UNIVERSAL SOLUTIONS LTD v. CHRISTOPHER GORDON YOUNG

HCA 1517/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1517 OF 2010

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BETWEEN

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J U D G M E N T

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1.  This is an application by the Plaintiff for summary judgment on its claim. The Plaintiff relies on a loan agreement it made with the Defendant and dated 9 August 2007 (“the Loan Agreement”) under which it advanced AUD250,000 to the Defendant. Of this sum, AUD70,000, was in fact advanced on 7 March 2007 pursuant to a sale and purchase agreement of shares dated 26 January 2007 (“the Sale and Purchase Agreement”). Only the balance of AUD180,000 was advanced under the Loan Agreement on 31 August 2007.

2.  The Plaintiff said that the Sale and Purchase Agreement had been superseded by the Loan Agreement and the total loan of AUD250,000 is governed by the terms and conditions of the Loan Agreement.

3.  The Loan Agreement provided that the loan of AUD250,000 was interest-free and repayable on the date falling 36 months after the payment of the balance of the loan.  The balance of the loan at AUD180,000 was paid on 31 August 2007.  Hence, the date of repayment was 31 August 2010. The Loan Agreement further provided that if the Defendant should fail to repay the loan when due, a default interest at 14%  per annum was payable from the date of default to the date of payment.

4.  The Plaintiff served on the Defendant a demand for repayment after the repayment date, but the Defendant made no repayment. The Plaintiff then started this action and applied for summary judgment.  The Defendant opposes this application.

BACKGROUND

5.  In November 2006, the Plaintiff was due to be acquired by one Hydrotech International Limited (“Hydrotech”).  Hydrotech became a listed company in Australia in 2007.  As part of the arrangement for Hydrotech to purchase the Plaintiff, the Defendant and the Plaintiff entered into the Sale and Purchase Agreement whereby the Defendant agreed to purchase from the Plaintiff 95% of the shares of a Universal Scientific Solutions Ltd (“USSL”), a subsidiary of the Plaintiff, for AUD1 million. 

6.  The Sale and Purchase Agreement is evidenced by an unsigned sale and purchase agreement dated 26 January 2007.  The Defendant said that this agreement had been signed but the Plaintiff put this to doubt. However, the Plaintiff accepted that there was a binding Sale and Purchase Agreement in terms of the document dated 26 January 2007 despite the document was unsigned.

7.  The Sale and Purchase Agreement further provided that the Plaintiff would procure one USIL UK PLC (“USIL UK”), another subsidiary of the Plaintiff, to enter into a Master Licensing Agreement (“MLA”) with USSL for the grant by USSL to USIL UK an exclusive licence to manufacture and sell certain industrial surface coating material (“the Product”).  The MLA provided that USIL UK in return had to pay USSL 35% of its net profit before tax and 20% surcharge on the costs of the materials for manufacturing the Product.

8.  The Sale and Purchase Agreement also provided that the Plaintiff would advance to the Defendant AUD250,000 in a lump sum or by instalments interest-free for 36 months.  Recital D of this agreement recorded that the AUD250,000 was repayable by the Defendant from the profits to accrue to the Defendant from the MLA.  The agreement also provided that this loan should be secured by the Defendant’s assignment to the Plaintiff 19,635 shares of the Plaintiff that were registered in the Defendant’s name and this security would remain until the loan was discharged.

9.  The AUD1 million payable to the Plaintiff for the 95% shares of USSL was to be discharged by the Defendant by transferring to the Plaintiff 78,653 shares of the Plaintiff as registered in the Defendant’s name.

10.  The sale and purchase of shares took place on 7 March 2007 when the Plaintiff transferred 95% of USSL shares to the Defendant and the Defendant transferred 78,653 shares of the Plaintiff to the Plaintiff. The Plaintiff also advanced AUD70,000 to the Defendant on the same day as part of the AUD250,000 loan.

11.  The Plaintiff and the Defendant then entered into the Loan Agreement on 9 August 2007.  Recital A of this agreement referred to the Plaintiff’s sale of 95% of the (or 10,000) shares of USSL to the Defendant for AUD1 million, and the Plaintiff’s agreement to advance to the Defendant an interest-free loan of AUD250,000 to be secured by the Defendant’s assignment to the Plaintiff of 19,635 shares of the Plaintiff as the Transaction.

12.  Recital C said that the parties to the Transaction had agreed “to restate and amend the terms of the Transaction by entering into this Loan Agreement and the New Transaction Documents.”

13.  The Loan Agreement restated the Plaintiff’s agreement to lend the Defendant AUD250,000 with AUD70,000 already advanced on 7 March 2007.  The repayment date was the date falling 36 months after the payment of the balance of the loan at AUD180,000, with default interest at 14% per annum payable from the date of default to the date of payment.

14.  The New Transaction Documents referred to in Recital C were defined to mean the Loan Agreement, a guarantee given by USSL to the Plaintiff, a share mortgage executed by the Defendant in favour of the Plaintiff over the Defendant’s 10,000 shares of USSL and a debenture executed by USSL in favour of the Plaintiff over the fixed and floating assets of USSL. Hence, the last three documents are the security for the Defendant’s repayment of the loan to the Plaintiff.  They do not include the original security in the Transaction, which was the assignment by the Defendant to the Plaintiff of 19,635 shares of the Plaintiff.  Indeed, the reason given by the Plaintiff to the Defendant for executing the New Transaction Documents was that the original security of 19,635 shares of the Plaintiff was not acceptable under Australian Law as security for the Plaintiff’s lending to the Defendant.  Hence, the New Transaction Documents were executed to substitute the security.

15.  The Loan Agreement also provided for no set-off or counterclaim in clause 11.1 and an entire agreement clause with mutual discharge of prior claims in clause 13.5.  These clauses stated:

“11.1 All payments required to be made by the Borrower hereunder shall be calculated without reference to any set-off or counterclaim and shall be made free and clear of all taxes, withholdings and without any deduction for or on account of any set-off or counterclaim, ...

…

13.5     The New Transaction Documents supercede any previous agreements between the parties in relation to the Transaction and the matters with which they deal and represent the entire understanding between the parties in relation to those matters.  Save as set out in the New Transaction Document the parties release and forever discharge each other from any and all claims arising from any agreement, fact, matter or circumstance whatsoever occurring prior to the date of this Agreement.”

THE DENFENDANT’S GROUNDS OF OPPOSITION

16.  The Defendant advanced several grounds of defence.  The first ground is that as a matter of construction, the Loan Agreement did not replace the Sale and Purchase Agreement.  Since there is no dispute that no profit was payable by USIL UK to USSL under the MLA, the Defendant had no obligation under the Sale and Purchase Agreement to repay the AUD250,000 to the Plaintiff.  The Defendant further asserted that it was the Plaintiff’s fault that resulted in no profit being payable under the MLA.

17.  The second ground is that the Defendant had been deceived into signing the Loan Agreement that contained the second part of clause 13.5 which provided for mutual discharge of prior claims.  This part of clause 13.5 is referred to as “the Addition”.

18.  The third ground is that the Plaintiff had breached the Loan Agreement.  Since the Loan Agreement provided for substitution of security, the Plaintiff should have reassigned the original security of 19,635 shares of the Plaintiff back to the Defendant.

19.  The Defendant also exhibited in his affidavit in opposition a draft defence and counterclaim which alleges substantial counterclaims that the Defendant would apply to set-off the Plaintiff’s claim.

20.  The Defendant has also intimated that the Plaintiff was trying to rip-off him in having received AUD1 million from him but produced no profit under the MLA for him to repay the loan and trying to sue him for repayment of the loan.

THE APPLICABLE PRINCIPLES

21.  Leading counsel for the Defendant has reminded me the following statements.  Godfrey JA has said in Man Earn Ltd v Wing Ting Fong [1996] 1 HKC at 228E:

“Unless it is obvious that the defence put forward by the defendant is ‘frivolous and practically moonshine, O 14 ought not to be applied’: see Codd v Delap (1905) 92 LT 510, per Lord Lindley at 511.”

22.  Litton JA (as he then was) also said in Sin Hua Bank Ltd v Sung Foo Kee Ltd [1993] 1 HKC 65 at 67I to 68A:

“Where there are real disputes of fact, or where the factual matrix is unclear, it would be a strong remedy for a court to give summary judgment to the plaintiff. By giving unconditional leave to defend, the court is, in effect, postponing judgment for the plaintiff if the plaintiff turns out eventually to be right. Any delay can be compensated for in interest.”

23.  Leading counsel also reminded me not to conduct a mini-trial on the affidavits.  He referred to Ng Shou Chun v Hung Chun San [1994] 1 HKC 155 per Godfrey JA at 158E to H: 

“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.” (emphasis supplied)

24.  Counsel for the Plaintiff also reminded me that where the Plaintiff has raised a plausible and prima facie sustainable case, the Defendant is expected to show a fair probability or reasonable grounds that a bona fide defence exists so that leave to defend can be given or the application or summary judgment is dismissed (see Toy Major Trading Co. Ltd v Hang Shun Plastics Ltd [2007] 3 HKLRD 345 at para 12 per Ma CJHC as he then was).

ANALYSIS AND DECISION

                             Construction of the Loan Agreement 

25.  The Defendant says that as a matter of construction, the Loan Agreement merely restated and amended the Transaction.

26.  He said on affidavit and his draft defence and counterclaim that there was no consideration in the Loan Agreement for changing the terms of the Sale and Purchase Agreement.  Hence, the Loan Agreement is unenforceable and the Sale and Purchase Agreement remains effective.  Since the Plaintiff also accepted that under the Sale and Purchase Agreement, repayment was to be from the profits of the MLA, and there was indeed no profit, hence, there was no obligation for him to repay. 

27.  However, counsel for the Plaintiff submitted that the Loan Agreement was a new bargain and there was additional consideration provided by the Plaintiff to the Defendant in the Loan Agreement.  Counsel referred to the extension of the repayment date for separate instalments of the loan from 36 months after the drawing down of the instalment to 36 months after the drawing down of the final instalment of the loan.  This effectively extended the repayment date of the first instalment of the loan at AUD70,000 by some five months.  Hence, the Defendant was wrong in suggesting that there was no consideration for the Loan Agreement or the New Transaction Documents. 

28.  Counsel also referred to Williams v Roffey Bros & Nicholls [1991] 1 QB 1 at 15G to 16B, however, that case concerned only with contracts for doing work or for supplying goods or services.  Hence, I would not take that case into consideration.

29.  After the additional consideration in the Loan Agreement was identified by counsel for the Plaintiff, leading counsel for the Defendant submitted that the Loan Agreement did not seek to vary the Sale and Purchase Agreement, in particular the provision that repayment of the AUD250,000 by the Defendant was to be out of the profits of the MLA.  Even though the Loan Agreement has a new timeframe for repayment, that did not amend the Sale and Purchase Agreement or change the source of funding for the repayment.

30.  Leading counsel submitted that the purpose behind the making of the New Transaction Documents and the driving force for them was the need to substitute the security of lending.  That was effected by the New Transaction Documents which did not vary the provision of the Sale and Purchase Agreement, which provided that repayment had to be from the profits of the MLA.

31.  Though the cause for making the New Transaction Documents was the need to substitute the security for lending and Recital C of the Loan Agreement stated that the parties had agreed to restate and amend the terms of the Transaction, but the restating and amending of the Transaction was “by entering into this Loan Agreement and the New Transaction Documents.”  I therefore have to look at the Loan Agreement and the New Transaction Documents to determine their meaning and effect, but I cannot go beyond these documents in discharging this task.

32.  Clause 13.5 of the Loan Agreement clearly provided for the New Transaction Documents to supersede any previous agreements in relation to the Transaction and the matters which they dealt with.  Those matters must include the making of the AUD250,000 loan by the Plaintiff to the Defendant, the Defendant’s repayment of the loan, and the security for the repayment.  These matters have been mentioned in Recital A as matters contemplated by the Transaction.  They are also matters that have been dealt with by the New Transaction Documents. 

33.  Clause 13.5 also provided that the New Transaction Documents represented the entire understanding between the parties in relation to these matters.  Hence, the arrangement of the loan, its repayment and its security have been provided for comprehensively in the New Transaction Documents.  Any term or condition regarding these matters as originally provided in the Sale and Purchase Agreement must have been superseded by the New Transaction Documents.  The superseded terms of course include the term that repayment of the loan should be from the profits of the MLA.  The Defendant’s obligation to repay the loan pursuant to the Loan Agreement is thus not dependant on any profit being generated from the MLA.

34.  I come to this conclusion even without considering the Addition in clause 13.5, which effected a mutual discharge of all claims arising from any agreement, fact, matter or circumstance prior to the Loan Agreement.

35.  I am therefore against the Defendant on the construction of the Loan Agreement.

                   Allegation of deceit in mutual discharge of claims

36.  The Defendant alleged that he was deceived into signing the Loan Agreement which contained the Addition in clause 15.3, which provided for the mutual discharge of claims.  He pleaded in his draft defence and counterclaim that there was perceived to be nothing contentious about the New Transaction Documents and he and the Plaintiff’s solicitor, Mr Gordon agreed that there was no reason for him to instruct separate solicitors.  That was disputed by Mr Gordon. 

37.  He then pleaded that the Addition was not inserted in clause 13.5 in the first and second drafts of the Loan Agreement.  Clause 13.5 only had the superseding previous agreements and entire agreement provisions in the first and second drafts.  The Addition only appeared as the second part of clause 13.5 in the third draft. The insertion was not brought to his attention by any one on the Plaintiff’s side, nor was he alerted to its intended purpose of defeating his claim and defence to the Plaintiff’s claim on the ground that there was no profit from the MLA.  The Addition also radically changed the terms and nature of the Loan Agreement as having been discussed or agreed between the parties.  It was wholly unrelated to the loan and the subject matter of the New Transaction Documents and was to his significant prejudice.  He had no reason and would not have signed an agreement containing it.  He executed the Loan Agreement before the Plaintiff’s solicitors and one of its directors, but no attempt was made to draw his attention to the Addition and its purpose.

38.  In order to refute these allegations of dishonesty and sharp practice which made Mr Gordon complicit in them, Mr Gordon made an affidavit to produce his file of correspondence and draft documents in relation to the preparation of the New Transaction Documents.  These papers show that the purpose of inserting the Addition was to separate the Defendant and USSL from the Hydrotech group including the Plaintiff.  Amongst these papers is an e-mail dated 8 August 2007 from Mr Gordon to the Defendant (page 339 of the bundle).  The first paragraph of the e-mail said:

“Dear Chris,

I attach amended mark-ups of the Loan Agreement, Guarantee, Share Mortgage and Debenture together with clean versions for final agreement and, hopefully, signature tomorrow.  Assuming that the amendments are satisfactory to you the only additional information that I await w`hich needs to be added before execution are:”

There then followed several points which required input of information by the Defendant.

39.  The third version of the draft Loan Agreement was attached to this e-mail.  The Addition which occupied three lines in clause 13.5 was clearly underlined indicating that it was a new amendment.  The margin next to clause 13.5 was also marked-up to highlight the amendment.

40.  If the Defendant should have looked at this draft, I think it would have been difficult for him not to have taken notice of the Addition.  In fact, the Defendant responded to this e-mail on 9 August at 1104 hours and gave input of the information requested by Mr Gordon in this e-mail.  The New Transaction Documents were then executed later on 9 August.

41.  I also note that the Defendant is a member of the Hong Kong Bar of many years standing.

42.  In the premises, I find that the Defendant has not made out a case in his defence that he had been deceived into signing the Loan Agreement which contained the Addition.

                   Allegation of non-reassignment of original security

43.  Leading counsel for the Defendant in the course of oral submissions suddenly submitted that the Plaintiff had breached the Loan Agreement in failing to reassign to the Defendant the original security of 19,635 shares of the Plaintiff.

44.  The execution of the New Transaction Documents would mean that the Plaintiff had to reassign the 19,635 shares to the Defendant as such shares were not required by the New Transaction Documents to be the security of the loan.  In fact, it was because such security was unacceptable that had necessitated the making of the New Transaction Documents with fresh security and guarantee for the loan.

45.  However, there is no evidence of what had happened to the 19,635 shares.  If the Plaintiff had wrongfully kept those shares despite the New Transaction Documents and new security, the Defendant would have referred to it in his draft defence and counterclaim and affidavit in opposition.   He had not done so.  The written submissions of leading counsel also made no mention of it.  It was only raised for the first time in the course of oral submissions. There was nothing that the Plaintiff could have done to deal with it.

46.  In these circumstances, I do not think it right or fair to allow the Defendant to rely on this as a ground of defence.  I also doubt if the Plaintiff’s failure to reassign those shares would be a ground for the Defendant not to make repayment of the loan.

                   Set-off and Counterclaim

47.  The Defendant also argued for a set-off of the Plaintiff’s claim by his counterclaims in the Draft Defence and Counterclaim. The Plaintiff’s first answer is to rely on clause 11.1 of the Loan Agreement which provided that the repayment of the loan should be calculated and made without any deduction for or on account of any set-off or counterclaim.

48.  Furthermore, a bona fide counterclaim should arise out of the same subject matter of the action and connected with the grounds of defence.  A separate and distinct counterclaim is no bar to summary judgment (see HKCP 2011, paragraph 14/4/14 at page 243 to 245).

49.  Some of the counterclaims are alleged to have arisen because of breaches by certain directors of the Plaintiff of duties owed by them to the Plaintiff (see paragraph 112B(12) and (13) of the Draft Defence and Counterclaim).  These alleged breaches, as submitted to by counsel for the Plaintiff, are only of concern to the Plaintiff.  The Defendant cannot raise from them any counterclaim against the Plaintiff.

50.  There is then an allegation that the Plaintiff through USIL UK had breached the MLA thereby caused loss to the Defendant and rendered the 10,000 shares of USSL, which cost the Defendant AUD1 million, valueless.  However, there is no documentary evidence in support of the Defendant’s allegation that the lack of profit from the MLA was the fault of the Plaintiff or USIL UK.  Even if such allegation can be proved, it can only afford a claim by USSL against USIL UK and not the Plaintiff.  Such claim also does not arise out of the Loan Agreement on which the Plaintiff’s claim is based.

51.  I therefore hold that the Defendant is not entitled to rely on set-off in defence to the Plaintiff’s claim.

                   Rip-off

52.  Finally, on the Defendant’s intimation of a rip-off, I do not think the Defendant is entitled to make this allegation.  It is clear from the evidence that the Defendant entered into a commercial deal with the Plaintiff.  The Defendant is an experienced member of the Hong Kong Bar.  All terms in the New Transaction Documents were made known to him before he committed to them.  He had also been a director of the Plaintiff.  I see no basis for the allegation of rip-off.

53.  The Defendant also mentioned in his affidavit and draft defence and counterclaim the grounds of economic duress and arrears of salary.  However, these were not relied upon by his leading counsel at the hearing.

54.  In the premises, I give judgment to the Plaintiff for the sum of AUD250,000 or its equivalent sum in Hong Kong dollars at the time of payment.  I also order that there be interest at 14% per annum from 1 September 2010 to the date of payment.

55.  I also make a costs order nisi that the Defendant do pay the Plaintiff costs of this action on a full indemnity basis as that was so provided in the Loan Agreement.

56.  I further direct that parties do fix a 9.30 a.m. hearing for summary assessment of such costs, which hearing shall be outside the next 14 days unless an application to vary the costs order nisi shall have been made within the next 14 days.