XCHRX WAYGOOD INVESTMENT LTD v. GRAND JEWELLERY MANUFACTURING LTD & OTHERS

HCA2874/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2874 OF 2000

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J U D G M E N T

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1. This was an appeal by the defendants against Master M. Yuen's decision made on 21 June 2001, granting summary judgment, under Order 14, rule 3 of the Rules of High Court, to the plaintiff against the 1st, 2nd and 3rd defendants in their applications dated 24 July 2000 and 16 February 2001, for the sum of US$1,693,135.69, together with interest and costs.

2. The background of the dispute was as follows :

(a) The plaintiff and the 1st defendant had made a Loan Agreement (the "Loan Agreement"), dated 4 March 1995, by which the plaintiff agreed to lend US$1 million to the 1st defendant to be drawn down in two Tranches, A and B, with repayments due on 3 September 1995 and 3 October 1995 respectively. Pursuant to the terms of the Loan Agreement, the 2nd and 3rd defendants each executed a guarantee ("the Guarantees") in favour of the plaintiff under the terms of the Guarantees, the 2nd and 3rd defendants accepted liability as principal debtor and not merely as surety. The sums had been advanced to the 1st defendant according to the terms of the Loan Agreement;

(b) Subsequently, the plaintiff agreed to advance a further sum to the 1st defendant and therefore a supplemental agreement ("the 1st Supplemental Agreement") dated 13 October 1995, was signed by which a further sum of US$500,000 was paid to the 1st defendant. The plaintiff and all the defendants had executed a deed ("the Deed of Confirmation") on the same date to confirm the validity of the Loan Agreement, the Guarantees and the 1st Supplemental Agreement. The repayment date for this amount, as Tranche C, was stated to be on 13 April 1996. The total amount advanced to the 1st defendant was therefore US$1.5 million. Later, the 1st defendant had made repayment of the Tranche A principal plus part of the interest and the commitment fee.

(c) As a further accommodation to the defendants, the plaintiff entered into a Second Supplemental Loan Agreement ("the 2nd Supplemental Loan Agreement") dated 2 February 1996 with all the defendants whereby repayment dates of Tranches B and C were extended to 3 April 1996 and 13 October 1996 respectively.

(d) In this 2nd Supplemental Loan Agreement, by the terms under clause 3, the defendants confirmed the validity and effect of the Loan Agreement, the 1st Supplemental Agreement, and the Guarantees.

(e) However, the 1st defendant failed to make repayment of Tranches B and C. As a result of the default, the plaintiff took steps to enforce the loans. The plaintiff gave formal notice to the 1st defendant on 23 September 1999. The plaintiff also made demand on the 2nd and 3rd defendants on 23 September 1999 and 22 September 2000 respectively.

(f) Application of summary judgment in respect of the 1st and 2nd defendants were filed on 24 July 2000 and summons in relation to the 3rd defendant was filed on 16 February 2001. The summonses were directed to be heard together pursuant to the Order of Master Jones made on 5 March 2001. There was a separate summons by the defence to strike out the claim which was dismissed by the Master. There was no appeal on that decision. The defendants gave notice of appeal regarding the summary judgment on 29 June 2001, stating that there was a meritorious defence and in view of the issues raised, the defendants ought to be allowed to proceed to trial.

 

The affirmations

3. The Order 14 application was supported by quite a number of affirmations from both sides. They were, briefly, as follows :

(A) From the plaintiff :

(1) three affirmations by Mr Wan Kai Cheong, the Accounts Manager of the plaintiff;

(2) one by Mr Anthony Leung Tat Kin, the plaintiff's solicitor;

(3) two by Ms Cheung Ling Fei, a director of the plaintiff, wife of Mr Stephen Lau. Mr Stephen Lau being the director who had negotiated with the 3rd defendant Cheng Ka Lun regarding the Loan Agreement;

(4) one by Mr Lau Shek Man, another director of the plaintiff.

(B) From the Defence :

(1) five affirmations by Mr Cheng Ka Lun, the 3rd defendant;

(2) one by Mrs Cheng, the wife of the 3rd defendant,

(3) one by Ms So Ka, the elder sister of Mrs Cheng.

4. The affirmation of Wan Kai Cheong, the accountant manager of the plaintiff, (dated 24 July 2000), had set out how the Loan Agreement and the Supplemental Agreements were executed, and how the defendants had defaulted in payment. In particular, he had made reference to, in detail, the demands made by the plaintiff. It appeared that the plaintiff's solicitor had written to the different defendants asking for payment on the following occasions :

(1) 23 September 1999 to the 1st and 2nd defendants;

(2) 29 February 2000 to the 2nd defendant's solicitor;

(3) 1 March 2000, to the 1st defendant;

(4) 13 March 2000, to the 2nd defendant's solicitors.

Consequently, the plaintiff proceeded to take action and filed/served its Writ on 17 March 2000, the Writ was subsequently amended on 19 April 2000. The 1st and 2nd defendants then filed their defence on 5 June 2000.

5. On 10 August 2000, the 3rd defendant, Cheng Ka Lun, Grand, the main person behind the 1st and 2nd defendants, had filed his affirmation in reply. He stated that in or about 1994, the 2nd defendant, (of which he was director and shareholder) had intended to form a joint venture company with a China-based company. The object of the business would be the manufacturing of jewellery in Shanghai. He told Stephen Lau of the plaintiff about this in early 1995. Lau appeared to be interested in the project. But Lau was also nervous about becoming an equity partner at that early stage. To deal with the situation, he and Lau had made an oral agreement. The gist of the agreement was that the plaintiff should advance money for the investment to the 1st defendant, but that should be disguised as a loan. Once the approval from the Chinese government was obtained for the joint venture agreement, then the "loan" would be converted into capital contribution to the business. That was how the Loan Agreement was made and the monies advanced by the plaintiff.

6. As to Tranche C under the Supplemental Agreement, Cheng explained that in or about September 1995, Lau told him that he needed some cash. Lau asked him to return half of the loan and he would later re-lend the same amount to him in October. Cheng said that he therefore made arrangement for a sum of US$500,000 to be repaid to Lau. This was done on 19 September 1995. As promised, Lau had, in October 1995, through the plaintiff, executed the 1st Supplemental Agreement, and paid the 1st defendant the sum of US$500,000, which was the Tranche C facility.

7. On or about 28 November 1995, Cheng said that the formal approval for the joint venture was finally granted by the Chinese government. Cheng said Lau was very pleased about this and agreed orally with him to terminate the Loan Agreement and the Guarantees. Cheng said that he should then proceed to prepare the documents for Lau to become an equity investor in the joint venture, converting the loan as the investment capital. However, at about the same time, there was a policy change in China and tighter control of the economy was imposed by the authorities. Lau became worried about the business environment and indicated his hesitation to participate in the joint venture. Later, Cheng said that the 1st and 2nd defendants began receiving demand letters from the plaintiff's solicitor in around September 1999. He himself was very surprised about the demands. He tried to contact Lau but in vain. That was the gist of the 3rd defendant's account on the background of the loans. In his other affirmations, Cheng had expanded on some of the details.

8. Actually Lau had been detained in China for political reasons since September 1999 and Mrs Lau had taken over in the pursuit of the loan. According to her, when she called Madam So Ka, who was involved in the daily operation of the 1st defendant, the latter complained that they were experiencing cash flow problem, but nothing was said about a joint venture business.

The plaintiff's case

9. The plaintiff submitted that this was a straightforward case of the borrower having failed to make repayments under a valid loan agreement, and that the 2nd and 3rd defendants were clearly liable under the Guarantees. Mr Bartlett, counsel for the plaintiff, stated that this was an obvious case for summary judgment. The documents really spoke for themselves.

10. Mr Bartlett argued that what the defence had raised about the disguised nature of the loan was unsustainable. The defence had never raised such matters in the correspondence. Up to the time of the filing of Cheng Ka Lun's affirmation on 10 August 2000, i.e. four days prior to the scheduled Order 14 hearing, the defence had never, in correspondence or otherwise, raised and relied on this defence that the sums advanced were actually intended for investment in a joint venture investment of jewellery business in China. The Defence filed by the 1st and 2nd defendants on 5 June 2000 also made no reference to this situation. The defence filed contained bare denials, acknowledging, however, that the 1st defendant had signed the Loan Agreement and had made a repayment of US$590,544.87, to the plaintiff, which was said to be made in full satisfaction of all the indebtedness owed to the plaintiff by the 1st defendant.

11. Mr Bartlett drew my attention to the following matters :

(1) There was no cogent document to support the defendant's claim that there was a joint venture in China in which the plaintiff had intended to participate. There may well be some evidence of a joint venture in which the defendants had connection with, but there was nothing in writing to indicate the plaintiff's involvement; however, the documentary evidence that support the plaintiff's case was compelling;

(2) The "new" defence and the alleged oral termination of the Loan Agreement and Guarantees, contradicted the entire contents and effect of the various contractual documents. The defence's allegation could be seen as an infringement of the parole evidence rule, (see Bank of Australasia v. Palmer [1897] AC 540), especially regarding the written notice requirement clause in the Loan Agreement;

(3) The 1st defendant's part performance of the Loan Agreement by repayment of Tranche A plus interest and commitment fee also contradicted the assertions of a 'sham' arrangement;

(4) Cheng's explanation that the 1st defendant's part-payment was really a loan by the 1st defendant back to Lau who was in need of the money, and the plaintiff later repaid this amount back to the 1st defendant dressed up as Tranche C, was an absurdity;

(5) The timing of some of the re-payments by the 1st defendant, on 13 February 1996 and 18 March 1996, contradicted Cheng's assertion of oral termination of the Loan Agreement in late 1995. These occurred after the alleged oral termination;

(6) The last minute appearance of the "sham" defence, the lack of timely protest to the plaintiff's demands and assertions in the 1st and 2nd defendants' Defence, were all contrary to Cheng's account. What he said about the plaintiff's intention to invest was not credible.

 

The defence case

12. The Defence case had been succinctly summarized in his skeleton by Mr Kwok acting for the defendants. The main points raised were as follows :

"(a) Mr Lau agreed to make investment in the JVC;

(b) Mr Lau agreed to provide US$1m for that investment;

(c) Mr Lau would provide that sum through P by way of a loan;

......

(e) Once the approval was given the loan agreement would be terminated and the moneys paid thereunder would be converted into investment;

(f) Approval was given by the Chinese government on or about 28 November 1995;

(g) D3 was asked to provide additional security. D3 objected as it was superfluous because the Chinese government would definitely issue the approval;

(h) Mr Lau insisted that the additional security be given for good measure;

(i) Since Mr Lau insisted and since Mr Lau added that the guarantee would be subject to the same term of the oral agreement, D3 signed the document;

(j) In late 1995, Mr Lau, for P, terminated the loan agreement and D1's guarantee;

(k) The guarantees fell with the loan agreements which were terminated in late 1995;

(l) the moneys paid were accordingly converted into investment by Mr Lau;

(m) But by then on 7 April 1995 and 26 June 1995 US$400,000 and US$500,000 had been paid into the JVC account;

(n) The completion of the documentation was pending certain dispute over the JVC agreement between the Chinese shareholders. To this Mr Lau agreed and said he would wait until the dispute resolved;

(o) The dispute was resolved in mid 1997. D3 then was to prepare the documentation for execution;

(p) In July 1997 during the handover ceremony, D3 asked Mr Lau to meet to discuss the details of the documentation;

(q) Thereafter, Mr Lau could not be located for completing the documentation;

......

(s) In respect of the re-payment of Tranche A, it was re-paid on 19 September 1995 because Mr Lau needed cash;

(t) Later on 10 October 1995, P paid D1 US$500,000 as being Tranche C;

....."

13. Mr Kwok submitted that the circumstances clearly showed that the moneys paid over to the 1st defendant was for investment purpose. The loans were never intended to be real loans in the true sense of the term. They were meant to be money for investment pending formalities and approval by the Chinese government in relation to the joint venture. Therefore the Loan Agreement and Guarantees had only a temporary subsistence which had finally been terminated by consent of both parties in late 1995.

14. Mr Kwok rejected the plaintiff's contention about the parole evidence rule. He argued that the oral agreement had the effect of cancelling the written agreements as a whole and therefore they effectively fell away. Hence the "notice to be in writing" requirement in the Loan Agreement would no longer be relevant. The parole evidence rule was really irrelevant. Mr Kwok submitted that there was a valid defence shown by Cheng in that the defendants were no longer indebted to the plaintiff or Lau.

15. Mr Kwok further submitted that there was some evidence from the plaintiff's side to support the defence of investment. He stated that the court should not at this stage make a detailed analysis of the issue of credibility. Order 14 was for clear and obvious cases and this was not such a case. As to the lack of reference to the investment issue in the defence filed, Mr Kwok said that there was nothing unusual about it. The 3rd defendant had to travel frequently and he would not be in a position to give full instructions to his legal representatives at the early stage. On the other hand, now that Lau was out of reach, there was really no one to refute the defence case. In the circumstances, Mr Kwok stated that no summary judgment ought to be made based on the available material.

Assessment

16. Having considered the circumstances and the submissions, I have to say I agree with the plaintiff's submissions. The defence was that the Loan Agreement was a disguise and the real object being investment. But the terms of the Loan Agreement, particularly the clauses on repayment were inconsistent with that claim. The conduct of repayment in accordance with the Loan Agreement was also inconsistent with the alleged object of investment. The defence's allegation regarding Tranche C being another sham of pay-back and re-borrowing was not evidenced by any document. In fact, the 1st Supplemental Agreement, dated 13 October 1995 made no reference to this situation at all and clause 3.1 confirmed the validity and binding effect of the Loan Agreement. Actually, Tranche C was described in the 1st Supplemental Agreement as a further loan. (clause 2.1)

17. I found it significant that this matter was never raised by the defence until the Order 14 application. If it was true that Cheng was very surprised at why Mr Lau would press for payment despite the termination of the Loan Agreements as he had suggested in his affirmation, there was simply no reason why it was not raised immediately by himself or through his legal representatives. Considering the carefully structured Loan Agreements and the Guarantees, I found it incredible that Mr Lau for the plaintiff would proceed to, in such a casual manner, agree with Cheng to terminate the Loan Agreements by words of mouth.

The law

18. The plaintiff relied mainly on the authority of B.K. Murjani v. Bank of India (1990) 1 HKLR 586 in which it was held that :

"1. The mere assertion of fact in an affidavit does not necessarily give leave to defend. O. 14, r. 3 puts an onus upon a defendant. It might be described as a threshold onus to show that there is a triable issue in the case. That onus can only be satisfied on the balance of probabilities. Dictum of Ackner, L.J. in Banque de Paris v. de Naray [1984] 1 Lloyd's Rep 21 followed.

2. The Court will test the credibility of an affidavit asserting a triable issue against the conduct of the defendant and contemporary documents."

19. The above principle was adopted in subsequent cases such as Ng Siu Kei v. Chong Mee Mee (1999) 1 HKC 693 in which Yeung J had stated the following :

" (1) The mere assertion in an affidavit of a given situation which was to be the base of a defence did not ipso facto provide leave to defend. The court must look at the whole situation and ask itself whether the defendant had satisfied the court that there was a fair and reasonable probability of the defendant having a real or bona fide defence.

(2) The defendant's allegation in respect of the price of the flat was incredible, or almost impossible, by reason of its inherent impossibility and inconsistency with the document pertaining to the transaction in question. The defendant could not possibly succeed and no leave ought to be granted on this point. Bhagwandas Kewaleram Murjani & Ors v Bank of India [1990] 1 HKLR 586 applied."

20. In the present case, the plaintiff's claim was clear. It was based on formal documents with meticulously structured clauses defining the loan and stipulating the terms of repayment, interest and other related obligations. There was nothing in these documents which tend to show that the sums advanced were not genuine loans. The 3rd defendant had acted upon the terms of the Loan Agreement and made repayments accordingly. I could not find anything to support the suggestion that the plaintiff had not intended the signed documents to have the apparent legal effect. If what Cheng said was true, there should be, at least, some reference to that in writing.

21. The present case appeared to be rather similar to the circumstances in Eastlite Industries Ltd v. William Hung Yu Yang CACV 313/2001. It was a case where the defendant also put forward the claim that the loan was meant to be an investment in disguise. There was also nothing in writing to support the alleged defence.

22. I am not suggesting that a claim of the existence of certain oral agreement can never be sufficient to resist an Order 14 application. Each case must be considered in light of its particular circumstances. Mr Kwok had reminded me that I should not go into a detailed analysis of the issue of credibility unless the defence was so incredible. He was apparently referring to the dictum made by Godfrey JA (as he then was) in the case of Ng Shou Chun v. Hung Chun San [1994] 1 HKC 155. What the learned judge had said, inter alia, was this :

" In the local case of Murjani BK & Ors v Bank of India [1990] 1 HKLR 586, the Court of Appeal, after going into all the evidence, came to the conclusion that the case of the defendant was plainly advanced dishonestly and was therefore incredible. But Murjani was decided before National Westminster Bank v Daniel and I would sound a note of caution about Murjani, which has come to be cited in almost every case under O 14 or O 86 to justify the plaintiff in asking the court to embark on a mini trial of the action on affidavit evidence. That is not a proper course for the court to take. It will in future be sufficient for the court to ask itself the simple question : 'Is what the defendant says credible?' If so, he must have leave to defend. If not, the plaintiff is entitled to summary judgment. The issue is not whether the defendant's assertions are to be believed; it is whether those assertions are believable."

 

Conclusion

23. Bearing in mind the relevant principles, I found that, in view of all the circumstances, the defence assertions are unbelievable. Although it was true that Mr Lau could not prepare any affirmation in person, the plaintiff's case was clear and well documented. Despite Mr Kwok's persuasive submissions, I was unable to agree that leave should be granted to the defendants to defend. This appeal must be dismissed.

24. Further, I shall make an order nisi that costs of the appeal be to the plaintiff and this order shall be made absolute 14 days after the handing down of his judgment.