CCMD OVERSEAS LTD v. SINOM INVESTMENTS LTD AND ANOTHER

HCA 903/2021

[2024] HKCFI 1525

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 903 OF 2021

____________

BETWEEN

____________

______________

J U D G M E N T

_______________

Introduction and Procedural History

1.  This is the defendants’ appeal from an order made by Master Alan Kwong on 7 August 2023 in which he:

(1) entered summary judgment against them in terms of prayers (1) and (3) of the Statement of Claim;

(2) struck out the defendants’ Amended Counterclaim;

(3) struck out the defendants’ application for security for costs against the plaintiff; and

(4) ordered the defendants to pay the costs of the above applications together with their application for re-amendment filed on 3 August 2023.

2.1.  On 14 August 2023, the defendants filed a notice of appeal from the master. The appeal was listed for hearing on 6 November 2023.

2.2.  Shortly before the hearing, the defendant changed their legal team and on 31 October 2023 issued a summons for leave to re-amend their Amended Defence and Counterclaim and to adduce new evidence in support of the appeal. The proposed re-amendment advanced a new defence[1] not raised before the master.

3.1.  On 6 November 2023, the matter came before Recorder Eugene Fung SC. The defendants’ leading counsel Mr Anson Wong SC[2] indicated that they were no longer pursuing any of the defences previously advanced, and acknowledged that the appeal would fall to be dismissed if their sole new defence were unsuccessful.

3.2.  On 15 November 2023, the learned recorder gave a Decision[3] in which he

(1) allowed the re-amendment[4], expressly on the agreed basis that “for the purpose of determining whether leave should be granted to amend a pleading, the proposed pleas should be taken as proven”[5];

(2) rejected the defendants’ application for leave to adduce further evidence[6];

(3) adjourned the hearing of the defendants’ appeal from the master; and

(4) gave directions for the plaintiff to file consequential amendments of the Reply and Defence to Counterclaim.

3.3.  The plaintiff’s submission that it should be allowed to file further evidence in reply to the defendants’ new defence was not opposed by the defendants[7]. Consequently, it filed:

(1) the 3^rd affirmation of Zhan Guang Mo, a director of the plaintiff, and

(2) an affirmation of Song Kuan, a receiver appointed in the circumstances set out below.

4.  The upshot is that on this appeal, the question is whether the defendants’ new defence raised a triable issue.

Background facts

5.  In light of some of the defendants’ arguments, it is necessary to set out some undisputed background.

6.1.  Asia Iron Holdings Ltd (“AIHL”) is a Hong Kong company which holds a group of Australian companies with mining operations in Australia. It was controlled by the 2^nd defendant Zhang Chi (“Mr Zhang”) through the 1^st defendant company Sinom Investments Ltd (“Sinom”).

6.2.  On 11 May 2010, a Share Subscription Agreement was made between Sinom, Mr Zhang, AIHL and Chongqing Chonggang Minerals Development Investment Ltd (“CCMD”)[8], the plaintiff’s parent company, as a result of which Sinom was left with 40% and CCMD[9] acquired 60% of AIHL.

6.3.  On 17 September 2010, the following documents were executed.

(1) A Shareholders Agreement between Sinom, CCMD and AIHL (“the Shareholders Agreement”) setting out AIHL’s shareholders’ respective rights and their agreement on the conduct of the business of AIHL and its subsidiaries, including a specific project for the mining of magnetite (“the Project”) to be financed by the shareholders in proportion to their shareholdings[10].

(2) A Loan Agreement between the plaintiff as lender and Sinom as borrower (“the Loan Agreement”) under which a term loan facility of US$159,035,000 was made available to Sinom “for general corporate purposes”. The repayment date was 15 June 2015[11].

(3) A Personal Guarantee by Mr Zhang as guarantor in favour of the plaintiff as lender (“the Personal Guarantee”), guaranteeing the obligations of Sinom under (among other things) the Loan Agreement.

(4) A Charge over Shares and Assignment (“the Share Charge”) between Sinom as chargor and the plaintiff as chargee, under which Sinom’s AIHL shares were charged to the plaintiff to secure Sinom’s liabilities under (among other things) the Loan Agreement (“the Charged Shares”).

6.4.  On the same day, the full amount of the facility was drawn down.

2010-2014 Events

7.1.  In the following years Sinom did not pay any interest, which was duly capitalized.

7.2.  There was no progress on the Project which, under the Shareholder Agreement, required financing by the two shareholders in proportion to their shareholdings. Sinom only advanced USD30 million by way of shareholder’s loans and was in default of cash calls[12].

8.  Before the repayment date under the Loan Agreement (15 June 2015), Mr Zhang wrote to the authorities in Chongqing about problems with the project (“Mr Zhang’s letter”).

The Status Report (April 2015)

9.1.  In response to Mr Zhang’s letter, CCMD submitted to the Chongqing Municipal State-owned Assets Supervision and Administration Commission of the State Council a document entitled “Australian Mining Project Status Report” dated 1 April 2015 (“the Status Report”). As Mr Wong has focused on certain parts of this Report, it may be helpful to set out the context.

9.2.  The Status Report recited two purposes:

(1) to explain the problems mentioned in Mr Zhang’s letter; and

(2) to provide some recommendations and opinions on problems affecting the progress of the Project, and the Project’s planning arrangements.

1. Under “Explanation with regards to the problems raised in [Mr Zhang’s letter”], CCMD stated (among other things) that:

- Mr Zhang had used the funds provided to him for the 60% shares in AIHL and the loan under the facility to repay old debts, or to invest in other types of mines and the securities market;

- the estimated completion date for the construction of the Project was later than initially thought;

- consequently, as Mr Zhang has problems in coming up with funds for the Project, to avoid being a defaulting shareholder, he has been obstructing the progress of the Project, eg by way of disagreements over who to appoint as AIHL’s financial consultant, technical proposals provided to banks, and management personnel.

- In the concluding paragraph in this part, CCMD said:

“To push the Australian mining project forward, the problem of [Mr Zhang’s] shareholdings must be resolved; in 2013, [CCMD] discussed with him a proposal for his withdrawal on numerous occasions; however, because the asking price was too high, this matter was dropped. Since 2014, we have also raised the matter of his readiness to make repayments in 2015, and [Mr Zhang] clearly indicated that he had no ability to repay and when the time came for repayment he would only be able to pay his debt to us with his [AIHL] shares[13]. Presently, [CCMD] is conducting preparatory work for debt recovery so that we can use legal means to cause him to withdraw from [AIHL] when the time comes”. (Emphasis added).

2. Under “Recommendations and opinions with regards to problems affecting the progress of the Australian mining Project and the Project’s planning arrangements”, CCMD set out various matters which needed to be implemented or solved. In para. 6, it said:

“With regards to a resolution proposal for the disparity of opinion between [AIHL’s] majority and minority shareholders and its impact on the normal progress of the Australian mining Project, we recommend that we wait until June, when [Sinom’s] debt to [CCMD] becomes due and, at such time, using legal methods to dissolve the shareholder relationship of Sinom and eliminate one of the management risks to the progress of the project”. (Emphasis added).

Failure to repay on due date (15 June 2015)

10.  As mentioned above, on 15 June 2015, the defendants failed to repay any part of the loan.

Demand letters (17 July 2015)

11.  On 17 July 2015, the plaintiff’s solicitors sent demand letters to the defendants, saying:

- the failure to repay amounted to an event of default,

- the plaintiff was exercising its rights to terminate the facility, declare that the outstanding amount and default interest were repayable forthwith, and demanded repayment of the outstanding amount and default interest in full;

- if Sinom failed to make repayment, the plaintiff would take action including exercising its rights under the Transaction Documents (which term incorporated by reference the Loan Agreement and the Share Charge).

12.  As emphasized above, first and foremost the plaintiff was seeking repayment of the debt. The relevance of this will be discussed later in this Judgment.

13.  It is common ground that the defendants failed to tender repayment at any stage (and indeed, to date).

Instrument of Transfer of Charged Shares (September 2015)

14.  Two months after the demand for repayment went unheeded, on 23 September 2015 an Instrument of Transfer dated 21 September 2015 of the Charged Shares was presented for stamping. Under this instrument, Sinom’s AIHL shares were transferred to the plaintiff. It is notable that the consideration was stated as:

“NIL (Transfer to chargee to secure the repayment of the loan)”. (Emphasis added).

Arbitration and HCCT43/2015 (October 2015 - August 2016)

15.1.  Shortly afterwards, on 13 October 2015 Sinom issued an originating summons in HCCT43/2015 against the plaintiff and AIHL for an injunction in aid of arbitration proceedings commenced in Hong Kong, alleging a dispute over the Shareholder Agreement.

15.2.  On 6 April 2016, the matter came before Lok J. The issue before the learned judge was whether equity should intervene to prevent the plaintiff from enforcing the Share Charge in view of unfair prejudice complaints by Sinom relating to the running of AIHL[14].

15.3.  On 22 August 2016, the judge gave a judgment in which he refused to intervene. In a nutshell, the reasons for the judge’s dismissal of the defendants’ case were that there were no restrictions on Sinom’s use of the loan (which it in fact used to discharge its other debts), the parties did not intend to link the repayment of the loan with the operation of the business, and the plaintiff’s position was no different from other financial institutions providing an independent loan to Sinom. The originating summons was accordingly dismissed.

15.4.  As for the arbitration, it was stayed by agreement on 2 December 2016, and eventually terminated by consent on 30 January 2019.

Registration of Charged Shares in plaintiff’s name (29 November 2016)

16.  Meanwhile, shortly after Lok J’s Judgment, on 26 October 2016, the plaintiff informed AIHL that by reason of Sinom’s failure to repay the loan, it was entitled to enforce its security over Sinom’s AIHL shares, which were registered in the plaintiff’s name on 29 November 2016.

Appointment of Receivers (1 June 2017)

17.  On 1 June 2017, the plaintiff appointed Cosimo Borelli and Song Kuan as joint and several receivers of the Charged Shares.

Receivers’ sale processes (April 2018- September 2020)

18.1.  According to the affirmation of Mr Song, the Receivers made two attempts to market and sell the Charged Shares (in 2018 and 2020 respectively).

18.2.  In summary, the 2018 process involved[15]:

- making a potential buyer list (“1^st potential buyer list”) which contained 287 target entities in Hong Kong, the PRC and other parts of the world which the Receivers, after doing certain research, had identified as being engaged in, and/or as having invested in, iron ores, mining and resource exploitation businesses;

- publishing advertisements in the Standard and the China Business Herald on 20 April 2018;

- sending letters to each of the potential buyers on the 1^st potential buyer list in May 2018;

- corresponding with 11 potential buyers who had expressed interest;

- providing a confidentiality agreement (prepared beforehand) to these potential buyers;

- providing an information memorandum (prepared beforehand) to the 6 potential buyers who had signed the confidentiality agreement;

- 1 potential buyer having withdrawn, following up with the remaining 5 potential buyers in July and August 2018 for an indicative offer;

- providing further information on enquiry made by 1 potential buyer in September 2018.

18.3.  However as no offer was received, the Receivers concluded the sale process in October 2018.

19.1.  The Receivers did not carry out any further attempts to sell the Charged Shares for about 1½ years until May 2020. This was because, according to Mr Song[16], in the Receivers’ experience, there would not be a significant change in the pool of potential buyers, nor a significant change in their interests or appetites, within a short period. The Receivers decided to wait until new potential buyers could be identified, and to allow time for the buyers already on the 1^st potential buyer list to reconsider.

19.2.  In summary, the 2020 sale process involved[17]:

- making another potential buyer list (“the 2^nd potential buyer list”) of 230 entities, including 32 entities which were added to the 1^st list;

- publishing advertisements in the Standard and the China Business Herald on 23 June 2020;

- sending letters to each of the potential buyers on the 2^nd potential buyer list in July 2020;

- correspondence with each of 3 potential buyers who had expressed interest;

- providing a confidentiality agreement to these potential buyers;

- providing an updated information memorandum to the 1 potential buyer who signed the confidentiality agreement;

- following up with each of the potential buyers.

19.3.  However as again no offer was received, the Receivers concluded the sale process in September 2020.

19.4.  The Receivers did not carry out any further attempts to sell the Charged Shares thereafter. This was because, according to Mr Song[18],

- the failure of the previous two attempts, despite reaching out to over 300 potential buyers, showed that any further attempts were unlikely to be successful;

- as the Charged Shares represented a non-controlling interest, they were less attractive or marketable;

- AIHL has been loss-making for some time, and was balance sheet insolvent since 2014.

This action (June 2021)

20.  About 9 months after the conclusion of the 2020 sale process, in June 2021 the plaintiff issued this action against Sinom and Mr Zhang for the outstanding amount of USD285,512,378.84 being the sum advanced and accrued interest, and further or alternatively, for damages to be assessed.

21.  Pausing here, it is clear as a matter of law that the plaintiff was entitled to sue the defendants for repayment even though the Receivers had earlier tried to sell the Charged Shares. As was succinctly stated by Lord Templeman in China and South Sea Bank v Tan Soon Gin[19], quoted in Chan Shu Chun v Right Margin Ltd[20]:

“The creditor has three sources of repayment. The creditor could sue the debtor, sell the mortgage securities or sue the surety. All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all”.

22.  The plaintiff’s claim was followed by a Defence and Counterclaim, and a Reply and Defence to Counterclaim.

23.  In April 2023, the plaintiff issued an application for summary judgment. This resulted in Master Kwong’s order. However, as mentioned earlier, the defendants’ new legal team has abandoned the original defences and has advanced only one defence which was not before the master, pleaded as follows in the RADCC:

“16A. It is averred that the Plaintiff as security holder owes a general duty to use his powers over the security for the sole purpose of securing repayments of the money owed to him and a duty to act in good faith. In breach of such duties, the Plaintiff had exercised its powers under the Share Charge in bad faith and for the improper purpose (“Improper Purpose”) of assuming full ownership of the [Charged Shares] and/or the sole, unchallenged and/or unsupervised control over AIHL. (Emphasis added)

16B. Without prejudice to the generality of the aforesaid, it is averred that the Plaintiff (1) had appointed receivers over the [Charged Shares], knowing that they intended to exercise their powers to promote the Improper Purpose, (2) had failed to revoke their appointment notwithstanding that the Plaintiff knew that they were acting to promote the Improper Purpose and/or (3) had acted in concert with the Receivers to promote the Improper Purpose.

16C. In support of paragraphs16A and 16B above, the Defendants rely on the following matters pending inquiries, discoveries and interrogatories:-

Particulars

16C.1. On or about 1 April 2015, by a report from CCMD Investment (i.e. the Plaintiff’s parent company) to the State-owned Assets Supervision and Administration Commission of the State Council , CCMD Investment had expressed a wish to remove the 1^st Defendant as a shareholder of AIHL by using the breach of the Loan Agreement as a convenient pretext.

16C.2. On or about 29 November 2016, the Plaintiff had procured the [Charged Shares] to be registered in its name in exercise of its rights under the Share Charge. Notwithstanding that the Plaintiff only held a security interest in [the Charged Shares], the Plaintiff held itself out, or permitted itself to be held out, as the sole shareholder of the AIHL, and made no attempt to sell the same.

16C.3. On or about 1 June 2017, the Plaintiff appointed the Receivers to take possession of the [Charged Shares]. To date, to the best knowledge of the Defendants, the Receivers (a) had only advertised the sale of the [Charged Shares] on two newspapers on 20 April 2018 and 23 June 2020 respectively and (b) had achieved no recovery whatsoever of any part of the liabilities under the Loan Agreement. Notwithstanding the conduct of the Receivers fell way below which would be expected of them, the Plaintiff did not revoke the appointment of the Receivers and further stonewalled the Defendants’ request for information concerning the Receivers’ attempt to sell the [Charged Shares].

16C.4. More generally, the Plaintiff had been dilatory in commencement and prosecution of this action to recover the outstanding sums under the Loan Agreement. The Defendants will refer to the whole course of conduct of the Plaintiff at the trial of this action.

16D. By reason of the aforesaid, the Plaintiff had assumed sole, unchallenged and/or unsupervised control of AIHL. In consequence of the assumption of such control, the 1^st Defendant had suffered losses and damages by way of diminution in the value of the [Charged Shares][21].

16E. Further or alternatively, by reason of the matters aforesaid, the 2^nd Defendant is discharged from his liability under the Personal Guarantee.

16E.1. It is an implied condition in the Personal Guarantee that the Plaintiff would not exercise its power in bad faith and/or for the Improper Purpose. By reason of the aforesaid, the Plaintiff had committed a repudiatory breach of the Personal Guarantee by reason of which the Personal Guarantee is discharged, and which repudiatory breach has been accepted by the 2^nd Defendant.

16E.2. Further or alternatively, by reason of the aforesaid, the Plaintiff had injured the value of [the Charged Shares] in bad faith and/or for the Improper Purpose. The 2^nd Defendant is discharged from his liability under the Personal Guarantee, either completely or to the extent of loss of value in [the Charged Shares]”.

Discussion

24.  I shall first discuss the submissions on law.

25.  Mr Wong’s primary submission, as pleaded in §16A, was that a chargee’s exercise of his powers is only valid if his sole purpose was to obtain repayment of the loan; so that if there was an additional motive, such as to gain control of a company from the chargor, the exercise would be in bad faith. His secondary submission, which was not pleaded, was that at least the chargee’s predominant purpose must be to secure repayment, otherwise the exercise would be invalid.

26.  I have been referred to the following cases among others (listed in chronological order):

- Downsview Nominees Ltd and Another v First City Corporation Ltd and Another[22];

- Hong Da Development & Investment Holding Co Ltd v China Aoyuan Property Group Ltd and others[23];

- Cukurova Finance International Ltd and another v Alfa Telecom Turkey Ltd (Nos.3 to 5)[24];

- Fatupaito v Harris;[25]

- Oliver Dean Morley t/a Morley Estates v Royal Bank of Scotland PLC[26].

I have also been referred to passages in the standard texts on mortgages[27].

27.1.  In Downsview, an appeal to the Privy Council from New Zealand, a company had issued 2 debentures. The holder of the 2^nd debenture appointed receivers who removed the manager of the company Pedersen.

27.2.  Pedersen consulted Russell. Russell then caused his company (“RC”) to acquire the 1^st debenture, followed by RC appointing him as receiver. The judge found as a fact that Russell did this, not to obtain repayment of the debt under the 1^st debenture, but to disrupt the receivership appointed by the 2^nd debenture holder and to reinstate Pedersen.

27.3.  Under Russell’s receivership, the company sustained substantial losses. The 2^nd debenture holder offered to repay the company’s debt to RC under the 1^st debenture, but RC refused to accept repayment.

27.4.  The 2^nd debenture holder eventually sued RC and Russell for damages in negligence (Russell having ceased to act as receiver).

28.1.  On the above facts, the Privy Council held that even though the mortgagee (RC) and the receiver (Russell) owed no general duty in negligence, equity imposed on them the duty to exercise their powers in good faith for the purpose of obtaining repayment. Since:

- Russell’s receivership had been instigated by him for improper purposes,

- his receivership had been conducted in bad faith, and

- RC was in breach of duty in refusing the 2^nd debenture holder’s offer to repay the loan under the 1^st debenture,

they were liable to the 2^nd debenture holder.

28.2.  In considering Russell’s arguments that as receiver deemed to act as agent for the mortgagor, he was under no duty to a subsequent encumbrancer (ie the 2^nd debenture holder), Lord Templeman held (at p312):

“... when a receiver and manager exercises the powers of sale conferred on him by the mortgage, he is dealing with the security; he is not merely selling or dealing with the interests of the mortgagor. He is exercising the power of selling and dealing with the mortgaged property for the purpose of securing repayment of the debt owing to his mortgagee and must exercise his powers in good faith and for the purpose of obtaining repayment of the debt owing to his mortgagee. The receiver and manager owes these duties to the mortgagor and to all subsequent encumbrancers in whose favour the mortgaged property has been charged.

...

Several centuries ago equity evolved principles for the enforcement of mortgages and the protection of borrowers. The most basic principles were, first, that a mortgage is security for the repayment of a debt and, secondly, that a security for repayment of a debt is only a mortgage. From these principles flowed two rules, first, that powers conferred on a mortgagee must be exercised in good faith for the purpose of obtaining repayment and secondly that, subject to the first rule, powers conferred on a mortgagee may be exercised although the consequences may be disadvantageous to the borrower. These principles and rules apply also to a receiver and manager appointed by the mortgagee”. (Emphasis added).

28.3.  As for RC’s duties as mortgagee, Lord Templeman held (at p317):

“A mortgagee owes a general duty to subsequent encumbrancers and to the mortgagor to use his powers for the sole purpose of securing repayments of the moneys owing under his mortgage and a duty to act in good faith. He also owes the specific duties which equity has imposed on him in the exercise of his powers to go into possession and his powers of sale. It may well be that a mortgagee who appoints a receiver and manager, knowing that the receiver and manager intends to exercise his powers for the purpose of frustrating the activities of the second mortgagee or for some other improper purpose or who fails to revoke the appointment of a receiver and manager when the mortgagee knows that the receiver and manager is abusing his powers, may himself be guilty of bad faith ...”. (Emphasis added).

29. In the present case, Mr Wong emphasized the word “sole” in the passage above.

30.1.  However, cases decided before Downsview (Nash v Eads[28] and Belton v Bass, Ratcliffe and Gretton Ltd[29]) establishing that a mortgagee did not need to have repayment of the debt as its sole or “pure” purpose when exercising its powers, were not cited to or discussed by the Privy Council.

30.2.  Of course, it is clear that in Downsview the Privy Council did not need to decide on “purity” of purpose because, as noted by Lewison J in Meretz Investment NV v ACP Ltd[30] (at [306]) , the finding of fact by the New Zealand court was that “no part of the first debenture holder’s [RC’s] purpose was the recovery of the debt secured by the first debenture” (emphasis added).

30.3.  Indeed, even in Fatupaito (which Mr Wong relied on for his secondary submission), it was acknowledged by the New Zealand Court of Appeal (“NZCA”) (at [49]) that “the Privy Council’s statement that the mortgagee owed a duty to use its powers for the ‘sole purpose’ of obtaining repayment was obiter” (emphasis added).

31.  After the obiter statement in Downsview, it was held in a number of cases that there was no requirement of “purity of purpose”. First, in Meretz, Lewison J analyzed the law in detail, in the following passage quoted in Hong Da (§132):

“314. Drawing the threads together, it seems to me that none of the authorities to which I was referred gives unequivocal support to [the] submission that the mortgagee must have ‘purity of purpose’. On the contrary, Nash v Eads and Belton v Bass are inconsistent with it. So, too, is the statement in Fisher & Lightwood, Law of Mortgages para 16.13. A dissection of a mortgagee’s motives is likely to be difficult in practice. Moreover, unlike statutory powers conferred for the public benefit or trustees’ powers conferred for the benefit of beneficiaries ...a mortgagee’s powers are conferred upon him for his own benefit. In such circumstances, ‘purity of purpose’ may be difficult to achieve. The cases do support the proposition that a power of sale is improperly exercised if it is no part of the mortgagee’s purpose to recover the debt secured by the mortgage. Where, however, a mortgagee has mixed motives (or purposes) one of which is a genuine purpose of recovering in whole or in part, the amount secured by the mortgage, then in my judgment his exercise of the power of sale will not be invalidated on that ground. ...”. (Emphasis added)

32.1.  Subsequently, the Privy Council in Cukurova affirmed the principle that “mixed motives” did not invalidate the exercise of a chargee’s powers.

32.2.  The facts in Cukurova, put simply, were as follows. TC was a cell phone provider company. Its shareholders were CH and SO.

32.3.  In 2005, CH entered into negotiations to borrow funds from AG, which was interested in acquiring cell phone networks.

32.4.  In June 2005, SO commenced arbitration proceedings against CH, claiming there was a pre-emption agreement entitling it to acquire CH’s shares in TC.

32.5.  To defeat SO’s claim, CH transferred its TC shares to a BVI company ultimately controlled by it. Then in September 2005, AG entered into a facility agreement to lend funds to that BVI company, with the TC shares charged as security.

32.6.  In 2007, AG declared that an event of default had occurred, demanded immediate repayment, and made a formal request to be registered as owner of the charged shares. Within a month, CH tendered repayment, but AG rejected the tender for being late.

32.7.  CH asserted that AG had acted in bad faith and for the improper purpose of obtaining the charged shares so that it could control TC.

33.1.  The BVI judge at first instance ruled that no event of default had occurred. On appeal, the BVI Court of Appeal held that there were three events of default, but it did not rule on the bad faith and improper purpose arguments.

33.2.  On further appeal, the Privy Council ruled that one event of default had occurred. In respect of the “purity of purpose” versus “mixed motives” arguments, it held first:

“73. It is the Board’s opinion that the judge’s findings afford no basis for treating the appropriation of the charged shares as ineffective ... In equity, a mortgagee has a limited title which is available only to secure satisfaction of the debt. The security is enforceable for that purpose and no other: Quennell v Maltby [1979] 1 WLR 318,322H (Lord Denning MR); Downsview ... 312G (Lord Templeman). It follows that any act by way of enforcement of the security (at least if it is purely) for a collateral purpose will be ineffective, at any rate between mortgagor and mortgagee. The reason is that such conduct frustrates the equity of redemption which ... a court of equity is ‘bound to regard with great jealousy’”. (Emphasis added)

The, after considering legislation which is not relevant to our case, Lord Neuberger held the following as a general principle:

“78. More generally, however, the Board considers that if a chargee enforces his security for the proper purpose of satisfying the debt, the mere fact that he might have additional purposes, however significant, which are collateral to that object, cannot vitiate his enforcement of the security. If the law were otherwise, the result would be that the exercise of the right to enforce the charge for its proper purpose would be indefinitely impeded because of other aspects of the chargee’s state of mind which were by definition irrelevant”. (Emphasis added)

33.3.  On the facts of that case, the Privy Council held that once AG declared that an event of default had occurred, the appropriation of those shares was a necessary incident of a permitted mode of satisfying the debt, and was at the time the only available way of doing so (as no tender of the debt had been made in time). In conclusion, CH failed in its argument that the appropriation of the shares was done in bad faith or had been undertaken for an improper purpose.

34.  It is clear from the above that even “significant additional purposes” would not vitiate the enforcement of the security, as long as the satisfaction of the debt was one of the chargee’s purposes.

35.  Cukurova was followed and applied in the English Court of Appeal in Morley Estates where it was argued that the mortgagee was in breach of duty because it failed to act as a lender, but instead was acting as a potential buyer of the mortgagor’s property portfolio. After rejecting that argument on the facts, the court held (§69):

“But even if the bank had mixed motives, that would have made no difference. It is unnecessary that a mortgagee should have ‘purity of purpose’, that is to say that its only motive is to recover, in whole or in part, the debt secured by the mortgage: Meretz ... at [300] to [314]; Cukurova ... at [78]”. (Emphasis original].

36.1.  In the face of the above authorities against his pleaded “sole purpose” argument, Mr Wong relied on Fatupaito, a judgment of the NZCA, to add the nuance that although the recovery of the debt need not be the chargee’s“sole” purpose, it must be the “predominant” purpose of the enforcement.

36.2.  In a nutshell, the facts of that case were as follows. Olliver, who had a personal dispute with his wife Sparks, controlled a company called CIT, to whom Sparks owed money.

36.3.  Olliver also controlled a company called Bankhouse. He caused Bankhouse to lend funds to CIT under a General Security Deed (“GSD”) which loan was secured by various properties owned by CIT.

36.4.  When CIT failed to pay outstanding tax, liquidators were appointed. Olliver (through his other companies) made offers to the liquidators to buy CIT’s properties on certain terms, but when the liquidators refused to accept those offers, he caused Bankhouse to appoint receivers of CIT under the GSD.

36.5.  The receivers then caused CIT to enter into a sale and purchase agreement with another company associated with Olliver, the agreement including certain conditions relating to the accounts receivable from Sparks.

36.6.  The liquidators considered that the agreement was uncommercial, and commenced proceedings to set aside the GSD, to declare the receivers’ appointment invalid, and to set aside the sale and purchase agreement.

37.1.  As mentioned above, the NZCA accepted that the statement in Downsview that the mortgagee owed a duty to use its powers for the “sole purpose” of obtaining repayment was obiter ([49]). However the Privy Council judgment in Cukurova holding that additional significant purposes did not vitiate the exercise of the mortgagee’s powers was not referred to at all.

37.2.  Instead, the NZCA followed a judgment of another division of the NZCA in Coltart v Lepionka & Co Investments Ltd[31]. In that case, Lewison J’s judgment in Meretz was discussed as follows (quoted in Fatupaito [51]):

“[63]. However, it is important to emphasise that Lewison J’s analysis is confined to the interests of the mortgagee as a mortgagee. In our judgment, a mortgagee may lawfully have other purposes coinciding with its core interest in discharging the debt and obtaining the best price reasonably obtainable and thereby properly anticipate the enjoyment of benefits collateral to exercising its power of sale. But an exogenous purpose - that is, a purpose flowing from interests outside the function of a mortgagee - cannot be allowed to prevail.” (Emphasis original)

“[65]. The leading authorities confirm that a mortgagee will come under the scrutiny of equity when the effect of its actions invites the inference that it was acting in breach of its duties. The ultimate question is whether a mortgagee has acted primarily for the purpose of recovering its debt. That question is to be answered objectively, not by examining a mortgagee’s subjective motives, but by examining whether its actions are taken in good faith, bearing in mind its entitlement to prefer its own interests wherever they conflict with other interested parties”. (Emphasis added)

38.  Although in Lepionka [65], the NZCA referred to “the leading authorities”, a review of the report shows that Cukurova was not mentioned. Lepionka was decided between 25 February and 7 April 2016. Cukurova was heard in 2013 but was reported only in 2016.

39.  Be that as it may, by the time Fatupaito was heard, Cukurova had been reported but again it was not referred to. Thus, the NZCA did not have the benefit of considering the Privy Council’s discussion of the reason why additional purposes are not relevant. Apart from the issue of relevance, the NZCA itself accepted that “it will be a rare case in which there is evidence to meet this very high standard” to show that the mortgagee has acted for a predominant purpose which was “exogenous to” its interests as mortgagee in preserving its security and obtaining repayment of a secured debt ([53] - [54]).

40.  With respect to the NZCA, it is difficult to see why and how a court would calibrate different purposes when a chargee exercises the power to enforce its security (of course, as long as one purpose is for repayment of the debt). Before advancing a loan, a lender would obviously consider the attractiveness of the security with an eye to the borrower’s possible default. If the borrower does default and the lender enforces the security, it is reasonable that the lender would then examine all the surrounding circumstances to choose the most beneficial option. To use the language of Lord Neuberger in Cukurova, there is no reason for equity to impede the exercise of the right to enforce the charge for its proper purpose, simply because there are other aspects of the chargee’s state of mind.

41.  In any event, I have considered the matters in this case applying both the holdings set out in Cukurova and Fatupaito.

Pleaded particulars of Improper Purpose and bad faith

42.  The 1^st particular of Improper Purpose and bad faith in §16C of the RADCC pleaded the Status Report.

43.1.  Whilst it showed CCMD’s dissatisfaction with Mr Zhang[32] for his failure to progress the Project as intended under the Shareholder Agreement, it is important to note that CCMD attributed Mr Zhang’s obstructive attitude to his financial situation. There was no indication that there was any other reason for the strain in their relationship.

43.2.  Unfortunately Mr Zhang’s financial situation was not going to improve. As recorded in the Status Report, Mr Zhang admitted that he had no ability to repay the loan[33], and when the time came for repayment (15 June 2015), he would only be able to repay the plaintiff’s loan with the Charged Shares. In other words, they would need to have recourse to the Charged Shares[34]. Whether those shares would end up with a third party buyer, or with the plaintiff, clearly they would no longer be Mr Zhang’s.

43.3.  It was in the above context that in the Status Report, CCMD concluded that upon default in repayment of the loan, the debt recovery process would result in Mr Zhang’s withdrawal as a shareholder, in other words, the shareholder relationship between Sinom and the plaintiff would “dissolve”. That was stating the inevitable legal consequence of Mr Zhang being unable to repay the loan. His withdrawal as a shareholder would lead to an end to the obstacles placed in the way of the Project.

44.1.  It is notable that the Status Report did not say that the plaintiff would not accept repayment from Mr Zhang if tendered, or would contest a third party’s acquisition of the Charged Shares irrespective of its identity or financial resources. Nor did it say that the plaintiff’s target was to become the 100% holder of the AIHL shares, or tentatively seek the Provincial Government’s approval to do so.

44.2.  In short, the loan was due soon, the borrower admitted he was unable to repay, and the Charged Shares would, after legal processes were gone through, eventually leave his hands. Hence, the recommendation to wait until June and the result of the “legal means” which would follow upon default. In my view, CCMD’s statement of the inevitable legal consequence of Mr Zhang being unable to repay the loan, and its report on the effect on the Project, does not constitute evidence of Improper Purpose or bad faith, and does not give rise to a triable issue.

45.  The 2^nd particular pleaded in §16C referred to the registration of shares in the plaintiff’s name in November 2016, and holding out that it was the sole shareholder.

46.1.  However:

- the first thing the plaintiff did after default was to demand payment of the debt, and it was only later, when the defendants failed to repay any part of the debt and had failed in obtaining an injunction before Lok J, that the plaintiff registered the Charged Shares; there was no evidence that if the defendants had managed to raise funds (eg from third party financiers) for repayment of the loan, the plaintiff would have put any impediment in Sinom’s way in redeeming the shares. This may be contrasted with the refusal of RC to accept the 2^nd debenture holder’s offer to pay off the company’s debt in Downsview. Thus, it could not be said that the plaintiff did not have as one of its purposes, or it did not have as its predominant purpose, that of recovering the amount secured;

- this is corroborated by the explicit statement in the Instrument of Transfer that the shares were transferred “to chargee to secure the repayment of the loan” (emphasis added);

- clause 7.2(b) and Schedule 11, §1 of the Share Charge provided that the chargee may take possession of the charged assets by completing instruments of transfer to transfer them into the chargee’s name. Obviously, as a company only recognises registered shareholders, transfer of the shares into the chargee’s name would enable them to protect the security eg by voting at meetings.

46.2.  Accordingly, I do not see any triable issue that the registration of shares in the plaintiff’s name would be evidence of Improper Purpose or bad faith.

47.  The 3^rd particular pleaded in §16C referred to the appointment and conduct of the Receivers in that they (a) had only advertised the sale of the Charged Shares on two newspapers on 20 April 2018 and 23 June 2020 and (b) had achieved no recovery.

48.1.  There is nothing in this allegation. First, the law is succinctly stated in Eder J’s judgment in Saltri III Ltd v MD Mezzanine SA Sicar (AS Mezzanine Facility Agent) and others[35],

“... the authorities do not prescribe - indeed expressly resist prescribing – any particular procedure which a mortgagee should adopt in deciding the manner in which the charged asset should be sold whether as to marketing or advertising or otherwise”.

48.2.  In any event, it is clear from Mr Song’s affirmation that the Receivers had done much more than merely advertising the sale of the Charged Shares in two newspapers on two days. As revealed in the affirmation, they had written to 287 potential buyers in the 2018 sale process, and 230 potential buyers (including 32 additional entities) in the 2020 sale process, drawing their attention to the offer for sale. These were specialist entities, so there is nothing in Mr Wong’s criticism that the sale had not been advertised in specialist trade press or platforms.

48.3.  As for Mr Wong’s query why expert advice was not sought on how to sell the shares, and his reference to the lack of detail or inadequate updating of the information memoranda, these criticisms show perhaps that the Receivers could have done a better marketing job, but there is no triable issue that they constitute evidence of Improper Purpose and bad faith.

48.4.  As for lack of recovery from the sale processes, Mr Song provided reasonable explanations[36] for why there were no takers.

48.5.  In summary, there is no triable issue that the evidence supports the defendants’ allegation that the Receivers’ conduct fell “way below” what was expected, and that the plaintiff’s non-revocation of their appointment was evidence of Improper Purpose and bad faith.

49.  Finally, there is no authority to support Mr Wong’s submission that the plaintiff had an obligation to provide information to the defendants regarding the Receivers’ sale processes, and there is no evidence even now from the defendants that there were third parties interested in purchasing the Charged Shares.

50.  As for Mr Wong’s argument that Improper Purpose may be “inferred” from the fact that the plaintiff had not disclosed documents reflecting internal discussions with the Receivers revealing their intentions, it is for a person alleging bad faith to prove it[37]. At this Order 14 stage, the court must ask itself whether the defendants’ evidence raises a sufficiently credible foundation on which the inference may (not must) be drawn at trial[38]. There is no such evidence.

51.  The 4^th and last particular pleaded in §16C referred to delay in the commencement and prosecution of this action to recover the outstanding sums under the Loan Agreement.

52.1.  As can be seen from the events narrated in chronological order above, arbitration proceedings commenced in October 2015 and terminated in January 2019. The Receivers’ second sale process concluded in September 2020. This action commenced in June 2021. Although there was a hiatus of 9 months between the last two events, it cannot be said, in the absence of anything else, that this raises a triable issue of Improper Purpose and bad faith.

52.2.  As for post-writ events, there was no delay on the plaintiff’s part in filing its pleadings. The Order 14 summons was taken out on 6 April 2023 after the Amended Reply and Defence to Counterclaim was filed on 24 November 2022. No triable issue of Improper Purpose and bad faith arises.

Unpleaded particular of Improper Purpose and bad faith

53.  Apart from the pleaded particulars of Improper Purpose and bad faith discussed above, Mr Wong also queried why the Receivers excluded the plaintiff and its associated companies from the sale processes. He argued that as it would be difficult to market the Charged Shares to third parties as they represented a minority of the shares in AIHL, the Receivers should have considered selling them to the plaintiff.

54.1.  As noted in Saltri, the court resists attempts to prescribe procedures for marketing the sale of charged assets. Further, although the plaintiff did explore the possibility of acquiring them and obtained the approval of the Australian authorities for that purpose (on the contingent basis that the plaintiff “may” become the holder of 100%” of AIHL, or “it is possible” that it would acquire all or any of the Charged Shares)[39], in fact this “alternative option”[40] did not obtain approval from the Chongqing Provincial authorities, its ultimate owner[41].

54.2.  As discussed earlier, the fact that the plaintiff was open to exploring alternative options does not mean that the enforcement of the security was for an Improper Purpose or was in bad faith. The hard fact was that Sinom had failed to repay any part of the loan on due date, and no funds were forthcoming from Mr Zhang or third parties. Mr Zhang himself realistically expected that the security would be enforced.

55.  For the reasons set out above, whether the test to be applied is that in Cukurova or even that set out in Fatupaito, no triable issue of Improper Purpose or bad faith has been shown. Nor are there any genuine doubts in the plaintiff’s case which would justify the court granting unconditional leave to defend.

56.  The discussion above applies also to Mr Zhang’s liability as guarantor.

Order

57.1.  I would dismiss the appeal from Master Kwong’s order, but out of an abundance of caution to address Mr Wong’s concerns, Mr Ma drafted the following paragraph to be added to the order (Mr Wong had no comments on the draft):

“Upon payment of the sum of USD284,512,378.84, accrued interest and costs to the plaintiff in full, the plaintiff shall, at the request and cost of the 1^st defendant, cause the release of the shares described in Schedule 1 to the Share Charge (“Charged Shares”) entered into between the plaintiff and the 1^st defendant dated 17 September 2010 (“Share Charge”) from the security created under the Share Charge and sign and complete all such documents as may be necessary to effect the transfer of the Charged Shares to the 1^st defendant within 28 days of the said request”.

57.2.  I would also make an order nisi that costs of this appeal be paid by the defendants to the plaintiff, to be taxed if not agreed, with certificate for two counsel.