SUN HUNG KAI INVESTMENT SERVICES LTD v. SHARP MERIT INTERNATIONAL LTD AND ANOTHER

HCA1176/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1176 OF 2005

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REASONS  FOR  JUDGMENT

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1. Sharp Merit International Ltd (“Sharp Merit”), of which Ma Bo Kee (“Ma”) is a director had a margin securities trading account with Sun Hung Kai Investment Services Ltd (“SHKIS”), by which SHKIS lent Sharp Merit money.  Ma guaranteed the loan.  For reasons which appear below, SHKIS called in Sharp Merit’s debt.  It was not paid.  SHKIS accordingly sued both defendants, Sharp Merit on the loan agreement and Ma on the guarantee, and applied for summary judgment against both.  Because of liquidation proceedings against Sharp Merit, the summons for summary judgment was adjourned sine die.  Before me, therefore, was SHKIS’s application for summary judgment against Ma as guarantor, for $15,682,054.03 plus interest at the contractual rate and indemnity costs, also as provided for by contract.  I gave summary judgment as applied for.  I now give reasons.

Background

2. Ma is the founder and chairman of Moulin Global Eyecare Holdings Ltd, a Hong Kong listed company.  It was described in the press as the world’s largest eyewear maker.  It acquired a large American eyewear business in early 2005 but then, apparently, could not raise finance, and it collapsed.  Trading in its shares on the Hong Kong Stock Exchange was suspended on 18 April 2005.

3. Sharp Merit is a BVI company, set up to hold shares in the Ma family trust, and it held a large number of Moulin shares.

4. In 1998 one KFL Holdings Ltd (“KFL”), of which Ma was a director, opened a securities margin trading account with Sun Tai Cheung Credits Ltd (“STC”), a company related to SKHIS and also within the Sun Hung Kai Financial Group.  Ma executed a personal guarantee of the indebtedness of KFL Holdings Ltd.

5. In 2001 the securities margin financing business of STC was transferred to SHKIS.  In 2004, KFL applied for voluntary liquidation and Ma requested the transfer of KFL’s portfolio with STC to Sharp Merit, which was to open a new securities margin trading account with SHKIS.

6. A director of SHKIS, Ms Lee, sent the necessary forms to Ma for completion.  He signed them and chopped some of them in blank and returned them to SHKIS.  The forms are dated 25 August 2004 and consist of :

(1) a duplicate Facility Letter, which Ma signed as director, over the chop of Sharp Merit;

(2) a Deed of Guarantee and Indemnity, which he signed but did not chop;

(3) Additional Risk Disclosure Information, signed and chopped;

(4) Securities Trading Account Application, signed and chopped (but not chopped where Ma gave specimen signatures as authorised signatory);

(5) Client Agreement and First Schedule, signed and chopped; and

(6) Pro-forma Board Resolution of Sharp Merit, signed and chopped.

7. By the Facility Letter dated 25 August 2004, SHKIS granted loan facilities to Sharp Merit of up to $2 million.  By a Revised Facility Letter dated 14 January 2005 the limit was increased to $25 million.  The contractual interest rate was 18%.

The claim

8. Moulin shares held by Sharp Merit were charged in favour of SHKIS to secure the loan.  When trading was suspended, SHKIS purported to exercise its contractual right under the Client Agreement to call in the loan.  SHKIS claimed that as at 28 April 2005, Sharp Merit and Ma were indebted to SHKIS for over $24 million plus interest; it demanded repayment but Sharp Merit did not pay.  SHKIS exercised a right of sale in respect of Moulin shares, and so reduced the debt somewhat.  It issued a Writ on 21 June 2005, claiming that as at 20 June 2005 Sharp Merit and Ma still owed $15,316,022.62 plus interest of $213,543,71.  The Writ was issued on 21 June 2005.

The defence

9. Ma’s grounds of defence, as they appear in his affirmation are as follows :

(1) The loan documents which he signed are in English, with which he is not conversant.

(2) Ms Lee told him that the English documents were standard application forms for opening a margin trading account so he did not consider it necessary to obtain legal advice.

(3) He did not know that a deed of guarantee was required.

(4) He signed as director only.

(5) SHKIS sold shares at below their true market value, in breach of the agreement.

(6) Ma’s liability is only secondary to that of Sharp Merit and SHKIS’s claim against Ma is contingent on the validity of its claim against Sharp Merit.

10. The first four of these are concerned with the execution of the Deed of Guarantee and Indemnity.  A further point was taken in argument, that Clause 35 of the Deed contains provision for a monetary limit on the guaranteed obligations but no figure was filled in, nor was the clause deleted.  It is said that the possibility of a limit should be investigated.

Principles

11. These are not in dispute.  The defendant must show a triable issue.  He must show a “real or bona fide defence”; Banque de Paris v. Costa de Naray [1984] 1 Lloyd’s Rep. 21.  The defendant must give evidence that is “reasonably capable of belief” and in deciding that issue the court will ask itself whether what the defendant says is credible; the issue being, not whether the defendant's assertions are to be believed, but whether they are believable; see Ng Shou Chun v. Hung Chun San [1994] 1 HKC 155.  But that question is to be answered, not by taking those assertions in isolation but rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute; seeRe Safe Rich Industries Limited [1994] HKLY 183.

Deed of Guarantee and Indemnity

12. Ma’s evidence is that Ms Lee told him that the documents were mere standard application forms, so he thought he did not need legal advice.  He signed them in his capacity as director of Sharp Merit.  In a later affirmation he said that because he did not know English, he was concerned that he would have difficulty in filling in the forms; so he told Ms Lee and she volunteered to fill them in for him, if he signed them in blank.  This he did, where directed by pencil or post-it notes.  He was never told that a guarantee was needed.

13. Ms Lee’s evidence is that she did indeed send him the forms, in blank save for marks to indicate where to sign them.  Ma’s assistant telephoned Ms Lee’s assistant to ask if it was necessary to sign a guarantee; and Ms Lee thereafter spoke to Ma directly and told him that it was.

14. Ma’s defence appears to be non est factum.  To establish non est factum he must show :

“(1)   there was a radical or fundamental difference between what he signed and what he thought he was signing;

 (2)   the mistake was as to the general character of the document, as opposed to its legal effect; and

 (3)   there was lack of negligence in that he had taken all reasonable precautions in the circumstances to find out what the document was.”

(See Chitty on Contracts, 28^th ed., vol. 1, paras. 5-057 and 5-059; Saunders v. Anglia Building Society [1971] AC 1004.)

15. In the first place, Ma was the chairman of a very large Hong Kong listed company with a very large overseas business.  It is unlikely, though possible that such a person would not know English.  More to the point, he would have many assistants and advisors for consultation.  It would obviously be negligent of him not to take the trouble to consult with those who could advise him before signing a document whose import he did not understand.  He would be unable to show the necessary absence of negligence for non est factum.

16. In the second place, Ma had in 1998 executed a personal guarantee, along with the other documents in connection with the securities margin trading account of KFL.  He could not have been ignorant of the meaning of such a document.

17. In the third place, although I cannot here hold a trial on affidavits, it is to be noted that Ms Lee’s evidence that she told Ma that he must execute a guarantee is uncontradicted.  Granted that this appears in an affidavit in reply, it was a new allegation, and it was open to Ma to seek the leave of the court to put in a further affirmation to rebut it.

18. It is also noted that, while Ma signed various documents for Sharp Merit over Sharp Merit’s chop, he did not chop the Deed.  This rather gives the lie to his assertion that he signed all the documents as director.  This one, he did not.  It is argued that he was just putting the signature and the chop where he was told, by means of notes.  But in his position he must have known when he was signing as a director and when he was signing as an individual; and when he signed as the latter, he would have been put on inquiry; why was he required to sign as an individual?

19. Finally, it is noted that when demands were made for payment, Ma did not, although legally advised, raise the question of the validity of the Deed.  He simply agreed, through solicitors, to proceed with arranging for the mortgage of his property at Wing Lung Villa in favour of SHKIS.  Explanations that he had a lot on his mind, including criminal investigations — which he no doubt had — and just wanted to settle this matter are hollow, given that he had the benefit of legal advice.

20. Looked at against the background facts which are not disputed, or incapable of dispute, Ma’s assertion that he signed the Deed of Guarantee and Indemnity without knowing what it was, or thinking that it was a standard document which he was signing as director is clearly incredible.

Breach of Agreement

21. SHKIS sold 500,000 Moulin shares on 8 June 2005; a further 500,000 on 10 June 2005; and a further 3,500,000 shares on 20 June 2005.  It advised the defendants in advance that it would sell the shares.  Ma says that the shares were not sold at the true market value.  However, he does not say what that value should be; and, given that trading was suspended, it would obviously not be high.  SHKIS of course says, through its witnesses, that it got the best price it could.

22. Ma says that even if SHKIS was entitled to sell the shares, he is advised by his legal advisors and believes that SHKIS must obtain the best available price or the true market value.  It is not clear where this comes from.  No doubt, in due course, some kind of implied term would be pleaded.  However Clause 3.8 of the Client Agreement specifically provides :

“SHK may exercise its power of sale pursuant to this Agreement in such manner and for such consideration as it shall think fit, and shall not be under a responsibility to Client to obtain the best price available and shall have discretion as to which of the securities comprise in the Margin Securities should be sold.”

If SHKIS did not get the best price, it was contractually under no responsibility to do so.  There is nothing in this defence.

Secondary liability

23. Ma says that his liability is only secondary to that of Sharp Merit and SHKIS’s claim against Ma is contingent on the validity of its claim against Sharp Merit.  Counsel argued that the obligation is “not so primary”.  It is argued that there is a question mark over the liability of Sharp Merit because of the failure to obtain the best price of the shares; and therefore there must be a question mark over the extent of Ma’s liability of Ma also.

24. Clause 2 of the Deed itself provides that :

“The Covenantor as primary obligor and not merely a surety, hereby irrevocably and unconditionally guarantees….”

By Clause 10, the Covenantor agrees that SHKIS :

“…may enforce this Deed notwithstanding that it may have any outstanding right, power or remedy against the Customer or any other person and without proceeding or enforcing any claim against the Customer or any other person…”

25. Quite clearly, Ma’s liability under the Deed is primary and not secondary.  I have already dealt with the question of obtaining the best price.

Clause 35

26. The proposition here seems to be that because no limiting figure for guarantee liability was put in, but the clause itself was not deleted (it is marked “Please delete if not applicable”) then there might have been a limit, and this should be investigated.

27. Obviously, SHKIS as creditor would not fix a limit on its own initiative.  It is in its interest to have a full guarantee from Ma as guarantor.  If there was to be a limit, that would have to be a matter of discussion.  There is no evidence of discussion.  There is nothing in this point.

Conclusion

28. The primary defence, relating to the execution of the Deed, was incredible when seen against the background facts.  The other defences were simply untenable in the light of the terms of the documents themselves.  This was a clear case for Order 14.