SILVER UNIVERSE INVESTMENTS LTD v. CHINA TIMES SECURITIES LTD AND OTHERS

CAMP 187/2020

[2021] HKCA 105

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 187 OF 2020

(ON AN INTENDED APPEAL FROM HCA 1824/2018)

________________________

________________________

________________________

REASONS FOR JUDGMENT

________________________

Hon Lam VP (giving the Reasons for Judgment of the Court):

1.  On 14 August 2020, Deputy High Court Judge M K Liu (“the Judge”) dismissed the applications by the Plaintiff for interim payments. The Plaintiff’s application for leave to appeal was refused by the Judge on 25 September 2020.

2.  The Plaintiff renewed the application for leave before us.

3.  The factual background was set out in the judgment of 14 August 2020 and we shall not repeat the same here.  In a nutshell, the Plaintiff borrowed money from the 2^nd Defendant using 70,000,000 shares (“the Shares”) in China Silver Group Limited, a company listed on the Main Board of the Hong Kong Stock Exchange, as security.  The loan was to be advanced in three tranches.  The Shares were deposited into an account with the 1^st Defendant.  The first tranche in the sum of $22,696,339 was advanced on 21 February 2018.  However, the other tranches were not made available.

4.  The Loan Agreement made between the Plaintiff and the 2^nd Defendant contained the following terms which are not found in conventional commercial loan transactions:

“1.  Definitions. The following terms used herein shall have the meanings set forth in this Section 1.

(a)  “Account” means the brokerage margin account with Broker into which the Collateral shall be deposited and maintained,

(b)  “Affiliate” means, with respect to any Person, any other Person that (i) directly or indirectly “controls”, is controlled by, or is under common control with, such Person, or (ii) is an immediate family member, spouse or immediately family member of such spouse of such Person or such Person's Affiliate. For purposes of this Agreement, the term “control” shall mean the ability, whether by equity ownership or position, directly or indirectly, to control the activities, policies, operations or procedures of another Person.

(c)  “Agreement” means this Loan Agreement including any Exhibits hereto and as amended or supplemented from time to time.

(d)  “Broker” means China Times Securities Ltd., a securities brokerage firm.

(e)  “Business Day” refers to any day other than (i) Saturday or Sunday or (ii) any day on which banks in the United States or Hong Kong are permitted or required to be closed. To the extent any action is required to be completed on or prior to any particular Business Day, such action must occur prior to 11:59pm Hong Kong time on such Business Day.

(f)  “Collateral” means all the Pledged Shares (including without limitation hereinafter Pledged Shares in which the Lender is granted a security interest pursuant to a Pledge Addendum) and all securities and interests received, receivable or otherwise distributed in respect of or in exchange for the Pledged Shares, including without limitation any securities and interests into which the Pledged Shares are convertible or exchangeable, and the proceeds and any and all of the products, whether tangible or intangible, of all of the foregoing, including without limitation proceeds of insurance covering any or all of the Collateral, and any and all accounts, equipment, general intangibles, goods, negotiable collateral, investment property, money, deposit accounts, or other tangible or intangible, real or personal, property resulting from the sale, exchange, collection, rent, lease, license or other disposition of the Collateral, or any portion thereof or interest therein, and the proceeds thereof. In the event that the Shares are exchanged by the Issuer for a different security, the provisions of this Agreement relating to the Collateral and the Shares shall apply to such other security mutatis mutandis.

(g)  “Collateral Agency Agreement” means the Collateral Agency Agreement executed by the Borrower (as beneficial owner of the Collateral), the Broker and the Lender entered into in connection with the Account opening documents, pursuant to which the Borrower appoints the Broker as collateral agent for the Collateral.

(h)  “Collateral Price” means the lowest of (a) the VWAP for the twenty-five (25) consecutive Trading Days immediately preceding the Determination Date, or (b) the lowest single day's VWAP occurring during such 25 consecutive Trading Day period, on the Principal Market on the Trading Day immediately preceding the applicable Determination Date (which with respect to the Funding Date, includes the Funding Date or date of execution hereof, whichever ls lower), (c) the VWAP for the day immediately preceding the Funding Date. The Collateral Price shall be based in U.S. Dollars, such that any average price or sale price used in determining the Collateral Price, if not based in U.S. Dollars, shall be converted to U.S. Dollars using the spot exchange rate as of the Determination Date.

(i)  “Collateral Value” means value of the Collateral, where the value of the Pledged Shares shall be determined by multiplying the number of Pledged Shares by the Collateral Price per share of Common Stock (provided that any Pledged Shares not yet in electronic form and deposited in the Borrower's Account with the Broker pursuant to the required Account documents shall be valued at zero).

(j)  “Daily VWAP'” means, for any particular Trading Day, the VWAP for such day, provided that if no shares of Common Stock are traded on the Principal Market during the regular trading session on such day, then the VWAP on the nearest preceding Trading Day on which such Common Stock was traded shall be used (but not more than five Trading Days prior).

(k)  “Determination Date” means the date on which the Collateral Price shall be determined using one of more market prices preceding such date as set forth herein.

(l)  “Event of Default” shall have the meaning set forth in Section 6 hereof.

(m)  “Funding Date” shall have the meaning set forth in section 2(a) below.

(n)  “Hong Kong” means the Hong Kong Special Administrative Region of the People's Republic of China.

(o)  “Interest Period" means, initially, the period beginning on and including the Funding Date and ending on and including July 30, 2018 then each six-month period thereafter (i.e. commencing August 1 and ending on January 31, and continuing thereafter in six (6) month increments) and finally the period beginning on and including the first day following the last full interest Period hereunder and ending on and including the Maturity Date; for clarification, if the Note is not repaid in full on the Maturity Date, Interest shall continue to accrue under the Note at the Default Rate.

(p)  “Interest Rate” equals four and one-half percent (4.5%) per annum, provided, however, that following an Event of Default hereunder or under the Note, the Interest Rate under the Note shall equal 15% per annum (“Default Rate”).

(q)  “Loan” shall have the meaning set forth in the recitals hereto.

(r)  “Loan Documents” shall collectively mean this Agreement, the Pledge Agreement, each Pledge Addendum, the Note, the Collateral Agency Agreement and any other agreements, documents, instruments or statements delivered in connection with the Loan.

(s)  “LTV Percentage” equals 50%.

(t)  “Market Price” for any Trading Day means the lower of the Dally VWAP or lowest sale price of one share of Common Stock on the Principal Market on such Trading Day (as appropriately and equitably adjusted for any stock splits, stock dividends and similar events).

(u)  “Maturity Date” shall mean the date which is three (3) years following the date of execution of the Note.

(v)  “Minimum Collateral Value”, at any time, shall equal 142% of the principal amount of the Loan then outstanding (i.e., approximately a 70% Loan-to-Collateral Value ratio).

(w)  “Note” means one (1) or more secured promissory notes, with an aggregate face amount not greater than the Maximum Loan Amount and each one of which shall be in the face amount of the "Tranche", as defined herein, disbursed as of the date of each such note, but all of which Notes shall evidence the Loan amounts advanced to the Borrower by the Lender hereunder. Each Note shall be in the form of, and contain the terms set forth in, Exhibit A attached hereto and all such notes are collectively referred to herein as the “Note”.

(x)  “Obligations” means all of the liabilities and obligations (primary, secondary, direct, contingent, sole, joint or several) due or to become due, or that are now or may be hereafter existing, of the Borrower to the Lender under this Agreement, the Note and any other instruments, agreements or other documents executed and/or delivered in connection herewith or therewith, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not Jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from the Lender as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time. Without limiting the generality of the foregoing, the term “Obligations” shall include, without limitation: (i) principal of, and interest on, the Note end the loans extended pursuant thereto; (ii) any and all other fees, indemnities, costs, obligations and liabilities of the Borrower from time to time under or in connection with this Agreement, the Note, and any other instruments, agreements or other documents executed and/or delivered in connection herewith or therewith (including without limitation any and all expenses relating to enforcement of the Loan Documents, including reasonable legal fees); and (iii) all amounts (including but not limited to post-petition interest) in respect of the foregoing that would be payable but for the fact that the obligations to pay such amounts are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving the Borrower.

(y)  “Person” means an individual, corporation, partnership, limited liability company, trust, business trust, association, joint stock company, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, governmental authority or agency or any other form of entity not specifically listed herein.

(z)  “Pledge Addendum” means each Pledge Addendum, executed by the Borrower in favor of the Lender, pursuant to which additional Shares are collaterally assigned and/or hypothecated to the Lender as Pledged Shares hereunder, in the form and substance of Exhibit C attached hereto.

(aa)  “Pledge Agreement” means the Pledge Agreement, executed by the Borrower in favor of the Lender, to separately document for filing the collateral assignment and hypothecation to the Lender of Shares as Pledged Shares hereunder, in the form and substance of Exhibit B attached hereto.

(bb)  “Pledge Laws” means any applicable law of the applicable jurisdiction which governs and/or applies to the pledge and/or security interest of securities and other assets granted as collateral to secure the obligations of a loan, including without limitation the Collateral. It is the intent of the parties that defined terms in the Pledge Laws should be construed in their broadest sense so that the term "Collateral'' will be construed in its broadest sense.

(cc)  “Pledged Shares” means any or all (as the context may so require) of the 70,000,000 Share of Common Stock of the issuer, including without limitation any securities for which such Shares are exchanged by the issuer, which shall he subject to a security interest granted by the Borrower to the Lender or otherwise collaterally assigned to the Lender, pursuant to this Agreement, together with any additional shares of the issuer included as Pledged Shares pursuant to a Pledge Addendum or share dividend (as such number of Pledged Shares are appropriately and equitably adjusted for stock splits, stock dividends, and similar events).

(dd)  “Portfolio Protection Arrangements” means any arrangements or transactions effectuated to mitigate the risk of loss of principal, assets or securities values, including without limitation effecting a pledge, encumbrance, hypothecation and/or loan of or on securities.

(ee)  “Principal Market” means the Stock Exchange or such other principal market or exchange on which the Common Stock is listed and traded.

(ff)  “Target Collateral Value”, at any time, shall equal 200% of the principal amount of the Loan then outstanding (i.e., 50% Loan-to-Collateral Value ratio).

(gg)  “Transfer” means to sell, trade, transfer, assign, convey or otherwise dispose of title to securities (for clarification, Transfer does not include Portfolio Protection Arrangements which may be effected).

(hh)  “Trading Day” means any day on which the Principal Market is open for general trading.

(ii)  “Trading 20-Day Volume” means, as of any date, the total dollar amount of shares of Common Stock publicly sold on the Principal Market during the regular trading sessions for the immediately preceding twenty (20) consecutive days (which for clarification does not include block trades), provided that (1) excluded from such total shall be shares traded on the Trading Day with the highest dollar volume and the Trading Day with the lowest dollar volume during such period, and (2) such Trading 20-Day Volume shall be appropriately and equitably adjusted for stock splits, stock dividends and similar events.

(jj)  “Tranche Valuation Price” means the Collateral Price as of the Trading Day immediately preceding the Funding Date, The Tranche Valuation Price shall be based in U.S. Dollars by converting to U.S. Dollars using the spot exchange rate as of the time of determination as reported by Bloomberg.

(kk)  “USD” or “U.S. Dollars” means the lawful currency of the United States of America.

(ll)  “VWAP” means, for any particular period (1) the volume-weighted average sale price per share of Common Stock on the Principal Market during the regular trading sessions during such period, or (2) if the foregoing does not apply, then a price mutually agreed upon between the Borrower and the Lender. All such determinations shall be appropriately and equitably adjusted for any stock dividend, stock split, stock combination or other similar transaction occurring during any pricing period for which VWAPs are included in the calculation. The VWAP shall be based in U.S. Dollars by converting to U.S. Dollars using the spot exchange rate as of the time of determination as reported by Bloomberg. In the event that the Issuer's Common Stock is exchanged for a different security, the provisions hereof shall apply to such other security mutatis mutandis.

2.  Closing

(a)  Tranches, The Loan contemplated hereby shall be funded in three (3) (in the Lender's sole discretion) tranches (each a “Tranche”), with the funding of each Tranche (each a “Funding Date”) reasonably determined by the Lender, subject to prevailing market conditions, provided that all the conditions for such funding have been satisfied or waived as contemplated herein. On the Funding Date, the Lender shall advance to the Borrower the Loan if so determined by the Lender in its sole discretion.

(b)  Note. On or before the Funding Date, Borrower shall execute and deliver to the Lender (i) the Note in the face amount of the Loan Arnount and (ii) the Pledge Agreement. The terms of the Loan shall be as set forth herein and in the Note, The Loan may not be prepaid in whole or in part except as set forth in the Note.

(c)  Closing Conditions, The obligation of the Lender to make the Loan, and to advance the Loan on the Funding Date, is subject to the satisfaction or waiver of the following conditions precedent (to the sole satisfaction of the Lender);

(1)  The Note evidencing the outstanding Loan amount shall have been duly executed and delivered by the Borrower and remain in full force and effect;

(2)  The Pledge Agreement shall have been duly executed and delivered by the Pledge in favor of the Lender and remain in full force and effect;

(3)  The Pledged Shares shall have been pledged and delivered to the Borrower's Account at the Broker in electronic form, and the Borrower shall have executed and delivered all Account opening documents reasonably requested by the Broker, including, without limitation, the Collateral Agency Agreement;

(4)  All representations and warranties of the Borrower under the Loan Documents shall be true and accurate in all material respects and not misleading;

(5)  The making of the Loan by the Lender to the Borrower and the execution, delivery and performance of any documents or agreements shall be in compliance with any and all applicable laws and government regulations imposed upon the Lender and the Borrower;

(6)  All matters and all documentation and other instruments in connection with the Loan shall be satisfactory in form and substance to the Lender and its counsel, and counsel to the Lender shall have received copies of all documents which it may reasonably request in connection with the Loan;

(7)  There shall not exist (i) any judgment, order, injunction or other restraint issued or filed which prohibits the making of the Loan or the consummation of the other transactions contemplated hereby, or (ii) any action, suit, litigation or similar proceeding at law or in equity by or before any court, governmental authority, or agency exists or is threatened with respect to the transactions contemplated hereby;

(8)  Since the date of execution of this Agreement, no event or series of events shall have occurred that has had, or would reasonably be expected to have or result in, a material adverse effect on the Borrower, the issuer or the Collateral;

(9)  Since the date of execution of this Agreement (A) trading in and/or quotation of the Common Stock on the Principal Market shall not have been suspended (except for any suspension of trading of limited duration agreed by the issuer, including without limitation with connection with a merger, acquisition or other material transaction involving the issuer, which suspension shall be terminated prior to the Funding Date), (B) trading generally shall not have been suspended or materially limited, nor shall minimum or maximum prices or a maximum range for prices have been established, in or on securities traded on the principal market or ,any major international stock market (including the Principal Market) by a regulatory body or governmental authority having jurisdiction, (C) no general moratorium on commercial banking activities in excess of one Trading Day shall have been declared by any governmental authorities or self-regulatory agencies that shall any material disruption in excess of one Trading Day have occurred in commercial banking or securities settlement or clearance services in any global securities market or the country in which the issuer's Common Stock is traded, and (D) there shall not have occurred (1) any material outbreak or escalation of hostilities or acts of terrorism involving the United States or the country in which the Issuer's Common Stock is traded (i.e., Hong Kong or the People's Republic of China), or any declaration by the United States or the People's Republic of China of a national emergency or war, or (2) any other national or international calamity or crisis of such magnitude to cause, or would reasonably be expected to cause, a material adverse effect on financial markets in general, or any material adverse change in general economic, political or financial conditions in any developed global financial markets, if the effect of any such event specified In this clause (D), in the reasonable judgment of the Lender, makes it impracticable or inadvisable to proceed with the completion of funding the Loan amount on the Funding Date on the terms and in the manner contemplated by this Agreement; and

(10)  Trading in and/or quotation of the Common Stock on the Principal Market shall not have been suspended as of the Funding Date or any of the ten (10) Trading Days immediately preceding such date.

3.  Collateral

(a)  Pledge. As collateral security for all of the Obligations, the Borrower hereby grants, transfers, assigns and conveys to the Lender a continuing security interest in, and pledges and grants a charge on, all currently existing and hereafter acquired or arising Collateral to secure prompt repayment of any and all Obligations and to secure prompt performance by the Borrower of Its covenants and duties under the Note and this Agreement. The Borrower agrees that the Lender shall have the rights stated in this Agreement with respect to the Collateral in addition to all other rights which the Lender may have by law.

(b)  Brokerage Account, At least three (3) days prior to the Funding Date, the Borrower shall transfer to and/or maintain in the Account all the Pledged Shares. The Borrower shall cause any additional Pledged Shares included in any Pledge Addendum to be transferred to and/or maintained in such Account within three (3) business days of such Pledge Addendum being required hereunder. Borrower shall remain the beneficial owner of the Account, provided that following an Event of Default the Lender may sell or otherwise dispose of the securities and assets therein in accordance with the terms herein and in the documents entered into in connection with the Account.

(c)  Non-Recourse Loan. The Lender agrees that, except as otherwise expressly provided in this Agreement, the responsibility to make payments hereunder is a non-recourse obligation of the Borrower, such that, for repayment of the Note, the Lender shall only look to the Collateral and/or the other instruments of security that secure the Note, and may not subsequently make any claim or institute any action or proceeding against the Borrower or any successors or assigns of the Borrower for any deficiency remaining after collection upon the Collateral.

(d)  NTT Loan. The lender shall not Transfer any Pledged Shares prior to an Event of Default, after which time the Lender may Transfer the Pledged Shares, The Borrower acknowledges that following an Event of Default, in the event of a diminution in the fair market value of the Pledged Shares, the failure of the Lender to dispose of the Collateral shall under no circumstances be deemed a failure to exercise reasonable care in the custody or preservation of the Collateral, and any such sale or other disposition of any Pledged Shares shall be deemed to be commercially reasonable under the applicable Pledge Laws. Notwithstanding anything contained herein, the Borrower acknowledges that during the term of this Agreement and the Loan Documents, the Lender shall have the absolute right to effect Portfolio Protection Arrangements free and deaf' of any liens, claims or encumbrances.

(e)  Maximum LTV; Top-Up. ln the event that at any time the Collateral Value falls below the Minimum Collateral Value, then within five (5) trading days thereafter, the Borrower shall pledge and deliver additional Shares (including without limitation instructing the Broker in writing to cause additional Shares to be transferred to the Account at the Broker) and/or cash (or cash equivalents acceptable to the Lender, to the bank account directed by the Lender) as additional Collateral hereunder in such amounts as shall cause the Collateral Value to exceed 100% of the Target Collateral Value, together with whatever reasonable documentation may be requested by the Lender to evidence that any such additional Shares constitute additional Collateral under the Loan Documents. Without limiting the foregoing, within such five (5) day period the Borrower shall have duly executed and delivered a Pledge Addendum, if necessary, for at least such amount of additional Shares of Common Stock as is necessary to provide sufficient Collateral hereunder such that the Collateral Value exceeds 100% of the Target Collateral Value.

(f)  Dividends and Voting. As to any of the Collateral, while any Obligations to the Lender remain outstanding and unpaid, Borrower hereby assigns to Lender all dividends and distributions (of whatever nature including, but not limited to, cash or stock) paid or made by the issuer on the shares included in such Collateral. Prior to an occurrence of an Event of Default, the Borrower shall be entitled to exercise all voting or other such consensual rights and powers appurtenant to the Collateral provided that (1) the Borrower shall not exercise such voting rights in any manner that could give rise to, or otherwise permit or agree to any (a) variation of the rights attaching to or conferred by any of the Pledged Shares or (b) liability on the part of the Lender, and (2) such voting or consensual rights shall be subject to the customary and usual limitations set forth in typical brokerage account agreements for margin accounts with regulated securities brokers. To the extent any dividends related to the Collateral are received by the Borrower, such dividends shall be held in trust for the benefit of the Lender and shall forthwith be delivered to the Lender or its designated agent (accompanied by proper instruments of assignment and/or stock powers executed by the Borrower in accordance with the Lender's instructions). The Borrower shall deliver to the Lender any distribution consisting of additional certificated securities of an issuer of Pledged Shares immediately upon receipt, together with executed stock powers and corporate resolutions authorizing the transfer of title of such shares after the occurrence and during the continuance of an Event of Default pursuant to the terms of this Agreement.

(g)  Return of Collateral. At such time as all of the Borrower's Obligations have been paid in full, the Pledged Shares together with any in-kind dividends or distributions made on the Pledged Shares shall he returned to the Borrower to the extent and in the manner set forth herein. The Lender acknowledges and agrees that all shares of Common Stock, including the Pledged Shares (together with their in-kind dividends and distributions), are fungible, such that the Lender's obligation to return the Pledged Shares (together with their in-kind dividends and distributions) herein is understood to mean the delivery to the Borrower of such number of shares of Common Stock as is equal to the total number of Pledged Shares (plus any dividend shares) required to be delivered to the Lender hereunder. lf any dividends or distributions are made in cash, such shall be retained by Lender and credited against amounts due it at the Maturity Date.

(h)  Fraudulent Instances, Notwithstanding anything contained herein, the Borrower agrees that the Lender and each of its successors, endorsees or assignees, in their sole discretion, may, for payment of the Note and Obligations (i) look to the Borrower and its affiliates, and/or (ii) to the Collateral and/or the other instruments of security that secure the Note, and subsequently make any claim or institute any action or proceeding against the Borrower or its affiliates, successors or assigns for any deficiency remaining after collection upon the Collateral or any other loss suffered by Lender or its successors, endorsees or assigns as a result of any of the following (referred to herein as “Fraudulent Instances”):

(1)  Damages arising from any fraud or willful misconduct by the Borrower;

(2)  Damage to the pledged Collateral resulting from gross negligence or intentional acts of the Borrower;

(3)  Failure to pay taxes or other property-related liens by the Borrower;

(4)  Damages arising from the failure to comply with any and all applicable laws and regulations by the Borrower;

(5)  The Issuer (x) selling its assets for significantly less than fair market value or (y) diluting the value per share of Common Stock without receiving approximately fair market value therefor based on current market conditions, with such fair market value in each case being reasonably determined by a reputable, independent valuation expert, such expert to be mutually and reasonably selected by the Borrower and Lender; and/or

(6)  The Issuer's Common Stock decreasing by greater than 75% from the Market Price as of the Trading Day immediately preceding the Funding Date within six (6) months following such Funding Date, unless such decrease is primarily due to the fall of stock market prices generally precipitated by a global or regional crisis.”

5.  There were the following features in this transaction:

(a)  The loan is to be advanced by three tranches “with the funding of each Tranche reasonably determined by the lender, subject to prevailing market conditions, provided that all the conditions for such funding have been satisfied or waived” (Clause 2(a)).  One of the closing conditions is set out at Clause 2(c)(8) by reference to absence of event(s) which would reasonably be expected to have or result in a material adverse effect on the Collateral. 

(b)  The loan is described as a non-recourse loan.  Under Clause 3(c), the lender has no recourse against the borrower and it can only resort to the Collateral to obtain repayment if the borrower fails to service the loan.  In this respect, the lender has a much greater interest than an ordinary commercial lender in hedging against the risk of a fall in the market value of the Collateral, particularly if such Collateral is made up of shares with a volatile market.  This should be taken into account in construing the effect of Clauses 3(d) and (g). 

(c)  Though there is an obligation not to transfer the Collateral prior to an Event of Default (Clause 3(d)), the definition of “transfer” in Clause 1 excludes Portfolio Protection Arrangements.  In the latter part of Clause 3(d) the borrower acknowledged the lender’s right to effect Portfolio Protection Arrangements free and clear of any liens, claims or encumbrances.  As defined in Clause 1, Portfolio Protection Arrangements means any arrangement effectuated to mitigate the risk of loss of securities values, including effecting a pledge, encumbrance, hypothecation and/or loan of or on securities. 

(d)  For the return of the Collateral, Clause 3(g) expressly provides that all shares are fungible such that the lender’s obligation to return the Pledged Shares is understood to mean the delivery to the borrower of such number of shares as is equal to the total number of Pledged Shares required to be delivered to the lender.

6.  Without the knowledge of the Plaintiff, the Shares were transferred out of the 1^st Defendant on 23 February 2018 pursuant to a hypothecation arrangement between the 2^nd Defendant and a company called Eden Investments Limited (“Eden”).  The 1^st Defendant claimed that it acted as the agent of Eden in making the transfer.  It was subsequently discovered by the Plaintiff that 51,000,000 shares had been sold in the market between 23 February and 2 March 2018 at the average price of $1.9 per share.  

7.  Though the Plaintiff advanced various allegations against the Defendants, the interim payment applications were made by the Plaintiff on the following bases as summarized by the Judge at [17] of the judgment:

“ (1)  Application against D1 under Order 29 rule 11(1)(c) on the basis of the following:

(a)  D1’s breach of express and/or implied terms of the Account Opening Documents and the Collateral Agreement; and/or

(b)  D1’s breach of its duties of care owed to P in tort.

(2)  Application against D2 is based on the following claims:

(a)  breach of express/implied terms of contract, based on Order 29, rule 11(1)(c) in respect of damages, or alternatively for a sum due under the Loan Agreement, based on Order 29, rule 12(c) in respect of a sum other than damages and costs;

(b)  breach of duties of care as mortgagee in possession or in tort, based on Order 29, rule 11(1)(c) in respect of damages; and/or

(c)  the claim under s.23 of MLO, based on Order 29, rule 11(1)(c) in respect of damages.”

8.  These bases of applications were taken by the Judge from the written submissions of the Plaintiff of 18 March 2020 at paragraphs 1, 39, 57 and 63. 

9.  In those submissions, the Plaintiff elaborated on the three causes of action it was relying upon to ask for interim payment against the 2^nd Defendant:

(a)  For breach of contract, the breaches were (i) the failure to reasonably advance the 2^nd and 3^rd tranches (paragraphs 65 to 72 of the submissions: and it is only in this respect that the Plaintiff sought interim payment for the remainder of the loan at $60,041,709 on a basis other than for damages, see paragraph 72); and (ii) abuse in the exercise of the power under Clause 3(d) of the loan agreement in executing the Eden transaction which was not for the proper purpose of such power (paragraphs 73 to 79) and it was in breach of Clause 1(dd);

(b)  For breach of duty of care as mortgagee in possession in failing to exercise reasonable care in the custody or preservation of the Shares, failing to account and withholding information regarding the Eden transaction, not exercising the power under Clause 3(d) in good faith (paragraphs 87 to 91).  Further, it was also alleged that the 2^nd Defendant acted in breach of a duty of care in disposing of the Shares under value and depriving the Plaintiff of the Shares before any event of default (paragraphs 92 to 96); and

(c)  For the Money Lenders Ordinance point, the Plaintiff said the 2^nd Defendant’s denial of being a money lender is shadowy and no relief had been sought (paragraphs 97 to 103).   

10.  We have referred to these submissions at length because in the application before us Mr Wong SC for the Plaintiff advanced an argument for seeking interim payments based on the rescission of the loan agreement.  Mr Wong submitted that the Judge failed to understand this aspect of the Plaintiff’s contention when the Judge held that the 2^nd Defendant would only be required to return the Shares to the Plaintiff after the Plaintiff has discharged its repayment obligation under the loan agreement. 

11.  With respect, this is not a valid complaint since counsel representing the Plaintiff at the court below (not Mr Wong) did not adequately explain to the Judge the basis on which the Plaintiff could assert that the rights and obligations of the Plaintiff and the 2^nd Defendant had been crystallized and the security interest of the 2^nd Defendant in the loan was replaced by an item in the set-off for damages payable by the 2^nd Defendant to the Plaintiff at a particular point in time. 

12.  Thus, the Judge said at [41] of the judgment:

“ According to P’s pleaded case, the 1^st Tranche of the Loan is secured by 1/3 of the Subject Shares. However, P has not yet repaid the 1^st Tranche and the interest accrued thereon to D2. P would only have the right to get back the 1/3 Subject Shares after making the repayment. The loss suffered by P in relation to the 1/3 Subject Shares should be assessed by reference to the point of time at which P is prepared to make repayment to D2. No assessment can be done at the moment, for the said point of time is unknown. P has not said that it is ready, willing and able to make repayment to D2. It is not known when P is prepared to make repayment. The price of the China Silver shares fluctuates from time to time in the market. If at the time when P is prepared to make repayment, the market value of the 1/3 Subject Shares is less than the amount to be repaid by P, there would not be judgment for a substantial amount to P, after taking into account the set-off which D2 is entitled to claim by reason of the repayment obliged to be made by P.”

13.  It was the Plaintiff’s case that the 2^nd Defendant was a mortgagee in possession.  There was no suggestion in the submissions of 18 March 2020 that the 2^nd Defendant ceased to be a mortgagee in possession by reason of the rescission or repudiation of the loan agreement.  There was also no suggestion how and at what point in time the 2^nd Defendant’s interest as a mortgagee could have been superseded or extinguished when there was no repayment of the loan.

14.  Though subsequent rounds of submissions were lodged, the Plaintiff had never indicated that it would be seeking interim payments on some bases other than those set out in the submissions of 18 March 2020.  The Judge and the Defendants addressed the applications on the bases set out in that set of submissions.  It is now too late and unfair to allow the Plaintiff to advance any new basis to support its claim for interim payments.

15.  As noted by the Judge, the applications were made under Order 29 Rules 11(1)(c) and Rule 12(c).  At [27] of the judgment, the Judge referred to the principles discussed in Rich Profit Creation Ltd v Ko Chung Lun [2020] HKCFI 1459 at [15] and [16] for the exercise of discretion in an application for interim payment.  Before us, counsel did not have any quarrel with those principles.  We are happy to adopt the same for present purposes.  

16.  After hearing counsel, we were not persuaded that the Plaintiff has reasonable prospect in making out a case that it would obtain a judgment for a substantial sum of money after trial.  Thus, we refused to grant leave to appeal for we are not satisfied that the intended appeal has reasonable prospect of success or there are other reasons in the interest of justice for leave to be granted.

17.  The transfer and disposal of the Shares was the main plank of the Plaintiff’s applications for interim payment.  The Plaintiff contended that the transfer and disposal was in breach of the loan agreement.  On the other hand, the Defendants contended that the transfer and disposal were within the scope of the Portfolio Protection Arrangement.  The Defendants also relied on Clause 3(g).  The Judge regarded this issue to be arguable (see [31] to [34] of the judgment).

18.  The Plaintiff relied on some authorities suggesting that such transfer could be wrongful: CPIT Investments Ltd v Qilin World Capital Ltd [2017] SGHC (I) 05 and Ding Huirong v China Times Securities Ltd [2020] HKCFI 376.  It is not clear to us if the provisions of the loan agreement in Qilin are the same as the ones in the present case.  The provisions in Ding Huirong are, as far as we can gather from the judgment, rather similar to those in the present case.

19.  However, the analysis in those cases was based substantially on the fundamental nature of the right to redeem in an ordinary mortgagor and mortgagee relationship.  There was apparently no discussion on the implications arising from the so-called non-recourse nature of the loan agreement.  Commercially speaking, the risk assumed by a lender in such agreement necessarily affects the safeguards a lender would require to be put in place.  Proper construction of the terms of the loan agreement should take the same into account.  

20.  In the judgment in Ding Huirong, the argument was advanced that a transaction of such nature should not be regarded as a pure mortgage by reference to Beconwood Securities Pty Ltd v Australia and New Zealand Banking Group Ltd (2008) 246 ALR 361.  Though the argument was rejected by the learned Recorder in Ding Huirong in an Order 14A context, we do not regard the point as so unarguable that the court could reject it in an application for interim payment.

21.  We are aware that Ding Huirong is under appeal.  For present purposes, we need not express a concluded view on the point. It suffices for us to say, in the context of Order 29 Rule 11 and 12 applications, we agree with the Judge that the defence contentions regarding the effect of Clauses 3(d) and (g) are arguable.  In other words, interim payments should not be ordered on the basis that the 2^nd Defendant did not have an arguable defence in that regard.

22.  It is not clear from the Amended Statement of Claim (“ASC”) of 17 July 2019 and the supporting affirmation of Chen Jianle of 23 August 2019 that the Plaintiff had an indisputable case that it had made a final election regarding the termination of the loan agreement at a specified point in time. 

23.  In the ASC, the Plaintiff pleaded at paragraph 29 that it has rescinded the transaction by an email dated 23 May 2018.  However, when one examines the email, it is not clear that the Plaintiff was rescinding the transaction.  Much depends on the context and there is scope for reasonable argument that such email is insufficient to serve as an acceptance of repudiation or notice of rescission.

24.  The other alternative for acceptance of repudiation as pleaded by the Plaintiff was the commencement of the action.  However, Mr Wong had to accept that when the action was commenced, the 2^nd Defendant was not made a party.  Thus, counsel had to accept before us that the commencement of action could not be an acceptance of repudiation vis-à-vis the 2^nd Defendant.

25.  Counsel therefore accepted that for present purposes, the Plaintiff could only rely on the date of the email (23 May 2018) as the date of acceptance of repudiation.  

26.  Even if one were to take account of the ASC, many causes of action were pleaded in the ASC and different reliefs were sought, including a declaration that the Defendants were holding the Shares on trust for the Plaintiff (prayer (9)), an account of the Shares and traceable fruits (prayer (8)), delivery up or transfer to the Plaintiff of the Shares and/or all of their traceable fruits or proceeds (prayers (7) and (10)).  These reliefs would not be available if the Plaintiff had disclaimed any proprietary right over the Shares as mortgagor and elected to sue for damages only.

27.  Some causes of action pleaded in the ASC proceeded on the basis that the Plaintiff relied on its current proprietary right as mortgagor of the Shares, see paragraphs 34 and 41N.  Thus, by implication, the Plaintiff asserted its proprietary right as current owners of the Shares.

28.  Thus, there was no election in the ASC by the Plaintiff confining itself to a claim for damages, disclaiming any interest as mortgagor under the loan agreement.

29.  Whilst it is open to a party to plead his claims on alternative bases, such pleas should clearly identify which one is the primary case and how the primary case related to the alternative claims.  Plainly, the Judge had difficulties in identifying the primary case of the Plaintiff in its pleadings. 

30.  It is also open to a party to reserve all the alternatives before judgment.  However, in the context of an application for interim payments, the court needs to assess how the alternatives would affect the claims which the Plaintiff relied upon to seek such payments.  If there are alternatives which invalidate the basis for granting interim payment, and such alternatives were not abandoned, they may cast doubt on whether interim payment can be granted on that basis.

31.  It was only in the Plaintiff’s submissions of 5 August 2020 at paragraph 176 that it clearly stated that it elected monetary awards and would not seek any remedy at trial which is inconsistent with the monetary award if the interim payment application is granted.

32.  For the following reasons, such belated election could not cure the difficulty.

33.  The requirement of a clear identification of the primary case and its relationship with the other alternative pleas (so long as they have not been abandoned) is of great importance in the present case because there was a mortgagor and mortgagee relationship between the Plaintiff and the 2^nd Defendant.  As long as that relationship subsisted, it is reasonably arguable that the Plaintiff’s claim for damages could not be crystallized until it had tendered repayment or until the termination of relationship with proper account being undertaken, see CPIT Investments Ltd v Qilin World Capital Ltd [2017] SGHC (I) 05 at [292] to [293] applying Ellis & Company’s Trustee v Dixon -Johnson [1924] 1 Ch 342.

34.  Even assuming that the primary case of the Plaintiff was rescission at some point in time (other than the date of the email which we consider to be problematic) and by virtue of such rescission the relationship of mortgagor and mortgagee ceased to subsist, the Plaintiff must pinpoint a particular point in time and produce evidence of the value of the Shares on that particular date.  Short of that, one cannot tell whether the value of the Shares exceeded the loan and interest accrued.

35.  Like the situation in CPIT Investments Ltd v Qilin World Capital Ltd, supra, the market value of the Shares had fallen over the relevant period.  Taking the figures from the Plaintiff’s own submissions, it fell from $2.17 on 13 February 2018 to $1.9 (as average price between 23 February to 2 March 2018) and then to $1.63 on 23 May 2018.

36.  If one were to take the election in the last round of submissions on 5 August 2020 as the basis for calculation, there is no evidence as to the market value of the Shares on that date.  In any event, this was not one of basis on which the Plaintiff’s case was pleaded in the ASC.  Nor was this the bases on which interim payment was applied for.  As the Judge noted at [28] of the judgment, an application for interim payment must be considered on the basis of what is pleaded in the applicant’s pleadings. 

37.  The Plaintiff failed to discharge the burden in showing that there was a specified point in time at which the relationship of mortgagor and mortgagee was effectively determined with an effective election, so that it could seek damages in the way it now asks for, notwithstanding that it had not tendered repayment. 

38.  In the Plaintiff’s submissions of 29 July 2020, 3 different approaches were put forward at paragraph 138 on behalf of the Plaintiff to support the application for interim payments.  Of the 3 approaches, only the second one was based on acceptance of repudiatory breach and it pinpointed the date of email of 23 May 2018 as the date of such purported acceptance[1].

39.  We do not find that to be a sound basis for granting interim payment because of the triable dispute on the adequacy of that email as acceptance of repudiation.

40.  Mr Wong alluded to the concept of equitable compensation in relation to the claim based on breach of duty of care as mortgagee in possession.  In light of the arguable dispute regarding the right of the 2^nd Defendant to transfer the Shares to Eden by way of hypothecation as a Portfolio Protection Arrangement, we do not think interim payment should be ordered on the basis that such transfer was wrongful.  Whether the 2^nd Defendant acted in breach of the duty of care or acted with improper purpose in so doing cannot be resolved summarily.

41.  We agree with the Judge in [16] to [17] of the Leave Decision of 25 September 2020 rejecting the reliance placed by the Plaintiff on Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479.  There is a material distinction between the present case and the situation in Akai where the transfer of the loan to Akai (for which it did not obtain any benefit as it was used to repay another loan due from another company) was held to be unauthorized and unlawful right from the beginning.  In the present applications (disregarding the allegations of fraud and conspiracy which were not relied upon in the interim payment applications, and the MLO point which was rejected by the Judge and no challenge is brought against the same), the loan agreement was made and the first tranche of the loan was made resulting in the 2^nd Defendant having a security interest over the Shares.

42.  As regards the application against the 1^st Defendant, the operation of the brokerage account was governed by the Collateral Agency Agreement made amongst the Plaintiff and the 1^st and 2^nd Defendants.  Control of the operation of the account was granted to the 2^nd Defendant pursuant to Clause 3 of that agreement.  It is a question of fact whether Eden was acting with the authority of the 2^nd Defendant in giving direction for the Shares to be transferred to another account.  This is at least an arguable point.  Against such background, we do not see any merit in Mr Wong’s attack on the Judge’s analysis at [19] to [24] of the Leave Decision.

43.  Mr Wong also drew our attention to Clause 5 of the Collateral Agency Agreement and submitted that the 1^st Defendant acted in breach of that clause in failing to give notice to the Plaintiff concerning the transfer of the Shares to another account.  Even if such breach is established, the loss suffered by the Plaintiff and the damages that could be awarded must depend on the legitimacy of the 2^nd Defendant’s hypothecation which, as we discussed, is an arguable point. 

44.  For these reasons, we dismissed the application for leave to appeal. 

45.  As regards costs of the application, we order the Plaintiff to pay the costs of the Defendants in the application.  Having considered the statement of costs of the 1^st Defendant (seeking $163,560) and that of the 2^nd Defendant (seeking $133,624) and after hearing submissions of counsel on the same, we would fix the costs of the 1^st Defendant at $150,000 and the costs of the 2^nd Defendant at $120,000.