit later than mid-April”, to “before May”, to “sure it was after May”, to “sure it was before May”, then back to “after May”, in a sequence of about 15 short questions; to his final answer of “Not much difference, April or May, 30 April and 1 May, with a difference of one day”.

39.  From his background, it is clear that Wong was an experienced investor and player on the stock market, and he was being advised by experienced solicitors in the field. It is incredible that he was novel to the concept of special deals, and their impact on the Proposed Supplemental Agreement, the Oral Agreement (if made) and the Share Sale Agreement. He accepted under cross-examination that although the Defendants and the Plaintiffs had agreed on the terms of the Proposed Supplemental Agreement, the agreement itself had not been signed, precisely because Optima had explained to him that the SFC considered that the transaction could not proceed. When it was put to Wong that it was because of the difficulties resulting from the Proposed Supplemental Agreement being a special deal under Rule 25, that the Lender and the Defendants did not continue to discuss the repayment and restructuring of the Loan, Wong also agreed. From the evidence, it is simply improbable and incredulous, that the Defendants and their solicitors did not know that the Proposed Supplemental Agreement had to be submitted to the SFC before it could be finalized, and it is inherently improbable that the solicitors for the Plaintiffs would not have informed the solicitors for the Defendant in April 2014 (as the Plaintiffs claim), after the exchanges with the SFC on 1 April to 3 April 2014, that the SFC had considered the Proposed Supplemental Agreement to be a special deal, such that the Rule 25 Requirements would have to be complied with. There was simply no reason for BL/ML/Optima to withhold this from the Defendants or their solicitors, when they are experienced in the area of deals in shares of listed companies. If Wong had known or been told that the Proposed Supplemental Agreement had to be approved by the SFC, and that SFC had considered that it could not proceed, it is incredible that he would not know that the Oral Agreement, which involved partial payment of the Loan and writing off of a part of the principal and of accrued interest, would not have been regarded by the SFC as a special deal and that the Rule 25 Requirements would have to be complied with for the Share Sale Agreement to be completed.

40.  As an example of Wong’s tendency to exaggerate his evidence, and to illustrate that his assertions are unreliable, Wong maintained in his Court testimony that Fullpower was a cash rich company, which had enough cash to make repayment of the Loan. The Defendants had originally in their Defence sought to challenge the assignment of the Loan to CL, on the basis that such assignment for $24.5 million was lower than the repayment of $28 million under the March Proposal. Wong maintained that Optima and CM should have further negotiated with MHL and SFC in April 2014, for MHL’s agreement and SFC’s approval to the Loan being repaid in full by Fullpower. These assertions are astounding when the whole litigation is the result of Fullpower’s failure and default in making repayment of the Loan, from its Due Date on 31 December 2013.

41.  On the whole, I consider Wong to be a boastful, evasive and untrustworthy witness, who has a natural tendency to exaggerate, embellish and tailor his evidence in order to suit his and Fullpower’s case. His evidence on the Oral Agreement is totally unreliable, inconsistent with and not supported by the contemporaneous documents, and is accordingly rejected.

42.  Since I reject the existence of the Oral Agreement alleged, the question of its enforceability does not have to be dealt with, and there is no question of estoppel.

Whether the Plaintiffs in breach by selling the CM Shares at undervalue

43.  The Defendants claim in their defence that the Plaintiffs, as chargees, were in breach of their duties by selling and causing the sale of the CM Shares at the consideration of $22,804,100 which was below the best price reasonably obtainable and the fair value of the CM Shares. They claim that since January 2014, the price of CM Shares had been rising, had attained $0.76 per share by 17 January 2014, to $1.10 per share by the end of January 2014, and $1.40 after the announcements in April 2014, and had closed at $1.29 on 21 July 2014. The Share Sale Agreement and the announcement of distribution of special dividends had been well received by the public investors.

44.  On the Defendants’ case, there were clear signs that the market price was rising for the CM Shares, that any drop was only temporary and for a very short period of time, and that acting reasonably, the sale of the CM Shares under the CM Charge (from 16 June 2014 to 18 July 2014) should have been delayed for a higher price to be fetched. They questioned whether CL had aimed to sell the CM Shares at the lowest price, after the assignment of the Loan to him.

45.  I cannot accept the Defendants’ assertions.

46.  The duties of a chargee are the same as those of a mortgagee, and their duties in exercising a power of sale are well-established. Such duties are explained in Fisher and Lightwood’s Law of Mortgage (15^th ed), at paragraph 30.23:

“The power of sale is given to the mortgagee for his own benefit to enable him the better to realize his debt. Accordingly, his own interests come before those of the mortgagor. The mortgagee is not a trustee of his own power of sale for the mortgagor nor is he under a general duty of care to the mortgagor. He can, therefore, act in his own interests in deciding whether or not to exercise his power of sale. If the mortgagee does decide to exercise his power of sale, he can likewise act in his own interest in deciding when to exercise it, subject to his duty to obtain the best price reasonably obtainable. He is entitled to sell even though a sale (or the time, or the terms, of the sale) may be disadvantageous to the mortgagor.

However, while the mortgagee may look to his own interests, he must nevertheless pay some regard to the interests of the mortgagor. Thus, the mortgagee owes a general duty in equity to the mortgagor and to others with an interest in the equity of redemption (including subsequent incumbrancers) to act in good faith and to use his powers for proper purposes. No duty is owed to an unsecured creditor with no interest in the equity of redemption.

…

Subject to those duties, the court will not inquire into his motives for exercising (or not exercising) the power of sale …” (Emphasis added)

47.  In Easy One Finance Ltd v Luk Wing Kee Andrew [2020] HKCFI 878, the duties of a chargee or mortgagee have also been helpfully summarized at paragraph 13 of the judgment:

“(1) A mortgagee is not a trustee for the mortgagor; that once a power of sale arises the mortgagee is entitled to exercise it for his own purposes whenever he chooses to do so and that it matters not that the moment may be unpropitious or that, by waiting, a higher price could or might be obtainable;

(2) The mortgagee is not required to obtain the mortgagor’s consent or to inform the mortgagor before he exercises the power to sell the mortgaged property and the mortgagee is not required to consult or advise the mortgagor of the sale of the property;

(3) The duty of the mortgagee is limited to the duty to act in good faith and the duty to take reasonable care to obtain the true market value of the property at the time he decides to sell it;

(4) The mortgagee cannot be expected to get the market completely right, nor is he required to do so;

(5) When the judgment involves assessing the market value of the property the mortgagee will have acted reasonably if his assessment falls within an acceptable margin of error;

(6) The steps taken by the mortgagee and those acting with him must be viewed in the round and in practical commercial terms; and

(7) In assessing whether or not a mortgagee had breached his duty as regards the exercise of its power of sale, the burden of proof fell upon the mortgagor.”

48.  At paragraph 30.24 of Fisher and Lightwood, the learned editors explained that the best price reasonably obtainable by the mortgagee is normally equated with the current market value of the property.

49.  In Almona Pty Ltd v Parklea Corporation Pty Ltd [2019] NSWSC 1868, the Court held that a mortgagee is not obliged to advise the mortgagor of its intention to exercise the power of sale, nor to communicate with the mortgagor or to respond to any proposals made by the mortgagor in relation to the sale. Nor is a mortgagee obliged to defer the exercise of the power until the mortgagor has had an opportunity to redeem the mortgage. The fact that the mortgagor claims he will shortly be able to redeem cannot give him a right in law to restrict the power of sale granted to the mortgagee.

50.  The CM Charge clearly provides (in clause 8.1) that the charge shall be immediately enforceable following the occurrence of an event of default, and that the Lender may without notice to the chargor in its discretion enforce all or any part of any charges, at the times, in the manner and on the terms it thinks fit, and take possession and hold or dispose of any part of the charged assets. The Lender is not required (by the express provisions of clause 8.2) to give any prior notice of default to the chargee or before enforcing the charges. In exercising the powers under the charge, the Lender is entitled (under clause 8.6) to exercise its power of sale “in such manner and at such time or times and for such consideration … as it shall in its absolute discretion thinks fit”, at any price which the Lender in its absolute discretion consider to be the best obtainable in the circumstances.

51.  As the English Court of Appeal explained in Sylvan Properties v Royal Bank of Scotland plc [2004] 1 BCLC 359, a mortgagee has no duty to exercise his powers to sell, to preserve the security or its value, or to realize his property, and is entitled to remain totally passive. The Court rejected the notion that the mortgagee is not entitled to ignore the fact that a short delay in the sale might result in a higher price, reiterating instead that a mortgagee is under no duty of care to the mortgagor in respect of the timing of the sale, and can act in its own interests in deciding whether and when he should exercise his power of sale. The Defendants’ reliance on Standard Chartered Bank Ltd v Walker [1982] 3 All ER 938 is misplaced, as the Court in Sylvan Properties made it clear.

52.  The burden is on the Defendants to establish that the Plaintiffs were in breach of their duties as chargees. Far from showing any facts to support their assertion, that CL had deliberately sold the CM Shares at the lowest price, they have not even been able to establish that there were clear signs that the market was improving rapidly and substantially (as alleged), and that the Plaintiffs had failed to act reasonably in choosing the time and price at which the CM Shares should be sold. CL explained in his evidence that he wanted to sell the CM Shares before the expiry of the general offer period, because he had no way of knowing how the share price would perform after the general offer. He explained that he did not know and could not find any information about MHL, the new incoming shareholder. He was unable to see the business plan of the new investor, and he was perfectly entitled on the evidence to take the view that there were risks of the price of the CM Shares dropping after the general offer period. I agree with Counsel for the Plaintiffs that it is only with the benefit of hindsight that the share price went up after the general offer period. There is no basis to justify a finding that CL should have speculated and gambled on the price of the Shares rising, and that the alleged “dip in value” of the Shares was only temporary, as the Defendants now claim. CL was entitled to the view he took as to when to sell, and there is no evidence of any bad faith on his part, or even of any lack of care. I do not accept that the Plaintiffs had the duty in the circumstances and on the evidence of this case to delay the sale, or that the sale was at any price other than the reasonable and current market price of the CM Shares in question.

Disposition

53.  I reject the Defendants’ defence, dismiss the Counterclaim, and enter judgment in favour of the Plaintiffs in terms of the prayer of the Amended Statement of Claim, with the costs of the action on indemnity basis pursuant to clause 19.2 of the Loan Agreement and clause 21 of the CM Charge, with certificate for 2 counsel.