KP FINANCIAL SERVICES LTD v. ETERNALUCK LTD AND ANOTHER

HCA 2525/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2525 OF 2015

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D E C I S I O N

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Background

1.  The plaintiff is a licensed money lender registered under the Money Lenders Ordinance, Cap 163 and its claim against the 1^st defendant is for breach of contract.

2.  The claim is based on a written memorandum of agreement and facility letter, both dated 18 March 2015, granting a loan of HK$5,400,000.00 to the 1^st defendant. The loan was secured by a first legal charge over real property owned by the 1^st defendant.  The plaintiff alleges that the legal charge was executed by the 1^st defendant through the 2^nd defendant acting in the capacity of sole director of the 1^st defendant.

3.  The 2^nd defendant signed a personal guarantee to secure the 1^st defendant’s liability to repay the loan.  The 2^nd defendant is sued as guarantor.

4.  Following a default in monthly repayments, the plaintiff issued demand letters to which there was no response.  A Writ was issued on 30 October 2015 by which the plaintiff claims payment of outstanding monies due and delivery of vacant possession of the real property.  On 14 January 2016, the 1^st defendant filed a defence and counterclaim, together with an affirmation of one Zhao Rufa.

The plaintiff’s case

5.  The plaintiff’s case is that the 2^nd defendant was the 1^st defendant’s director and shareholder acting on behalf of the 1^st defendant when agreeing to the loan and the mortgage.  The plaintiff alleges that, to establish his position, the 2^nd defendant produced to the plaintiff copies of the following documents:

(1) instrument of transfer of the 1^st defendant’s shares from Zhao Rufa to the 2^nd defendant signed by Mr Zhao;

(2) instrument of transfer of the 1^st defendant’s shares from one Huang Beiqiang to the 2^nd defendant signed by Mr Huang;

(3) bought and sold note;

(4) return of allotment, dated 18 November 2014;

(5) notices of cessation of acting as directors of the 1^st defendant for Mr Zhao and Mr Huang;

(6) notice of appointment of the 2^nd defendant as director of the 1^st defendant; and

(7) minutes of the 1^st defendant’s directors and shareholders meeting, dated 17 November 2014, approving the transfer of Mr Zhao and Mr Huang’s shares to the 2^nd defendant.

6.  The documents at (1), (2) and (3) purportedly bore the signatures of Mr Zhao and Mr Huang. These documents bear chops marked “Hong Kong stamp duty paid”.  The documents at (4) to (7) appear on their face to have been filed at the Companies Registry because they bear the receipt chop of the Registry’s Document Management Section.  A number of these documents bear a chop in the form of “Certified True Copy” and apparently signed by one Tung Yui Tao Kaiser, solicitor, Choi and Associates.

7.  The memorandum of agreement and other documents associated with the loan bear the chop “For and on behalf of” the 1^st defendant, signed by the 2^nd defendant.

8.  The plaintiff also relies on a letter confirming the 2^nd defendant’s employment and salary as a director of the 1^st defendant, purportedly on the 1^st defendant’s letterhead and bearing the chop “For and on behalf of” the 1^st defendant, signed by the 2^nd defendant and the 1^st defendant’s business registration form produced by the 2^nd defendant.

9.  Finally, the plaintiff relies on a bank statement produced by the 2^nd defendant, purportedly concerning an account held by the 1^st defendant with HSBC.

The 1^st defendant’s case

10.  In essence, the 1^st defendant’s case is:

(1) the 2^nd defendant is a stranger.  He had no authority to enter into any agreement or legal documents for and on behalf of the 1^st defendant;

(2) the 1^st defendant did not apply for or obtain any loan from the plaintiff;

(3) the 1^st defendant did not agree to mortgage the real property to the plaintiff;

(4) the loan documents and first legal charge bore a forged common seal and, hence, are forged documents.

11.  By its counterclaim the 1^st defendant claims:

(1) a declaration that the 1^st defendant is not party or privy to the memorandum of agreement and the same is of no effect, void and/or unenforceable as against the 1^st defendant;

(2) a declaration that the 1^st defendant is not party or privy to the legal charge and the same is of no effect, void and/or unenforceable as against the 1^st defendant; and

(3) an order that the registration of the purported legal charge/mortgage at the Land Registry or Land Office be vacated.

Application to strike out

12.  By summons, dated 25 July 2016, the 1^st defendant applied to strike out the plaintiff’s claim against it on the grounds that it:

(1) discloses no reasonable cause of action against the 1^st defendant;

(2) is frivolous and vexatious; and/or

(3) amounts to an abuse of the court’s process.

13.  The application was brought pursuant to the Rules of the High Court, Order 18, rule 19 and the court’s inherent jurisdiction.

14.  As far as ground (1) is concerned, it is trite law that no evidence will be admissible and the court will examine only the pleading.  The amended statement of claim discloses a loan, a legal charge, default on the loan, monies outstanding and enforcement of mortgage security, in short, a cause of action. The 1^st defendant’s counsel, Mr Kwong, did not argue otherwise.

15.  Rather, the 1^st defendant’s case is that the plaintiff has failed to discharge its legal burden of proving that the documents upon which it relies to establish its case are genuine. Mr Kwong submitted that the plaintiff’s evidence is not cogent; it has only produced copy documents, which is not enough to discharge the legal burden of proof.  Mr Kwong submitted that the plaintiff has to prove that the documents are genuine by pinpointing objective evidence, such as, having checked the public record to confirm that the documents are genuine.  Counsel also submitted that the copy documents are forgeries.

16.  The 1^st defendant also relies on the affirmations of Mr Zhao, who asserts that he and Mr Huang are and have been at all material times the 1^st defendant’s directors and shareholders and that the 2^nd defendant is not known to them and never had authority to enter into the loan agreement and mortgage on behalf of the 1^st defendant, and the exhibits thereto.  The principle evidence upon which the 1^st defendant relies is as follows.

17.  Regarding the bank statement, HSBC has provided a letter advising:

(1) the name of the account is not that of the 1^st defendant;

(2) the bank statements were not issued by HSBC; and

(3) there is currently no account in the 1^st defendant’s name.

18.  A search of the Companies Registry revealed that no notice of either the cessation of Mr Zhao and Mr Huang’s directorship or the appointment of the 2^nd defendant as director has ever been filed.

19.  The 2^nd defendant made a statutory declaration provided to the plaintiff alleging that the title deeds of the property were lost.  However, Mr Zhao stated that the title deeds were always in Mr Huang’s and his possession.  Hence, counsel submitted the statutory declaration is false.

20.  A statement of claim filed in another action, HCA 1320/2016, alleges that the 2^nd defendant is a fraudster and a wanted person.

21.  The 1^st defendant also relied upon a comparison of two photographs, one of the common seal affixed to the charge and the other of another common seal, which shows (the 1^st defendant) says that the one affixed to the charge differs from the 1^st defendant’s genuine common seal.  Hence, the 1^st defendant asserts, it is obviously faked.

Legal principles

22.  The principles concerning an application to strike out are well‑settled and were not in dispute:

(1) Only in plain and obvious cases should the court exercise its power to strike out an endorsement on a writ or pleading;

(2) There should not be a trial on affidavit.  Disputed facts are to be taken in favour of the party against whom the application is made;

(3) The claim must be obviously unsustainable, and it must be impossible, not just improbable, for the claim to succeed.  The court must be “clear beyond doubt” before striking out is ordered;

(4) Where the legal viability of a cause of action is sensitive to the facts, an order to strike out should not be made;

(5) That a case is weak and not likely to succeed is no ground for striking out.

See: Hong Kong Civil Procedure 2017 Vol. 1, para 18/19/4; LY Group Development Ltd v East Canton Ltd [2015] 4 HKLRD 84 at para 14; Wenlock v Moloney [1965] 1 WLR 1238 at p1244.

23.  In Hutchvision Asia Ltd v Asia Television Ltd [1993] 2 HKC 510 at p514, Godfrey J observed:

“… any lawyer with any experience of private practice will be able to remember, only too well, those cases which appeared to be certainties but which, to his surprise, nevertheless failed and, by the same token, those cases which seemed bound to fail but which, to his surprise, nevertheless succeeded. It is for just this reason that the court will not embark, at this stage of an action, on a consideration whether the case of one side or the other is true or false…”

The application’s merits

24.  Mr Pow SC accepts that the plaintiff bears a legal burden to prove that the documents are genuine and, in my view, the plaintiff has discharged that burden.  The plaintiff has produced documents, albeit copies, which bear what appear to be the signatures of Mr Zhao and Mr Huang.  The documents bear what appear to be Companies Registry chops, the 1^st defendant’s chops and common seal and certification by a solicitor.  Regarding the bank statement, HSBC has not revealed the name of the account holder and the statement contains entries in terms of “From Eternaluck H‑gold/exchange credit”; there appears to be a connection with the 1^st defendant.  These references are not exhaustive but establish a case that the 2^nd defendant had the 1^st defendant’s authority to enter into the loan and mortgage.

25.  Having discharged its burden, the burden shifted to the 1^st defendant.  The 1^st defendant has produced evidence to rebut the plaintiff’s evidence but the resolution of the conflict between the parties’ evidence should not be undertaken on the affirmations alone.  This is clearly a matter which should go to trial.  To give some examples as to why there should be a trial:

(1) The plaintiff is entitled to test the evidence concerning the apparent signatures of Mr Zhao and Mr Huang;

(2) The plaintiff is entitled to cross‑examine the 1^st defendant’s witnesses regarding the 1^st defendant’s apparent connection with the bank statement;

(3) The plaintiff is entitled to cross‑examine the 1^st defendant’s witnesses regarding the letter purportedly on the 1^st defendant’s letterhead confirming the 2^nd defendant’s employment and salary as a director of the 1^st defendant, bearing the chop “For and on behalf of” the 1^st defendant, signed by the 2^nd defendant;

(4) The plaintiff is entitled to explore the question how the 2^nd defendant came into possession of the 1^st defendant’s business registration form;

(5) The plaintiff is entitled to investigate (a) whether there are differences in the two seals shown in the photographs; and, if so (b) the reason for the differences

26.  Moreover, the plaintiff’s counsel submitted that one cannot rule out the possibility that, if there is forgery, the 1^st defendant was involved.  In this regard, counsel referred me to the approach of Recorder Kotewall SC in Talent Wise Ltd v Cheung Shui Ching [1998] 2 HKLRD 744. That case concerned an application for summary judgment in which the defendant raised a defence based on an allegation of possible conspiracy and fraud. Although Recorder Kotewall characterized the defendant’s case as “intriguing possibilities”, it was sufficient to provide circumstances which called for further investigation.

27.  Relying on Nina Kung alias Nina T.H. Wang v Wang Din Shin [2005] 8 HKCFAR 387, at paras 183–187, Mr Pow also submitted that,  if the 1^st defendant is alleging forgery, the 1^st defendant bears the evidential burden of proving forgery by adducing cogent evidence.  This evidence, Mr Pow submits, the plaintiff is entitled to test at trial.  Mr Kwong submitted that the 1^st defendant did not have to prove forgery, only that the 2^nd defendant did not have the 1^st defendant’s authority to enter into the loan and charge such that there was no contract between the plaintiff and the 1^st defendant.  Mr Kwong may be correct but his submission does not answer the point that there is a dispute concerning authority, which dispute should be resolved at trial.

28.  As the evidential conflicts should be resolved at trial, I dismiss the 1^st defendant’s summons.

Discretion

29.  The plaintiff submitted that there is a further consideration which is relevant to the exercise of discretion to dismiss the summons.  The plaintiff has issued a third party notice to its former solicitors who acted for it in respect of the loan and mortgage.  The third party notice has identified common issues of fact as between the plaintiff, the 1^st defendant and the former solicitors.  The plaintiff submits that, while the trial proceeds as between it and the 1^st defendant, the former solicitors should be given the opportunity to participate in the resolution of those common issues and would be bound by findings of fact.  I agree with the plaintiff that this would attain justice between all relevant parties and avoid a multiplicity of proceedings and the risk of inconsistent findings of fact.  Having dismissed the summons on its merits, it is not necessary for me to consider my discretion but, if it had come down to discretion, I would have exercised it in favour of the plaintiff’s submissions and dismissed the summons.

Disposition

30.  The 1^st defendant’s summons, dated 25 July 2016, is dismissed.

31.  I make a costs order nisi that the 1^st defendant is to pay the plaintiff’s costs, which I assess summarily at HK$516,596.00.