SOUTHWEST SECURITIES (HK) BROKERAGE LTD v. NIEUMARKT INVESTMENTS LTD AND ANOTHER

CACV 250/2020

[2021] HKCA 740

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 250 OF 2020

(ON APPEAL FROM HCA NO. 1200 OF 2019)

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REASONS FOR JUDGMENT

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Hon Cheung JA (giving the Reasons for Judgment of the Court) :

I. The appeal and cross-appeal

1.  The plaintiff applied for summary judgment against the 1^st and 2^nd defendants for HK$163,512,038.71 together with interest and costs.  The 1^st and 2^nd defendants denied that they were liable and raised a counterclaim against the plaintiff based on a collateral agreement between the parties.  Deputy High Court Judge Whitehead SC gave final judgment for the plaintiff against the 1^st and 2^nd defendants with damages to be assessed.  He dismissed the counterclaim of the 1^st and 2^nd defendants.  The 1^st and 2^nd defendants appealed.  The plaintiff also cross‑appealed by way of a respondent’s notice, seeking final judgment as claimed.  The 1^st and 2^nd defendants were absent at the hearing of the appeal.  We dismissed their appeal and allowed the plaintiff’s cross‑appeal.  I now give reasons for our judgment.  

II.     The plaintiff’s case

2.1       The plaintiff’s claim is a simple one.  On 24 November 2017, the plaintiff as lender, 1^st defendant as borrower and 2^nd defendant as guarantor entered into the Facility Agreement in writing, under which the plaintiff agreed to make available to the 1^st defendant a term loan of HK$251,000,000.  The 2^nd defendant is the sole director and shareholder of the 1^st defendant. 

2.2     The 1^st defendant obtained the loan facility in order to acquire shares in Celebrate International, a company listed on the GEM Board by way of mandatory general offer.

2.3     On about 24 November 2017, as security for the loan under the Facility Agreement, the 1^st defendant as mortgagor executed in favour of the plaintiff a mortgage over 991,689,459 shares in Celebrate International (‘the shares’).  A further personal guarantee was provided by the 3^rd defendant but he is not involved in this application.

2.4     On 12 February 2019, the parties entered into an Amended Facility Agreement to amend certain terms of the Facility Agreement including how the loan is to be made available to the 1^st defendant and repayment of the loans.  The 1^st defendant was required to repay the outstanding sums by 16 April 2019.

2.5     As of 16 April 2019, the 1^st defendant failed to repay the outstanding sums drawn down by it under the Amended Facility Agreement in total of HK$163,512,038.71.  By letters dated 25 April 2019, the plaintiff through its former solicitors demanded repayment from the 1^st and 2^nd defendants.  They have failed and refused to pay the outstanding sums. 

III.     The defence

3.  1     The 1^st and 2^nd defendants contended that the real intention of the plaintiff at the time when it entered into the Facility Agreement (as amended) with them was to use the 1^st defendant as its nominee, agent and/or proxy in completing the acquisition of Celebrate International’s 59% total issued shares (‘Controlling Shares’) and the general offer, so that the shares would become beneficially owned by the plaintiff in the event that the 1^st and 2^nd defendants defaulted in interest payments and repayment of the facility, which was bound to happen given their financial inability. 

3.2     The 1^st and 2^nd defendants contended that a collateral agreement existed between the parties in the following manner. After a meeting concerning the proposed funding on 8 September 2017, the 2^nd defendant had a telephone conversation with Mr Luo for and on behalf of the plaintiff during which :

1)     Mr Luo urged the 2^nd defendant to take out a loan facility from the plaintiff to acquire the Controlling Shares;

2)     Mr Luo represented to the 2^nd defendant that the value of the listing status of Celebrate International itself was worth more than the loan amount to be granted.  Therefore, by acquiring the Controlling Shares, it was a transaction with no down‑side.  If the 2^nd defendant could have found a buyer for the Controlling Shares, he would be able to earn a quick and substantial profit from the transaction;

3)     In order to lure the 2^nd defendant, Mr Luo agreed to sweeten the deal by lowering the interest rate under the facility to 13% per annum (from 15-16% per annum as proposed by Mr Luo in the meeting on 8 September 2017); and

4)     It was also expressly represented to the 2^nd defendant that, despite the terms of the Facility Agreement (as amended) and other ancillary security agreements including the Guarantee, the 2^nd defendant would not be held liable and accountable for the money owed therein.  It was expressly promised by Mr Luo to the 2^nd defendant that, in the worst case scenario, the shares would be sold and the value of which was more than sufficient to cover any personal indebtedness owed to the plaintiff (‘the Collateral Agreement’).

3.3     The 1^st and 2^nd defendants contended that it was only because of the representations and promises made by Mr Lou that they entered into the loan facility.  By commencing these proceedings against them, the plaintiff was in breach of the Collateral Agreement.  As such, they further sought a declaration that the Collateral Agreement be specifically performed, and a counterclaim for payments or repayments that were made by them pursuant to the Facility Agreements. 

IV.     The decision

4.    The Judge found that the defendants’ case on the Collateral Agreement was not credible.  He dismissed their counterclaim.  However, instead of entering judgment for the plaintiff as claimed, he ordered judgment to be given to the plaintiff with damages to be assessed because he held that the 1^st defendant is the mortgagor of the shares and the plaintiff has now appointed receivers over these shares who ‘can or may realise the value of these shares, which would thus reduce the defendants’ liability to the plaintiff’.  

V.     Our view

1)     The appeal

5.1       The 1^st and 2^nd defendants rely on two grounds of appeal.  First, the Judge erred in summarily rejecting their case that the Collateral Agreement existed by finding that it ‘is not reasonably capable of belief’.  Second, the Judge erred in holding that the terms under the Collateral Agreement are so vague and uncertainsuch that ‘there is insufficient certainty to found the existence of a contract’.

5.2     The 1^st and 2^nd defendants did not appear at the appeal.  Accordingly, their appeal was dismissed.  The Judge obviously was correct in rejecting their defence and had given proper reasons for so doing. 

2)     The cross-appeal

5.3     In respect of the cross-appeal, the only reason given by the Judge for damages to be assessed is because of the possible realisation of the value of the security held by the 1^st defendant.  Before I deal with the issue of security, it is important to identify the nature of the plaintiff’s claim.  Is it a claim for damages or a claim for a debt?

5.4     The claim against the 1^st defendant as the borrower is for the outstanding debt under the Amended Facility Agreement.  This is clearly a liquidated sum which does not need further assessment because it is a specific sum of money due and payable under or by virtue of a contract, the amount of which is capable of being ascertained as a mere matter of arithmetic, see Re Grande Holdings Ltd [2016] 1 HKLRD 535, at [6.5] and HKCP 2021, paragraph 6/2/4.

5.5     In respect of the 2^nd defendant as the guarantor, Clause 17.1 of the Facility Agreement provided that :

‘ Mr Ng [i.e. the 2^nd defendant] irrevocably and unconditionally:-

(a)     guarantees to the Lender punctual performance by each Obligor of all that Obligor’s obligations under the Finance Documents.

(b)     undertakes with the Lender that whenever an Obligor does not pay any amount when due under or in connection with any Finance Document, he shall immediately on demand pay that amount as if it was the principal obligor; and

(c)     agrees with the Lender that if any obligation guaranteed by it is or becomes unenforceable, invalid or illegal, it will, as an independent and primary obligation, indemnify the Lender immediately on demand against any cost, loss or liability it incurs as a result of an Obligor not paying any amount which would, but for such unenforceability, invalidity or illegality, have been payable by it under any Finance Document on the date when it would have been due.  The amount payable by Mr Ng under this indemnity will not exceed the amount it would have had to pay under this Clause 17 if the amount claimed had been recoverable on the basis of a guarantee.’

5.6     Under Clause 1.1 :

‘ Obligors’ means the Borrower and Mr Ng, and ‘Obligor’ means each one of them.’

5.7     In McGuinness v. Norwich and Peterborough Building Society [2012] 2 BCLC 233, Patten LJ identified four classes of liability that may be imposed on a guarantor.

‘ [7] It is common ground that a guarantee of a loan may impose one or more of the following types of liability on the guarantor. These are:

(1)   a “see to it” obligation: i.e. an undertaking by the guarantor that the principal debtor will perform his own contract with the creditor;

(2)   a conditional payment obligation: i.e. a promise by the guarantor to pay the instalments of principal and interest which fall due if the principal debtor fails to make those payments;

(3)   an indemnity; and

(4)   a concurrent liability with the debtor for what is due under the contract of loan.’

5.8     Patten LJ held at [8] that the obligations in classes (2) and (4) create a liability in debt.  On the other hand the obligations in classes (1) and (3) are enforceable by way of action for unliquidated damages.  He explained in respect of classes (1) and (3),

‘ a guarantee of the ‘see to it’ type has also been held by the House of Lords to create a liability in damages.  The obligation undertaken by the guarantor is not one to pay the debt but consists of a promise that the debt will be paid by the principal debtor:  see Moschi v Lep Air Services Ltd [1972] 2 All ER 393, [1973] AC 331.  It is well established that an indemnity is enforceable by way of action for unliquidated damages: see Firma C-Trade SA v Newcastle Protection and Indemnity Association [1990] 2 All ER 705 at 715‑717, [1991] 2 AC 1 at 33‑36.  The liability arises from the failure of the indemnifier to prevent the person indemnified from suffering the type of loss specified in the contract.’

5.9     In the present case, whilst Clause 17.1(a) is a ‘see to it’ obligation, Clause 17.1(b) is clearly a conditional payment obligation.  Clause 17.1(c) imposes a primary obligation on the 2^nd defendant to indemnify the plaintiff if the obligation guaranteed by it is or becomes unenforceable, invalid or illegal.  This is a concurrent liability and imposes a class (4) liability on the 2^nd defendant as well.  Hence Clauses 17(1)(a) and (c) create a liability in debt which does not require further assessment.  See also Easy Mount Group Ltd v. Lam Ka Yuk James [2019] HKCA 890.

5.10     In respect of the security held by the plaintiff, Lord Templeman in China and South Sea Bank v George Tan [1990] 1 AC 536 at 545 stated that a secured creditor is not under a duty to exercise his powers of sale over the mortgage securities at any particular time or at all.  He explained :

‘ ......the creditor had three sources of repayment. The creditor could sue the debtor, sell the mortgage securities or sue the surety. All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all. If the creditor chose to sue the surety and not pursue any other remedy, the creditor on being paid in full was bound to assign the mortgaged securities to the surety. If the creditor chose to exercise his power of sale over the mortgaged security he must sell for the current market value but the creditor must decide in his own interest if and when he should sell. The creditor does not become a trustee of the mortgaged securities and the power of sale for the surety unless and until the creditor is paid in full and the surety, having paid the whole of the debt is entitled to a transfer of the mortgaged securities to procure recovery of the whole or part of the sum he has paid to the creditor.’

5.11     Although in China and South Sea Bank Limited Lord Templeman was dealing with a case of a surety, the principles he had enunciated covered the position of the borrower as well.  If the issue of the value of the security is to be disregarded, then clearly there is no room for any assessment of damages.  Further, in this case Clause 17.5 expressly provided that :

‘ Immediate recourse

Mr Ng waives any right it may have of first requiring the Lender (or any trustee or agent on its behalf) to proceed against or enforce any other rights or security or claim repayment from any person before claiming from Mr Ng under this Clause 17.  This waiver applies irrespective of any law or any provision of a Finance Document to the contrary.’

5.12     Accordingly, the cross-appeal was allowed and judgment was entered for the plaintiff in the sum as claimed. 

3)     Interest

5.13     The plaintiff claimed interest on the principal of HK$163,512,038.71 from 16 April 2019 until payment at the rate of 30% per annum, compounded on an annual basis. This is supported by Clause 9.3 of the Facility Agreement which provided that :

‘ (a) If an Obligor fails to pay any amount payable by it under a Finance Document on its due date, interest shall accrue on the unpaid sum from the due date to the date of actual payment (both before and after judgment) at a rate of, subject to paragraph (b) below, thirty per cent. (30%) per annum. Any interest accruing under this Clause 9.3 shall be immediately payable by the Obligor on demand by the Lender.

(b)     If any Unpaid Sum consists of all or part of any Loan which became due on a day which was not the last day of an Interest Period relating to that Loan:

(i)    the first Interest Period for that Unpaid Sum shall have a duration equal to the unexpired portion of the current Interest Period relating to that Loan; and

(ii)     the rate of interest applying to the Unpaid Sum during that first Interest Period shall be thirty per cent. (30%) per annum.

(c)     Default interest (if unpaid) arising on an Unpaid Sum will be compounded on an annual basis but will remain immediately due and payable.’  (emphasis added)

5.14     We will order interest as claimed. 

4)     Costs

5.15     The plaintiff is to have the costs of the appeal with certificate for two counsel.  As the Judge had already awarded costs below to the plaintiff there is no need to make any order on the costs below.