WONG LAI LING v. LAM KIN CHUNG

HCA 828/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 828 OF 2011

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BETWEEN

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J U D G M E N T

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Introduction

1.  This is an appeal by the defendant from an Order 14 Judgment entered against him by Master Kwang on 27 January this year.  The plaintiff has sued the defendant on an agreement in writing dated 25 April 2005 by which the plaintiff said that she lent the defendant the sum of $5,000,000.  By Clause 2 of the Agreement, the defendant was bound to repay the loan, together with agreed interest of $250,000 on or before 25 April 2006.  Suffice it to say that there are further interest provisions in the event of non-payment in full by the due repayment date.

2.  The loan of $5,000,000 was advanced on 25 April 2005, but repayment was not made by 25 April 2006.  Repayments have been made in varying amounts between June 2006 and December 2009.  As at 26 April 2011 the outstanding principal on the loan was $1,176,138.20 together with interest of $498,903.86, which is a total of $1,675,042.06.

3.  On 10 May this year, I had before me an application by the defendant to have admitted into evidence on the appeal a cheque for $600,000 to a Mr Loong about which it was said that the plaintiff had not told the truth in her affidavit evidence before the Master.  Consequent upon that the defendant has taken out committal proceedings against the plaintiff alleging a contempt of court based on this allegation of having given untruthful evidence about this particular cheque to the Master.

4.  Having heard the argument in respect to that application, I handed down a judgment dated 14 May dismissing the application to have this “new” evidence admitted on the Appeal.  Thereafter, I adjourned the Appeal which was argued on 28 May.

5.  In setting out the background to this matter, I propose to repeat many of the introductory paragraphs to my judgment of 14 May.

6.  Returning to the substance of the claim, a writ was issued in the sum of $1,675,042.06 on 16 May 2011.  The defendant filed a defence and counterclaim and it was not after the plaintiff had filed a reply and her defence and counterclaim that she took out this Order 14 summons on 14 October 2011.

7.  The issues that arise on the pleadings can be stated shortly.  The defendant’s primary case is that the Loan Agreement does not represent a genuine borrower/lender transaction.  The Agreement was prepared by the plaintiff’s solicitors on instructions from the plaintiff alone.  The contents of the Agreement do not reflect the true nature and the extent of the transaction between the parties. The defendant had not being advised to seek independent legal advice before being asked to sign the Agreement.  The main allegation, which is completely unparticularised, is that he signed under duress and/or undue influence and the agreement is therefore not binding.  This is set out paragraph 3 of the defence.

8.  By paragraph 5 of the defence, “it is not admitted” that the sum of $5,000,000 was advanced to the defendant nor that he agreed to repay this amount by 25 April 2006.  There is an admission in paragraph 7 that the defendant had paid various sums of money to the plaintiff from June 2006 to December 2009 but, by paragraph 8 of the defence, it is denied that the amount claimed in the writ is payable by the defendant.

9.  By paragraph 9 of the defence, a case is sought to be set up that in the event that the Agreement is found to be binding, then the plaintiff is obliged to give credit for all monies paid by him to the plaintiff since 25 April 2005 and that a binding agreement, that is to say another agreement, exists between the plaintiff and the defendant that “no payment or no more payment” should be made by the defendant to the plaintiff after 2009, until a company controlled by the defendant had been publicly listed.  This further agreement is also wholly unparticularised.

10.  There is then a separate counterclaim for $428,000 being for the repayment of the amount represented by 20 separate payments between June 2009 and January 2011 made by the defendant to the plaintiff.

11.  By the reply and the defence and counterclaim, the validity of the Loan Agreement is reiterated.  As to the payments of $428,000, the plaintiff has pleaded in great detail how these relate to tenancies of car parking spaces between Polycom Limited, a company owned by the plaintiff as tenant, and the Strongman Investment Limited, a company owned by the defendant as landlord.

12.  These payments totalling $428,000 are rebates on rent paid by agreement by Strongman Investment Limited to Polycom Limited, and which are now the subject of dispute and are the subject matter of a separate action by Strongman Investment Limited against Polycom Limited.  These being the pleaded cases, the Order 14 summons was taken out by the plaintiff, supported by her affidavit of 14 October 2011, which is to be found in page 65 of the hearing bundle.  The defendant’s affirmation in reply is dated 21 November 2011, at page 75 of the hearing bundle. In it, the defendant draws attention to the fact that the cheque for $5,000,000, which is the subject matter of the Loan Agreement, was not paid to him personally but to a company called Zhongyang of which he is a director and shareholder. Relying on this, he says that there is, therefore, no evidence of any loan to him.

13.  Going on from there it is to be noted that this sum of $5,000,000 was then paid into the account of eBizAnywhere, of which the defendant was also a director and shareholder. eBizAnywhere then used this amount to issue shares to the plaintiff for a face value $1,427,703 and the balance of $3,572,297 to a company called Eve International Enterprises Limited.  Therefore, he says that this $5,000,000 was not lent to him but for the allotment of the shares paid for by the plaintiff. As to the shareholding in Eve, the plaintiff owned 50% of its share.  40% was owned by a Miss Yao San Mui, who is the wife of a Mr Loong, a gentleman with whom the defendant has business dealings.

14.  In relation to the case on the Order 14 summons raised in the affirmation evidence, the defendant has not sought to advance the points in the defence and counterclaim as to not being advised to seek independent legal advice, nor the allegation that he signed the Agreement under duress and/or undue influence.

15.  In her second affirmation, the plaintiff has gone on to explain the payment of the $5,000,000 to eBizAnywhere.  She says that the defendant wished to have eBizAnywhere listed on the Stock Exchange in Singapore and that he was short of money.  He therefore sought this loan from her and, as an incentive for her to advance the $5,000,000, he issued shares in eBizAnywhere to her personally and to Eve, of which she was a 50% shareholder.  It was as simple as that.

16.  She then goes on to say that what happened was that the defendant failed to get his listing in Singapore and the plaintiff says that the value of her shareholding in eBizAnywhere was severely reduced.  It was after that the defendant made a number of repayments of the loan to the plaintiff or, to her order, to a Mr Loong, because she says she owed Mr Loong money arising from business transactions that she had between her and Mr Loong.

17.  From this I now turn to consider counsel’s submissions in support of and against the appeal.

The defendant appellant’s submission

18.  Mr Bruce Lau, for the defendant, submits that there are triable issues based on 3 separate limbs of his appeal.  Firstly, whether the Loan Agreement represents a genuine borrower-lender transaction or whether it was a sham transaction.  Secondly, whether there was in fact an advancement of the $5,000,000 “loan” passing from the plaintiff to the defendant pursuant to the Loan Agreement itself, or whether the advance of money was for the purpose of share subscriptions.  Lastly, whether the defendant’s repayment to the plaintiff were for the sole purpose of repaying the loan.

19.  Mr Lau draws attention to the fact that a defendant is able to establish a triable issue provided the account given by him “is not moonshine”. This he says is the burden that he needs to discharge.

Was the loan agreement a sham?

20.  The plaintiff sues on a loan Agreement in writing on the basis that it is a genuine straightforward borrower-lender transaction which reflects the true intention of the parties.  The defendant has not denied the receipt of the $5,000,000 from the plaintiff on 25 April 2005, neither has he denied signing the Agreement.  His case on the evidence is that the Agreement does not reflect the true situation and is accordingly, a sham.

21.  The plaintiff does not deny that on the instruction of the defendant, she paid the $5,000,000 to Zhongyang.  The defendant accepts that he was one of the two directors of Zhongyang.  This amount which was received from the plaintiff was as I have already reflected earlier in the Judgment immediately paid over to eBizAnywhere.  Upon the receipt of this amount, there was an allotment of 235 shares in favour of the plaintiff totalling $1,427,703 and of 588 shares in favour of Eve for $3,572,297.  Based on this material, Mr Lau submits that the way the $5,000,000 travelled and the purpose to which it was put immediately indicates that this was not a genuine loan as the written Agreement purport to make out.  At the very least it raises a triable issue as to whether the plaintiff is entitled to rely upon it in this action.

Was the $5,000,00 in fact to fund shares subscriptions?

22.  The plaintiff’s case at paragraph 8 of her 2nd affirmation is that the shares in eBizAnywhere were allotted to her as a gift and she relies on the fact that the total premium for the allotment of the 823 shares in the sum of $5,000,000 was shown as an “amount payable” instead of “amount paid”.  As to this, Mr Lau draws attention to the fact that in the two allotment applications which were signed by the plaintiff she applied for shares to be allotted to her and to Eve for the two amounts which were expressed to be “payable in full in cash upon allotment”.

23.  Faced with such evidence, Mr Lau submits that this clearly calls for an explanation by the plaintiff and must, therefore, raise a triable issue to force her to go to trial.

Were the payments to the plaintiff made under the Loan Agreement?

24.  The plaintiff’s case is that the defendant had made various repayments between June 2006 and December 2009 pursuant to and for the only purpose of repaying her under the Loan Agreement.

25.  This all relates to the explanation given by the plaintiff as to why a number of payments were made to her order to Mr Loong.

26.  Mr Lau submits that when one looks at the evidence in relation to each of these issues and, more particularly, having regard to the cumulative effect of the points that he has sought to make, then this is a case where the defendant should not be driven from the judgement seat and that the matter merits investigation through a trial.

The plaintiff’s response

27.  Mr Lam, on behalf of the plaintiff, correctly reminds me that the burden is on a defendant to satisfy the court that there is an issue or question in dispute which ought to be tried (see O 14 r 3(1)).  He needs to show that he has a real or bona fide defence.

28.  Mr Lam begins by relying on the binding effect of the written Loan Agreement.  He submits, correctly in my view, that the starting point is that a person who has signed the document is bound by its contents unless he can show that his signature has been affected by vitiating factors which the law will recognise. For this reliance is placed on the Judgment of Ribeiro PJ in Ming Shiu Chung, the Ming Shiu Shum and Ors [2006] 9 HKCFAR 334.

29.  Mr Lam goes on from there to submit that in this case there is no dispute that the defendant signed the Agreement and that he must have appreciated that it was a document with legal effect, he having signed at a firm of solicitors.  He must therefore be held to the document.  It is not enough for him to say that the Agreement does not represent a genuine borrower-lender transaction.

30.  It is only now, on appeal that the defendant has raised what appears to be a new defence of alleging that the Agreement was a sham.  This was never pleaded. The essential ingredients for the establishment of a sham document are :-

(1) a common intention of;

(2) both parties;

(3) that the document was not to create legal rights;

(4) but to give to third parties the appearance of the document creating legal rights between them; and

(5) different from the actual legal rights between them.

In this regard, attention has been drawn to the decision of Waung J in Alexina Investment Limited, the Keysberg Limited, HCA 6359/1992 at para 40.

31.  In considering whether the defendant’s case measures up to the requirements of demonstrating a sham agreement, Mr Lam refers to the considerable number of payments by the defendant to the plaintiff which are unexplained by him save as being repayments relating to the agreement itself and in support of which Mr Lam is able to demonstrate that the payments made by the defendant exactly match the 5% interest provided for in the agreement itself. Rather than setting out the repayment table and interest calculation as part of the judgment, I propose attaching it as an Appendix.

32.  In such circumstances, Mr Lam submits that it is inconceivable that such numerous payments, all of which carry the 5% interest provided for in the Agreement, would have been made unless they were referable to the Agreement itself.  This being so, the defendant cannot begin to demonstrate any triable issue based on an unpleaded allegation of a sham.

The use to which the loan was put

33.  Mr Lam draws attention to the fact that it is wrong to suggest that the payment of $5,000,000 was only for the allotment of the shares and had nothing to do with the Loan Agreement.  The plaintiff has given a full explanation that the allotment of the shares to the plaintiff was as an incentive to induce to the plaintiff to lend the $5,000,000.

34.  In my judgment, the real stumbling block for the defendant is created by the terms of the Loan Agreement.  Where in my judgment it is quite impossible for the defendant to demonstrate that this agreement was a sham then the law must take its course on the face of the document itself which contains an “express acknowledgment” clause which will bind the party signing the document and give rise to a contractual estoppel which prevents the defendant from now asserting facts contrary to what he has acknowledged.  In this case the defendant acknowledged receipt of the loan advance in the Loan Agreement and in my judgment is now estopped from denying that this was so.  The parties had entered into this agreement which in my judgment is conclusive.  How the money was then used is neither here nor there.  The case of Peekay Intermark Ltd v ANZ Banking Group Ltd [2006] 1 CLC 582 at paras 57-60 and para 70 is authority for the proposition that it is open to a party to enter into transactions on the basis that a certain state of affairs is true.  In this case the defendant had acknowledged receipt of the loan and he is therefore now to be prevented from denying that this was the case.

35.  It is also instructive to note that the defendant has been willing to raise serious and unparticularised allegations of duress and/or undue inference only to say nothing about them in his affidavit evidence on this summons.  It is also instructive to observe that such defences would be completely inconsistent with the principal defence of a sham agreement.

36.  I am afraid that having regard to the terms of the written document and the numerous repayments made by the defendant to the plaintiff, which incorporated the 5% interest chargeable under the Agreement itself, that the defendant must be held to what he signed up to.  I can see no possible defence which can be reasonably available to him and which ought to go to trial.

Conclusion

37.  Accordingly, the appeal must stand dismissed and there must be judgment in the amount claimed.  As to costs I think Mr Lam must be right that these should be on any indemnity basis as provided for in Clause 8 of the Agreement [Appeal Bundle/96].  Authority for this proposition is to be found in Bank of China (Hong Kong) Ltd v Twin Profit Ltd [2011] 3 HKC 59 where the Court of Appeal held that such costs should generally be given effect to. The costs order will be an order nisi.

APPENDIX