CATHAY PORT LTD v. ZHU MING

HCMP 447/2010 AND HCMP 449/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NOS. 447 OF 2010 AND 449 OF 2010

(ON AN INTENDED APPEAL FROM HCA NOS. 2707 OF 2008

AND 1096 OF 2009)

________________________

HCA 2707/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2707 OF 2008

________________________

BETWEEN

________________________

AND

HCA 1096/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1096 OF 2009

BETWEEN

________________________

________________________

(Heard Together)

___________________________

REASONS FOR JUDGMENT

___________________________

Hon Le Pichon JA:

1.  These were applications seeking a reconsideration of the refusal by a single judge of this court for leave to appeal a judgment of Deputy High Court Judge Mayo dated 26 January 2010 relating to summonses issued in HCA 2707 of 2008 and HCA 1096 of 2009. At the conclusion of the hearing, leave to appeal was refused with costs. The reasons appear below.

2.  The relevant background is set out in §§ 4 to 26 of the judgment below to which reference should be made.  In outline, the plaintiff, a private equity investment fund subscribed for 45% of the issued share capital of BVI Nantong which operated a port in China.  Under a subscription agreement of 22 December 2005 between the plaintiff and CGLI, the parent of BVI Nantong, CGLI agreed to issue a convertible note for US$10 million.  The note was constituted by an instrument issued the same day with CGLI as the debtor and the defendant as guarantor (“the Instrument”).  The principal was repayable on demand and attracted simple interest at 25% per annum.  The loan was secured by mortgages of the shares of various group companies.

3.  CGLI was in default in respect of interest repayments for the year 2007, paying just over US$1 million out of US$2.5 million payable for that year.  On 1 December 2008, the plaintiff, the defendant and CGLI entered into a Deed of Forbearance and a Deed of Modification.  The amount outstanding at that date was US$2,026,522.40.  The defendant agreed to pay US$1.5 million by 8 December 2008 (“the first instalment”) and the balance of a little over US$0.5 million by 31 December 2008 (“the second instalment”).  HCA 2707 was commenced after the defendant defaulted under the Deed of Forbearance, the plaintiff claiming US$2,026,373.56 as interest outstanding under the Instrument for the year 2007 (“the 2007 interest claim”) and US$2,854,022.75 as penalty interest under the Deed of Forbearance (“the penalty interest claim”).

4.  The plaintiff obtained a default judgment which the defendant sought to set aside.  The master granted unconditional leave to defend the penalty interest claim but refused to set aside the judgment for the 2007 interest claim.  There were three applications before the judge: (1) an appeal and cross-appeal in HCA 2707 in relation to the order of the master; (2) the plaintiff’s application to strike out part of the defence filed by the defendant in HCA 2707; and (3) the plaintiff’s application for summary judgment in HCA 1096, an action commenced in April 2009 for the payment of the principal sum of US$10 million.  The judge allowed the defendant’s appeal and dismissed the plaintiff’s cross-appeal, the strikeout summons and the Order 14 application.

5.  The judge having dismissed the plaintiff’s application for leave to appeal, the plaintiff applied by summonses dated 8 March 2010 to a single judge of the Court of Appeal for leave to appeal.  The matters came before Rogers VP who determined the applications on the basis of written submissions only and on 31 March 2010 ordered as follows:

“Leave to appeal refused. This is eminently a case which should go to trial as quickly as possible. A speedy trial can be ordered and the matter resolved much better than if there were an appeal, which in my view would, at best, only result in a partial judgment for the Plaintiff.”

6.  The penalty interest claim arises under the Deed of Forbearance which is by no means a straightforward document.  The judge considered that the interest provisions in the Deed of Forbearance offended sections 24 and/or 25 of the Moneylenders Ordinance.  Under those provisions, if the amount of interest exceeds 60%, the agreement is unenforceable and any outstanding amount is irrecoverable.  If the interest exceeds 48%, the transaction can be reopened and the Ordinance sets up the matters to be considered.

7.  Suffice it to say that the interest provisions in clause 2(b) are particularly convoluted.  Clause 2(b)(i) provides for a “penalty interest” of 12% if payment of the first or the second instalment is made late but within 60 days from the respective payment deadlines.  Mr Barlow SC (who appeared for the first defendant) submitted that the interest is simply 25% (under the Instrument) + 12% and therefore well below 48%.  However the interest calculation is not a straightforward 12% on the relevant ‘late’ instalment but on the principal amount of the Instrument and is to be calculated with “retrospective effect from 1 January 2007” until payment.  In my view, it is not readily apparent what the effective rate of interest would be less than, or that it cannot exceed, 48%.  Then subclause (ii) provides for “additional penalty interest” of 12% where the default is over 60 days which is the present case.  Mr Barlow submitted that its effect is not 25% + 12% + 12% as the judge thought but less, because of the concluding sentence.  However that is a sentence that runs for more than 10 lines and its construction bristles with difficulties.  Further, there is also the fact that the share mortgages have been enforced and that might well impinge on quantum.  In my view, the defendant plainly has an arguable defence to the penalty interest claim.

8.  Mr Barlow submitted that his client should not be deprived of what he submitted are reasonable prospects of obtaining summary judgment in respect of the amount of principal and the 25% interest for 2007.  But by the Deed of Modification, the Instrument was modified as of 1 December 2008.  The modification was the addition of interest provisions that mirrored clause 2(b) of the Deed of Forbearance as the new Condition 4(C).  Any claim in respect of principal or the 2007 interest made after 1 December 2008 (which is the case in both HCA 2707 and HCA 1906, respectively commenced on 22 December 2008 and 29 April 2009) can only be based on the Instrument as modified and not in its unmodified state.  If there is an arguable defence based on the Deed of Forbearance, that must also apply to any claim based on the Instrument as modified.

9.  For my part, I do not consider that the plaintiff has met the threshold test of showing that it has reasonable prospects of success.  In any event, the court is entitled is consider the broader picture of this litigation to see how best the underlying objectives of the rules of court may be achieved, recognising that the primary aim is to secure the “just resolution of disputes in accordance with the substantive rights of the parties”.  I share the sentiments expressed by Rogers VP when he refused leave.  Accordingly, I order that the parties apply to the listing judge for directions for a speedy trial.

Hon Cheung JA:

10.  I agree.