KKC CAPITAL LTD PARTNERSHIP v. AGAPE INTERNATIONAL ENTERPRISE LTD

HCA 2240/2016

[2018] HKCFI 1621

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2240 OF 2016

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JUDGMENT

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1.  This an appeal against the charging order absolute made by Master Chow on 12 July 2017.

Background

2.  In this action, the Plaintiff, KKC Capital Limited Partnership (“KKC”), claims against the Defendant, Agape International Enterprise Limited (“Agape”), for the outstanding sum of $17,759,859.35 plus interest under a loan agreement made on or around 1 April 2015.

3.  On 20 January 2017, default judgment was entered against Agape (“the Judgment”).

4.  On 6 February 2017, the court made a charging order nisi against Agape over its alleged beneficial interest on a convertible bond (“the Bond”) at the value of $16,300,000, which was due on 14 April 2017 including any interest, dividends or other distributions payable and bonus issue in respect of the Bond.

5.  The Bond was issued by the party named in the charging order nisi, Capstone Corporate Investments Limited (“Capstone”), in respect of a loan of $16,300,000 advanced by Agape to Capstone.

6.  The main terms of the Bond are as follows:

“2. Upon receipt of the Principal sum of HK$16,300,000 … … , [Capstone] shall issue to [Agape] this Bond together with a Certificate as set out in the document annexed hereto in the name of [Agape] and this Bond shall be deemed to be beneficially and solely owned by [Agape].

3. [Agape] shall have the right to convert this Bond into shares of [Capstone] at any time during the conversion period of months (“conversion period”) from the 14 day of February 2017 to the 14 day of April 2017 (“Maturity date”) subject to and as provided in Clauses 4 to 10.

4. Not later than one (1) month before the Maturity date, [Agape] shall exercise the said right under Clause 3 by giving to [Capstone] in the manner provided in this Agreement, 30 days’ prior written notice thereof.

5. Within 3 days after receipt of the said notice from [Agape] to exercise the said right under Clause 2, [Capstone] at its own cost, shall and undertakes to allot and issue to [Agape], new ordinary shares in [Capstone] based on a unit value of HK$1.00 per share, credited as fully paid shares (“new issued shares”) … … …

… … …

7. This Bond constitutes direct, unsubordinated, unconditional and unsecured obligation of [Capstone] to [Agape] and shall rank equally with all other present or future unsecured and unsubordinated obligations or debts of [Capstone].

8. [Capstone] may at any time hereafter but not earlier than 6 months after the date hereof and not later than two months before the Maturity date, by giving 30 days’ notice to [Agape], redeem this Bond by paying to [Agape] the Principal Sum together with the said interest thereon in which event this Bond shall become null, void and of no effect.

9. During the continuance of this Bond, [Capstone] shall pay [Agape] interest on the Principal sum at the rate of five (5) per cent per annum on the 14^th day of each month commencing from the 14^th day of May, 2016 until the Maturity date and thereafter at the same rate until full payment of the Principal sum.

10. Unless previously redeemed or converted by [Agape] as provided in, this Agreement, [Capstone] will redeem this Bond by paying to [Agape] the whole of the Principal sum together with the said interest thereon on the Maturity date in which event this Bond shall become null, void, and cease to have any further effect.

11. It is hereby expressly declared and warranted by [Capstone] as follows:

… … …

(2) Up to the date hereof and until this Bond is converted or redeemed under the provisions of Clauses 3 and 8 respectively, neither [Capstone] nor any of its directors or officers has granted any right to or entered into any agreement or transaction with any third party in such manner as to prejudice or affect the rights and interests of [Agape] or will do so at any time thereafter, without first obtaining the written consent and authority of [Agape] so to do.”

7.  Capstone intervenes in the proceedings and opposes the charging order absolute application (“the Absolute Application”). Capstone’s case is as follows:

(i)  From mid-2016 to the beginning of 2017, Capstone was assigned debts due by Agape to 10 retail investors (“the Investors”) in the total principal sum of $17,284,000.  Together with these assignments, the 10 Investors also executed powers of attorney to Capstone to pursue repayment of the said debts or otherwise commence proceedings to recover the principal sums due together with any other sums owing under their respective debt instruments.

(ii)  Following the execution of the assignments of transfer, notice of such assignments were sent to the registered office of Agape.

(iii)  On 8 December 2016, Capstone commenced proceedings against Agape seeking repayment of $6,000,000 (“the 2016 Action”). On 20 January 2017, default judgment was entered in favour of Capstone against Agape.

(iv)  On 11 August 2017, Capstone commenced another proceedings against Agape to recover the loans advanced by some of the Investors which had been assigned to Capstone (“the 2017 Action”).  On 22 September 2017, Capstone obtained default judgment against Agape in the sum of $12,234,000.

(v)  According to Capstone, it is now a judgment creditor of Agape.  The total judgment debt due under the 2016 and 2017 Actions is in the sum of $17,234,000, and Capstone is entitled to set-off such debt against the loan due under the Bond thereby extinguishing Agape’s right under such Bond.

8.  The first hearing for the Absolute Application came before Master S Lo on 2 March 2017.  During that hearing, Capstone gave an undertaking to the court (“the Undertaking”) that, pending the substantive determination of the Absolute Application, “Capstone will not rely on Clause 8 of [the Bond] to declare that [the Bond] is null and void and of no effect”. Master S Lo then gave directions for the filing of affidavit evidence and adjourned the application for argument.

9.  The substantive hearing came before Master Chow on 12 July 2017.  After hearing the submissions of the parties, Master Chow refused Capstone’s application for leave to file the 8^th affirmation of Archambaud-Chao Percy (“Percy Chao”) and ordered the charging order be made absolute.

10.  Capstone lodged an appeal against the said order.  Just before this appeal hearing, Capstone made an application to file the affidavit of John David Ip sworn on 7 November 2017.  I allowed the application on the ground that the materials deposed to in the said affidavit relate to matters which occurred after the making of Master Chow’s order.  By reason of such ruling, Mr Jose Remedios, counsel for Capstone, confirms that his client would not pursue the appeal relating to the filing of the 8^th affirmation of Percy Chao.  The only remaining issue is, therefore, whether the court should grant the charging order absolute.

Merits of the appeal

11.  There is no dispute about the following legal principles governing the exercise of the court’s discretion to make a charging order:[1]

(i)  The question whether a charging order nisi should be made absolute is one of the discretion of the court.

(ii)  The burden of showing cause why a charging order nisi should be made absolute is on the judgment debtor or any other person interested in the subject matter of the charge.

(iii)  For the purpose of the exercise of the court’s discretion, there is, in general, no material difference between the making absolute of a charging order nisi on the one hand and a garnishee order nisi on the other.

(iv)  In exercising its discretion, the court has both the right and duty to take into account all the circumstances of a particular case, whether such circumstances arose before or after the making of the order nisi.

(v)  The court should so exercise its discretion as to do equity, so far as possible, to all the various parties involved.

12.  Having heard the submissions from the parties, I agree with Capstone that the charging order absolute should not have been made.

13.  In my judgment, the appeal can be disposed of on one simple ground alone.  Since Agape has not exercised the right to convert the Bond into shares of Capstone (“the Conversion Right”) in accordance with the terms in the Bond, the only right left to Apage under the Bond is the right to enforce the unpaid debt against Capstone.   Such kind of right should not be a proper subject matter for a charging order.  If KKC seeks to attach the unpaid debt owed by Capstone to Agape for the purpose of satisfying the Judgment, KKC should do so by way of garnishee proceedings.

14.  S 20A(1)(a) of the High Court Ordinance (Cap 4) provides that a charging order can be made on any interest held by the debtor beneficially in any assets mentioned in s 20A(2), which include, inter alia, “stock in any limited company”.   KKC argues that since Agape, being the sole beneficial owner of the Bond, has the right to convert the Bond into shares of Capstone, the Bond falls within the term “stock in any limited company” in s 20A(2), and as such the Bond can be made a subject matter of a charging order.

15.  However, clauses 3 and 4 of the Bond provide that the Conversion Right has to be exercised by Agape during the conversion period from 14 February to 14 April 2017 (“the Conversion Period”).   It is common ground that Agape, and indeed KKC, had not exercised the Conversion Right within the Conversion Period, and so Agape and KKC have lost the Conversion Right under the Bond.  Without such right, the Bond is no more than an unpaid debt owed by Capstone to Agape.

16.  In a way, the main dispute between the parties now is whether the Undertaking would have the effect of preserving Agape’s Conversion Right pending the substantive determination of the Absolute Application.  Since such issue has not been fully canvassed in the oral hearing, I have invited the parties to make further written submissions on the point.

17.  Ms Law, counsel for KKC, argues that, by the provision of the Undertaking, it must be the intention of the parties to preserve the status quo and all rights of the parties pending the substantive determination of the Absolute Application.  By the time when the Undertaking was provided, the Conversion Period had not expired.  Capstone was seeking the indulgence of the court to intervene in the Absolute Application. When the Undertaking was given, it was by then clear that there was no prospect of the matter being concluded before the end of the Conversion Period, and that was why the Undertaking was given to preserve the rights of the parties.

18.  Ms Law has also invited the court to test Capstone’s argument in this way.  If Agape sought to exercise the Conversion Right the day immediately after the hearing on 2 March 2017, which was well within the Conversion Period, Capstone would have been debarred, by reason of the Undertaking, from responding to Agape’s request by exercising the right of set-off, such that the Bond is of no effect and the Conversion Right could no longer be exercised.  If the Undertaking is only to limit Capstone’s rights without limiting Agape’s right to request for conversion, Agape’s exercise of the Conversion Right must be treated as valid and cannot be resisted by Capstone.  Agape must be allotted new shares in Capstone as per the terms of the Bond, notwithstanding Capstone’s arguments raised in these proceedings and the fact that they have not been substantively heard and determined by the court.  This could not have been the intention of the parties in particular Capstone.  According to Ms Law, the true spirit and effect of the Undertaking must be to preserve the Conversion Right until the determination of KKC’s Absolute Application, in the sense that the issue of the availability of the Conversion Right would be deferred until after the court determines in these proceedings the validity of Capstone’s case on the status of the Bond.

19.  There is some force in these arguments.  KKC was placed in an awkward situation when Capstone intervened before the end of the Conversion Period.  At the time when KKC first made the charging order application, Agape still enjoyed the Conversion Right under the Bond.  Since the Conversion Right relates to the shares of a limited company, it was quite proper for KKC to make the application by that time.  Bearing such background in mind, it is certainly arguable that the object of the Undertaking is to preserve the Conversion Right.

20.  However, without evidence from the parties about their intention, the court can only determine the effect of the Undertaking by looking at the wording of the Undertaking itself.  In my judgment, the wording is clear.  It only relates to Capstone’s right of early redemption under clause 8 of the Bond.  The Undertaking makes no reference to the Conversion Right as provided for in clauses 2, 3 and 4 of the Bond, and so in my judgment, the Undertaking does not operate to preserve, vary or extend the contractually stipulated time for the conversion of shares under the terms of the Bond.

21.  As I see it, the exercise of the Conversion Right under clauses 3 and 4 and the right of early redemption under clause 8 are two different matters.  In the Absolute Application, Capstone tries to put forward a case that it is entitled to set-off the assigned debts due by Agape to the Investors against the loan due under the Bond thereby extinguishing Agape’s right under the Bond.  It is clear that such argument relates to clause 8 of the Bond, as Capstone’s right to redeem the Bond is governed by such clause.  In other words, Capstone can only extinguish the Conversion Right in accordance with the provisions in clause 8.  Hence, the Undertaking only relates to the right of early redemption under clause 8, and it does not have the effect of preserving the Conversion Right under clauses 3 and 4.

22.  I agree with Ms Law that there is a close connection between the Conversion Right and the Capstone’s right of early redemption under the Bond.  Both rights would affect whether Agape can convert the Bond into Capstone’s shares which is the main feature of the Bond.  One may even say that Capstone’s interpretation of the Undertaking is too narrow, which may have the effect of rendering the Undertaking useless or putting Capstone in an unfavourable position as suggested by Ms Law.  Nevertheless, if the Undertaking is to have the effect as contended for by KKC, it has to be expressly worded to preserve Agape’s or KKC’s Conversion Right pending the substantive determination of the Absolute Application.  After all, Capstone is a not a party in the present proceedings.  Being dragged into the dispute, it is perfectly legitimate for it to rely on the express terms in the Bond and the Understanding to protect its rights.  As against Capstone, KKC’s position would not be superior to that of Agape.  If Agape cannot extend the time for the exercise of the Conversion Right, neither can KKC do so in the absence of an express undertaking to that effect.

23.  In fact, Master Chow also agreed that KKC and Agape have already lost the Conversion Right.  At the beginning of her ex tempore ruling on 12 July 2017, the learned Master said the following:

“Although [the Bond] itself gives [Agape] the right of converting [the Bond] into shares of Capstone, that right has not been exercised pursuant to the terms of [the Bond]. The only right left to [Agape] is the right to payment of the principal sum with interest on the maturity date which is 14 April 2017.”

24.  The learned Master was right in making such observation.  Unfortunately, she had not considered the issue whether the Bond without the Conversion Right should be made a subject of a charging order. Without addressing such fundamental question, all the other issues are red herrings.

25.  By reason of my aforesaid analysis, it is not necessary for me to deal with the other issues in this case, such as:

(i)  whether Capstone’s story about the assignments of debts by the Investors is a credible one;

(ii)  whether Capstone is entitled to rely on such assignments of debts to set-off the debt owed by Capstone to Agape under the Bond;

(iii)  whether clause 11(2) of the Bond prevents Capstone from accepting the assignments of debts by the Investors; and

(iv)  whether KKC should have priority over Capstone in the enforcement of the Judgment against Agape.

26.  As mentioned above, these are red herrings so far as the Absolute Application is concerned.  As Agape and KKC have not exercised the Conversion Right within the Conversion Period, they have since then lost the Conversion Right.  In such case, the Bond is no more than an unpaid debt owed by Capstone to Agape.  The unpaid debt would not be a proper subject matter for a charging order and so I allow the appeal and set aside the charging order absolute made by Master Chow on 12 July 2017.

27.  I also make the following costs order nisi:

(i)  the costs of the Appeal be paid by KKC to Capstone;

(ii)  for the costs below vis-à-vis KKC and Capstone incurred on or before 14 April 2017, there be no order as to costs;

(iii)  for the costs below vis-à-vis KKC and Capstone incurred after 14 April 2017, such costs be paid by KKC to Capstone.

28.  The order nisi shall be made absolute 14 days after the date of the handing down of this judgment.