XCHRX GUANGDONG CREDIT LTD. v. HONG KONG HANI FINANCE CO. LTD.

HCA 8827/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CIVIL JURISDICTION

ACTION NO. 8827 OF 1998

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D E C I S I O N

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The Plaintiff's Claim:

1. The plaintiff is a licensed money lender. It alleges that pursuant to an oral agreement made between Mr. Chi and Mr. Huang on behalf the plaintiff and Miss Zheng and Mr. Cheung on behalf of the defendant, the plaintiff agreed to lend the defendant a loan of $20 million for three months at an interest rate of 18% per annum. The loan was secured by a mortgage of 20 million share warrants of Pearl Oriental. The warrants were transferred in two lots of 10 million each from the account of Linkwise Asset Limited with the defendant to the account of the plaintiff with the defendant on 28.11.1996 and 29.11.1996. The money was transferred to the defendant's bank account with Sin Hua Bank Limited on 29.11.1996. Despite repeated demands and correspondence between the plaintiff's solicitors and the defendant's solicitors from March to May 1998, the loan was not repaid.

2. The Plaintiff issued a writ in May 1998 to recover the loan. The defence was initially a bare denial which was later amended to include a counterclaim. The plaintiff now seeks to enter summary judgment and to strike out the defendant's counterclaim. In Mr. Cheung's affirmation filed on behalf of the defendant, it is suggested that the loan was a personal loan between the plaintiff and Miss Zheng who then lent the money received from the plaintiff to the defendant. A draft re-amended defence to that effect is annexed to the bundle of document but has not yet been filed.

3. Mr. Ho, on behalf of the plaintiff, submitted with some force that the defence, whether as it now stands or as it is proposed to be amended, is not credible as the payment and receipt of the loan is fully supported by uncontroverted evidence, whereas the alleged loan from Miss Zheng to the defendant is not documented in the defendant's books at all. No evidence has been produced in support of Miss Zheng's loan to the defendant. What the defendant could offer is just Mr. Cheung's belief based on what he was told by Miss Zheng. Miss Zheng has resigned from directorship on 21.7.1997 and sold all her shares in the defendant company on 23.1.1998, and is not available to give evidence.

4. Mr. Ho also referred me to the correspondence between the parties' solicitors and submitted that despite clear identification of the defendant's bank account into which the loan was paid, the response from the defendant's solicitors was not forthcoming but evasive. He referred me to the often cited observations of Cons V-P in Murjani v. Bank of India, [1990] 1 HKLR 586 at 597, that the defendant has the opportunity of putting before the Court as much evidence as he wishes in defending an application for summary judgment and the lack of evidence is something that weighs against the defendant.

5. Until 23.1.1998, Miss Zheng held 999,999 of the one million issued shares of the defendant company. The only other share was allotted to a Mr. Chau whose address is the same as Miss Zheng's. It could be inferred that the defendant company was a company over which Miss Zheng has full control. It is therefore possible that Mr. Cheung, albeit a director, may not have been a party to the negotiation of the loan between Miss Zheng and the defendant and knew nothing about the loan arrangements between the plaintiff and Miss Zheng and between Miss Zheng and the defendant. Mr. Cheung's affirmation and the response from the defendant's solicitors have to be understood in this light. Accepting Mr. Cheung's ignorance about the negotiation, I consider the response from the defendant's solicitor not inexplicable.

6. Having read Mr. Cheung's two affirmations, I consider there are striking features in the plaintiff's claim. Firstly, the loan was allegedly a short term loan for three months. In normal course, it would have been repaid by 28.2.1997. There is nothing in Mr. Huang's affirmation as to why the loan was not recalled by the end of February 1997. Instead, it is alleged in the plaintiff solicitor's letter that on 13.8.1997, i.e. 9 months after making the loan and 6 months after repayment was overdue, the necessary documentation, i.e. the loan deed, deed of guarantee, Board resolutions, shareholders' resolution etc. were allegedly sent to Miss Zheng for execution.

7. Secondly, despite Mr. Huang's claim that the loan agreement provided for interest at the rate of 18% per annum, the ledger from the plaintiff's books does not indicate any interest had ever accrued.

8. Thirdly, the timing for the sending of the loan documents is of significance. The documents were sent after Miss Zheng has resigned as director of the company on 21.7.1997, and also three months after the security, i.e. the 20 million share warrants had been returned to Miss Zheng.

9. Fourthly, no action was taken by the plaintiff to demand the return of the loan until March 1998, i.e. two months after Miss Zheng has sold all her shares in the company and is now unavailable to answer the allegations.

10. Fifthly, despite the size of the loan, there is a total of lack of documentation. The plaintiff is a licensed money lender in the business of lending money. It must be aware of the statutory requirement under section 18 of the Money Lenders Ordinance that a memorandum in writing containing all the terms of the loan agreement has to be signed by the borrower before the money was lent or the security was given otherwise the agreement for repayment of money lent or for payment of interest or for security shall not be enforceable. This point has not been taken by the defendant, presumably because counsel anticipated that the court would consider it equitable to enforce the loan agreement in view of the uncontroverted evidence that the loan had been duly received by the defendant and that the terms were not unconscionable.

11. Sixthly, the security was not provided by the defendant, but by an unrelated company, Linkwise Asset Limited, which was also controlled by Miss Zheng. Mr. Ho submitted that it is not unusual for security to be provided personally by a director of the borrower, instead of the borrower itself. Be that as it may, the striking feature in here is that the security never left the defendant company. The transfer was only an accounting entry in which the warrants held by the defendant for the account of Linkwise Asset Limited was transferred to the plaintiff's account with the defendant. The plaintiff has its own share brokerage company, i.e. Guangdong Securities Limited to which had been transferred 50 million share warrants of Pearl Oriental as security in respect of a loan to China Hani (Holdings) Limited (hereinafter called "China Hani"), an associated company of the defendant (see below). If the defendant was the borrower of the loan as alleged by the plaintiff, it is highly unusual for the security to stay with the defendant and not delivered to the plaintiff. On the other hand, if the loan was a personal loan to Miss Zheng, it makes practical sense for the delivery of the security to be effected by an internal transfer between the accounts of the defendant as custodian.

12. Though the receipt of the loan is not in dispute, the identity of the parties to the loan agreement is in issue. Mr. Cheung disputed that he was among those who negotiated the loan for the defendant. At the present stage of the pleading, the defendant seeks to put the plaintiff to strict proof. In the light of the six striking features enumerated above, I do not think this is a case where there is no dispute as to facts which raises a reasonable doubt that the plaintiff is entitled to judgment: see Jones v. Stone, [1894] A.C. 122. In view of the size of the loan and the six striking features above, it is unfair that the defendant should be shut out and judgment entered in favour of the plaintiff without having its witnesses tested by cross examination. Accordingly, I refuse the plaintiff's application to enter judgment.

The Defendant's Counterclaim:

13. The defendant's counterclaim relates to a wholly separate loan transaction between the plaintiff and an associated company of the defendant, China Hani. It is common ground that pursuant to that agreement, China Hani delivered 50 million share warrants of Pearl Oriental as security for the loan to Guangdong Securities Limited as agent for the plaintiff. The loan was duly repaid on 27.4.1997 by a cheque issued not by China Hani, but by the defendant. However, the plaintiff failed to transfer the share warrants to the defendant at the instruction of China Hani. The defendant claims damages for the wrongful detention and/or conversion of the share warrants.

14. According to the defendant, upon repayment of the loan on 27.4.1997, China Hani instructed the plaintiff to transfer the share warrants to the defendant. The instruction relied upon by the defendant is in fact a document titled "Settlement Instruction" issued by China Hani to Hani Securities (H.K.) Ltd, (hereinafter called "Hani Securities") which is also an associated company of the defendant conducting share brokerage business. The Settlement Instruction contains the following material particulars:

To :	Hani Securities (H.K.) Ltd.
From :	China Hani (Holdings) Limited
Instruction Type:	Receive
Counterparty :	Guangdong Securities (B301256)
Client A/C No. :	China Hani
Purpose of SI :	Broker/Custodian TRN

15. Mr. Ho therefore submitted that the Settlement Instruction, put at its highest, was just an instruction to Hani Securities to receive from the counterparty, Guandong Securities Limited, the 50 million share warrants of Pearl Oriental; and not an instruction to Guangdong Securities Limited, or the plaintiff, to deliver the share warrants to the defendant. Even if I were to adopt a most favourable view for the defendant by treating Hani Securities as agent of the defendant and China Hani, and treating Guangdong Securities Limited as agent of the plaintiff, the question still remains as to whom should Hani Securities hold the warrants for. It must be for China Hani as that name is shown in the entry against "Client A/C No." on the Settlement Instruction and the defendant's name did not appear anywhere on the instruction. The defendant is therefore not the intended recipient of the warrants and has no right to immediate possession of the warrant, which is needed to support a claim for detinue or conversion.

16. Mr. Reyes sought to justify the defendant's counterclaim by relying on the principle of subrogation. He submitted that the defendant by repaying the loan for China Hani has acquired the right to immediate possession of the security by subrogation. He referred me to the following passage in Goff & Jones, The Law of Restitution (5th ed.) pp. 151-2:

"It has been said that it is not enough for A to show that his money has been used to pay off B's debt to C. There must be ... something more." Unfortunately, it is not clear from the case law what that "something more" must be. Some judges have regarded the intention of the parties as a matter of paramount importance. Others have not. .................. If "the true nature of the transaction ... [between A and B] is simply the creation of an unsecured loan, this in itself will be sufficient to dispose of any question of subrogation" to C's security. Conversely, if the parties intended to create a secured loan, then A will succeed to C's security if no effective security is created by the agreement between A and B. This will certainly follow if the loan agreement between A and B expressly provides for a security. But an express agreement for a security is not essential. "The whole circumstances of the transaction" may also indicate that A intended to take a security over B's property. "The whole circumstances" may include a payment directly by A to C, with B's concurrence; or a loan to B, accompanied by a direction from A that the money should be used to discharge C's mortgage or to buy C's land; or a payment to C, where A had no direct dealings with C and intended to retain his beneficial interest in his money until that interest was replaced by a legal mortgage over B's property. In resolving the question of A and B's intention, the allocation of the burden of proof may be critical. Paul v. Speirway Ltd suggests that there is a presumption, which can be rebutted by contrary evidence, that A intended to make a secured loan whenever it can be shown that A's money has been used to discharge C's mortgage or lien over B's property."

17. In my judgment, an examination of all the circumstances, including the Settlement Instruction, negates the presumption in favour of subrogation. This is because the instruction clearly states that the warrants shall be held for the account of China Hani and not the defendant. The defendant therefore acquired no proprietary right by repaying the loan for China Hani. In the circumstances, the claim for detinue or conversion must fail and the counterclaim must be struck out as disclosing no reasonable cause of action.

18. Accordingly, I dismiss the plaintiff's application for final judgment and order that the defendant's counterclaim be struck out on the ground that it discloses no reasonable cause of action. In view of the outcome, I make a costs order nisi that there be no order as to costs.