ING BANK N.V. v. MR TSUI TSIN TONG

CACV 354/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 354 OF 1999

(ON APPEAL FROM HCCL 305/1998)

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J U D G M E N T

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Hon Mayo VP:

1. This is an appeal from the summary judgment entered by Stone J for the plaintiff pursuant to its application under Order 14 and 14A of the Rules of the High Court.

2. According to the summons which lay before the Judge one of the issues which he was required to determine was "whether the transactions in question which arose under the ISDA Master Agreement and/or the Put Option Confirmation and/or the New Trade Confirmation constituted a dealing or dealings under s. 76 of the Securities Ordinance, Cap. 333".

3. The Judge has very helpfully analysed the background to this fairly complex litigation.

4. From this it can be seen that Wilfred Lam a client of the New China Hong Kong Capital Ltd. ("NCHK Capital") purchased warrants over shares in Pearl Oriental Holdings Ltd. ("Pearl Oriental"). These were purchased from NCHK Capital who in turn subscribed for the warrants through ING Baring Financial Products ("ING BFP"). Mr Lam had the right to require ING BFP to sell a specified number of shares in Pearl Oriental at a particular price at the given date.

5. ING BFP protected itself from the risk of Pearl Oriental shares increasing in price by hedging the warrant contracts. They protected themselves from a fall in the price of the shares by requiring NCHK Capital to sell it a put option over the shares under which NCHK Capital would be required to purchase the shares at the specified date at the pre-agreed strike price. NCHK Capital required Mr Lam to purchase a similar put option which thereby reduced their risk as against him.

6. In June 1997 the shares fell sharply. As a consequence of this an agreement was concluded between ING BFP and NCHK Capital that the shares the subject of the put option should be sold so as to minimise losses. When ING BFP exercised the put option on 4 September 1997 383,586,000 out of the 400,000,000 shares remained unsold and NCHK Capital had to purchase these in accordance with the terms of the put option. No payment was made and this resulted in further sales being effected in September and October 1997.

7. The two agreements which are central to the claim being made by the plaintiff in the Statement of Claim were entered into on 28 November 1997. The first agreement which is referred to as the New Trade Confirmation provided for ING BFP to sell 165,586,000 shares which had remained unsold under the put option for $0.40 each making a total amount of $66,234,400. The second was a Debt Rescheduling Deed which contained in Clause 13 the guarantee which is sued on.

"13.1 Guarantee

Each Guarantor irrevocably and unconditionally:-

(a) as principal obligor guarantees to the Creditor prompt performance by the Debtor of all its obligations under the Finance Documents (other than the Existing Guarantee);

(b) undertakes with the Creditor that whenever the Debtor does not pay any amount when due under or in connection with any Finance Document (other than the Existing Guarantee), it shall forthwith on demand by the Creditor pay that amount as if it instead of the Debtor were expressed to be the principal obligor; and

(c) indemnifies the Creditor on demand against any loss or liability suffered by the Creditor if any obligation guaranteed by it is or becomes unenforceable, invalid or illegal.

13.2 Continuing guarantee

Each guarantee under this Clause 13 (Guarantee) is a continuing guarantee and will extend to the ultimate balance of all sums payable by the Debtor under the Finance Documents, regardless of any intermediate payment or discharge in whole or in part."

8. The defendant was a party to this guarantee. He guaranteed and indemnified the obligations of NCHK Capital. According to the supporting affidavit of Peter Berg an employee in the plaintiff's group of companies he guaranteed:

9. First, the sum which NCHK Capital owed to ING BFP in respect of accrued losses on the sales of part of the total parcel of shares in Pearl Oriental over which NCHK Capital had sold to ING BFP a put option and which ING BFP had permitted NCHK Capital to sell in the market before the option expiration date to alleviate the effect of the falling Pearl Oriental share price; and

10. Second, the crystallised obligation and loss on the sale of the balance of the Shares which NCHK Capital bought from ING BFP at the fixed price of HK$0.40 per share - thus fixing (a) the price of the balance of the Shares and (b) the loss on the sale of the balance of the Shares by reference to that price as compared to the strike price under the put option.

11. There is no claim in the action to enforce any agreement other than the guarantee in the Debt Rescheduling Deed.

12. The rights of ING BFP under both agreements were assigned to the plaintiff by a Supplemental Deed dated 19 August 1998.

13. It is the plaintiff's claim under the guarantee that is the subject of the Order 14 application.

14. The defendant ran a number of different defences before the Judge. Needless to say he did not consider that any of these defences met the required criteria under Order 14 to enable him to grant leave to the defendant to defend the proceedings. It is convenient to deal separately with each of the defences advanced.

15. Mr Neoh SC for the defendant submitted that the Judge had been in error when he considered the Debt Rescheduling Deed separately and independently from the other documentation which formed an integral part of transactions which had been entered into by the various parties. What the Judge had failed to appreciate was that the main purpose of the Debt Rescheduling Deed was to seek to enforce the obligations of NCHK Capital under their agreement with the plaintiff's subsidiary company ING BFP in relation to the put option transaction which had been guaranteed by the defendant. This necessitated a consideration of the whole of the scheme which had been transacted and more particularly the question as to whether the defendant had an arguable case that the put option transaction was illegal, void or unenforceable.

16. This omission on the part of the Judge was said to be unfortunate as it was not possible to consider the enforceability of a guarantee without having regard to the validity of the primary obligation which was the subject of the guarantee.

17. The put option in this case was an Over the Counter Option ("OTC Option"). Dealings in such options are subject to the controls laid down in the Securities Ordinance, Cap. 333. Mr Neoh contended the OTC Option clearly contravened the provisions contained in s. 76.

"76. Dealers not to engage in option or forward trading

(1) Except as provided in regulations, a dealer (including an exempt dealer) shall not transact in Hong Kong, or hold himself out as being prepared to transact in Hong Kong -

(a) any dealing whereby the dealer confers on any person an option to purchase from or sell to the dealer any securities listed on the Unified Exchange; or (Amended 58 of 1985 s. 54)

(b) any dealing in any such securities which is completed later than the end of the next trading day after the dealing was entered into.

(2) Any dealer who contravenes subsection (1) shall, subject to subsection (3), be guilty of an offence and shall be liable on conviction to a fine of $5,000.

(3) It shall be a defence to any criminal proceedings brought under subsection (2) in respect of a dealing mentioned in paragraph (b) of subsection (1) for the accused to prove that he took all reasonable and practicable steps to secure completion of the transaction within the period permitted by that paragraph.

(4) A contract entered into in contravention of subsection (1) shall not be enforceable by either the dealer or the other contracting party."

18. Mr Neoh argued that it was evident from the affirmation of Mr William Kwong a former employee of NCHK Capital that the company came within the definition of a dealer in the Ordinance. A dealer should not sell put options as they had to be sold in the open market. The consequence of contravening s. 76 was to render any contract entered into unenforceable.

19. Mr Fok SC for the plaintiff accepted the proposition that if a primary obligation is unenforceable a guarantor who undertakes merely a secondary obligation is not liable.

20. Mr Neoh then went on to consider whether it was possible to "contract out" of illegality or unenforceability. This was in the context of Clause 13(1)(c) of the Debt Rescheduling Deed and Clause 13.4 which dealt with waiver of defences.

"13.4 Waiver of defences

The obligations of each Guarantor under this Clause 13 (Guarantee) will not be affected by any act, omission, matter or thing which, but for this provision, would reduce, release or prejudice any of its obligations under this Clause 13 (Guarantee) or prejudice or diminish those obligations in whole or in part, including (whether or not known to it or the Creditor): -

(a) any time or waiver granted to, or composition with, the Debtor or other person;

(b) the taking, variation, compromise, exchange, renewal or release of, or refusal or neglect to perfect, take up or enforce, any rights against, or security over assets of, the Debtor or any other person or any non-presentation or non-observance of any formality or other requirement in respect of any instrument or any failure to realise the full value of any security;

(c) any incapacity or lack of powers, authority or legal personality of or dissolution or change in the members or status of the Debtor or any other person;

(d) any variation (however fundamental) or replacement of a Finance Document or any other document or security so that references to that Finance Document in this Clause 13 (Guarantee) shall include each variation or replacement;

(e) any unenforceability, illegality or invalidity of any obligation of any person under any Finance Document or any other document or security, to the intent that each Guarantor's obligations under this Clause 13 (Guarantee) shall remain in full force and its guarantee be construed accordingly, as if there were no unenforceability, illegality or invalidity; or

(f) any postponement, discharge, reduction, non-provability or other similar circumstance affecting any obligation of the Debtor under a Finance Document resulting from any insolvency, liquidation or dissolution proceedings or from any law, regulation or order so that each such obligation shall for the purposes of each Guarantor's obligations under this Clause 13 (Guarantee) be construed as if there were no such circumstance."

21. He referred to the line of cases leading up to Spector v Ageda [1973] 1 Ch 30 and the passage at p. 45 from the judgment of Megarry J (as he then was):

"No authority has been put before me which states the law applicable to a subsequent transaction which is based on a contract which is illegal only in part, and I do not wish to decide more than is necessary to dispose of this case. It seems to me that where, as here, the subsequent transaction is entered into by a person who not only knows of the partial illegality of the prior contract but also is in a real degree responsible for it and wishes to avoid the consequences of it (as I think that Mrs Spector probably did), then unless that partial illegality is shown to relate solely to some defined portion of the subsequent transaction, so that only that defined portion is affected, the whole of the subsequent transaction will be affected by the illegality. I cannot see why the court should be astute to limit the effects of the illegality and make some artificial apportionment of the subsequent transaction for this purpose. When the illegality affects only a small part of the prior contract, it may seem somewhat Draconian to hold that the whole of the subsequent transaction is affected by the illegality: but illegality is illegality, and it is not for the court to devise means of preventing those who are implicated from burning their fingers more than to a limited extent."

22. Mr Neoh submitted that it was clear from these cases and from the passage cited that if the primary obligation was tainted with illegality this was fatal to any subsequent related agreement.

23. It will be appreciated that if the defendant is to succeed in establishing that there is an arguable defence on this issue he will have to demonstrate both that it is arguable that the agreement between ING BFP and NCHK Capital relating to the put option contravened the provisions contained in the Securities Ordinance and that it is arguable that the guarantee and indemnity are tainted by this illegality. Closely associated with this he will have to demonstrate that it is arguable that the waiver provisions in the Deed have no application.

24. Mr Neoh also submitted that even though reference was made to an indemnity in the Deed it was necessary to determine the true nature of the provision. It was evident that the indemnity covered the same commitment as the guarantee and that it should be treated in the same way regardless of the label attached to it.

25. Mr Fok's answer to these submissions was to argue that the Judge had been correct in his analysis of the position and that the New Trade Confirmation and the Debt Rescheduling Deed were separate and distinct from the earlier dealings between all the relevant parties.

26. What was necessary was to determine the true nature of the obligations which the defendant was guaranteeing. What was clear was that NCHK Capital was acknowledging its indebtedness and was making a series of promises to repay the moneys they owed. It was evident from the claims which were being made in the Statement of Claim that the plaintiff was suing on the guarantee and indemnity in Clause 13 and there was no question of the guarantee or indemnity being in any way tainted with illegality.

27. In this connection he called in aid Clause 25 of the Deed which was in these terms:

"25. SEVERABILITY

If a provision of any finance document is or becomes illegal, invalid or unenforceable in any jurisdiction, that shall not affect: -

(a) the validity or enforceability in that jurisdiction of any other provision of the Finance Documents; or

(b) the validity or enforceability in other jurisdictions of that or any other provision of the Finance Documents."

28. The Deed came within the definition of a "Finance Document".

29. Mr Fok went on to submit that even if these contentions could not be maintained he did not accept that the said put option did contravene s. 76 of the Ordinance.

30. He referred to the fact that it was clear on the evidence ING BFP was also a dealer as defined in the Ordinance. It was accordingly open to ING BFP to place reliance upon the savings provisions in s. 3(1) of the Ordinance which exempt dealings between dealers from the operation of s. 76.

31. S. 3(1) is in these terms:

"3. Saving for certain transactions

(1) For the purpose of determining whether or not a person has dealt in securities or has communicated an offer to acquire or dispose of securities, no account shall be taken of an act done on behalf of that person by, or of an offer made by that person to, a registered dealer, a dealer's representative, an exempt dealer or an exempt dealer's representative or of that person having (whether as principal or as agent) - (Amended 24 of 1991 s. 3)

(a) (Repealed 24 of 1991 s. 3)

(b) issued a prospectus which complies with, or is exempt from compliance with, Part II of the Companies Ordinance (Cap. 32), or in the case of a company incorporated outside Hong Kong, complies with or is exempted from compliance with Part XII of that Ordinance;

(c) issued any document relating to securities of a corporation incorporated in Hong Kong that is not a registered company, being a document which -

(i) would if the corporation were a registered company be a prospectus to which section 38 of the Companies Ordinance (Cap. 32) applies, or would apply if not excluded by subsection (5)(b) of that section or by section 38A of that Ordinance; and

(ii) contains all the matters which, by virtue of Part XII of that Ordinance, it would be required to contain if the corporation were a company incorporated outside Hong Kong and the document were a prospectus issued by that company;

(d) issued a form of application for shares or debentures of a company, together with -

(i) a prospectus which complies with, or is exempt from compliance with, Part II of the Companies Ordinance (Cap. 32) or, in the case of a company incorporated outside Hong Kong, complies with or is exempt from compliance with Part XII of that Ordinance; or

(ii) in the case of a corporation incorporated in Hong Kong which is not a registered company, a document which contains the matters specified in paragraph (c)(ii);

(e) issued a prospectus which has been approved by the Commission in relation to a mutual fund corporation or unit trust authorized by the Commission under section 15;

(f) issued a form of application for the shares of a mutual fund corporation or the units of a unit trust, being a mutual fund corporation or unit trust which has been authorized by the Commission under section 15, together with a prospectus approved by the Commission;

(g) entered into a market contract; (Added 68 of 1992 s. 20)

or of his having as principal, acquired, subscribed for, or underwritten securities, or effected transactions with a person whose business involves the acquisition and disposal, or the holding, of securities (whether as principal or as agent)."

32. In this context it is necessary to also consider the definition of "dealer" and "dealing in securities" in s. 2(1) of the Ordinance.

" 'dealer' (交易商), subject to section 82(1), means a person who carries on a business of dealing in securities, whether he carries on any other business or not, and, in the case of a corporation which is a dealer, includes any director of the corporation who actively participates in, or is in any way directly responsible for the supervision of, the corporation's business of dealing in securities; but does not include - (Amended 62 of 1976 s. 2)

(a) a solicitor or professional accountant whose carrying on business as a dealer is wholly incidental to the practice of his profession;

(b) except where specifically provided in this Ordinance, an exempt dealer;

(c) a recognized clearing house; (Added 68 of 1992 s. 20)"

" 'dealing in securities' (證券交易), in relation to any person (whether acting as principal or agent), subject to section 3(1), means making or offering to make an agreement with any other person, or inducing or attempting to induce any other person to enter into or offer to enter into any agreement - (Amended 24 of 1991 s. 2)

(a) for or with a view to acquiring, disposing of, subscribing for or underwriting securities;

(b) the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities; (Amended 62 of 1976 s. 2)"

33. Mr Neoh's reply to this was that it was apparent from Mr Kwong's affirmation that NCHK Capital had on a number of occasions undertaken transactions relating to OTC Options with parties who were not dealers and that this was sufficient to trigger a contravention of the section. This is not a satisfactory answer to the problem. What we are concerned with is the present series of transactions. Clearly the savings provisions in s. 3(1) do apply in the present case and accordingly the put option did not contravene s. 76.

34. As indicated earlier in this judgment it is necessary for the defendant to surmount both the s. 76 hurdle and demonstrate that the guarantee was not tainted with illegality and that the waiver provisions have no application.

35. I am satisfied that Mr Neoh has not been able to demonstrate that there has been any contravention of s. 76. This being the case it is neither necessary nor desirable for me to express a view on whether or not the guarantee and indemnity are in any way flawed or whether the waiver provisions can be invoked. This ground of appeal must fail.

36. The next ground argued by Mr Neoh was that the put option was a "contract for differences" and thus contravened the Gambling Ordinance, Cap. 148. This ground can be disposed of in fairly short order. As was pointed out by Mr Fok the put option was the opposite of a gaming contract. It was a commercial arrangement which enabled the party entering into it to hedge a risk. Over and above this s. 8.1 of the 1994 ISDA Equity Option definitions provides for "settlement of share transactions" by delivery.

37. It is in this form:

"Section 8.1. Settlement of Share Transactions. In respect of each Exercise Date under a Share Transaction for which 'Physical Settlement' is specified to be applicable, (a) in the case of a Call, Buyer will pay to Seller the Settlement Price and Seller will deliver to Buyer the Number of Shares to be Delivered and (b) in the case of a Put, Buyer will deliver to Seller the Number of Shares to be Delivered and Seller will pay to Buyer the Settlement Price (subject in each case to the provisions of Article 10 ('Adjustments and Extraordinary Events Affecting Share')). Such payment and such delivery will be made through the relevant Clearance System at the accounts specified below on a delivery versus payment basis (if that is possible through the specified Clearance System)."

38. It is clear that a put option does not come within the ambit of the Gambling Ordinance. This is not arguable.

39. The next ground argued was uncertainty. In the grounds of appeal it was framed in this way:

"Uncertainty

3. The learned judge erred in law in holding that it is not arguable that the collateral clause in the Put Option Confirmation is uncertain. Having considered, and apparently accepted, that as the collateral is cash and cannot be marked to market, the learned Judge ought to have found that it is arguable that the collateral clause is void for uncertainty, and is unenforceable. Alternatively, if the collateral clause is found not to be uncertain, the construction of the collateral clause is a matter of mixed law and fact which has to be tried."

40. The collateral provisions are set out on pages 178 to 180 of the exhibits bundle which was before us. It is quite a lengthy document and it is not convenient to embody the terms in this judgment. However it is evident from a perusal of the provision that there is no uncertainty. As was pointed out by the Judge at p. 12 of his judgment "the calculation amount" can readily be extrapolated. I think that the Judge was right to express the view that there was no merit in this point.

41. The next ground which related to economic duress was formulated in this way:

"Economic duress

4. The learned Judge erred in law in holding that it is not arguable that the guarantee was signed under duress. In particular, he failed to give any weight to the evidence, in particular:

(1) that the demand for additional collateral of HK$281 million by ING BFP was considered by the Defendant and NCHK Capital to have been wholly excessive in the circumstances;

(2) that the collateral clause was open to such interpretation; and

(3) that there was a threat of legal proceedings, and INB BFP well knew about the Defendant's fear of the publicity which may follow from a claim."

42. The test as to what constitutes economic duress was referred to at p. 635 of the speech of Lord Scarman in Pao On v Lau Yiu-long [1980] AC 614:

"The third question

Duress, whatever form it takes, is a coercion of the will so as to vitiate consent. Their Lordships agree with the observation of Kerr J. in Occidental Worldwide Investment Corporation v. Skibs A/S Avanti [1976] 1 Lloyd's Rep. 293, 336 that in a contractual situation commercial pressure is not enough. There must be present some factor 'which could in law be regarded as a coercion of his will so as to vitiate his consent.' This conception is in line with what was said in this Board's decision in Barton v. Armstrong [1976] A.C. 104, 121 by Lord Wilberforce and Lord Simon of Glaisdale - observations with which the majority judgment appears to be in agreement. In determining whether there was a coercion of will such that there was no true consent, it is material to inquire whether the person alleged to have been coerced did or did not protest; whether, at the time he was allegedly coerced into making the contract, he did or did not have an alternative course open to him such as an adequate legal remedy; whether he was independently advised; and whether after entering the contract he took steps to avoid it. All these matters are, as was recognised in Maskell v. Horner [1915] 3 K.B. 106, relevant in determining whether he acted voluntarily or not."

43. I do not believe that the defendant can make out an arguable case that he can meet this test.

44. Perhaps the most significant point is that if he thought that the demands which were being made were excessive there was a channel for redress laid down in Clause 5 of the ISDA Master Agreement. It is noteworthy that the defendant did not through NCHK Capital avail himself of the procedure which is laid down in the clause.

45. It is also noteworthy that Clauses 14.10 and 14.11 of the Debt Rescheduling Deed are inconsistent with a claim of this nature being made.

"14.10 Independent legal advice

Mr. Tsui Tsin Tong has been advised by the Debtor and the Credit to seek independent legal advice in relation to his obligations and liabilities under the Finance Documents and Mr. Tsui Tsin Tong fully understands the nature and extent of his obligations and liabilities under the Finance Documents.

14.11 No undue influence

Mr. Tsui Tsin Tong has acted independently and free from any undue influence by any person."

46. Having regard to the fact that this complaint was made at a very late stage it is not surprising that the Judge viewed it with a certain degree of scepticism.

47. I do not think that there is any merit in this ground.

48. The next ground of appeal related to the alleged failure of ING BFP to mitigate losses. It was made out in this way:

"Failure to mitigate

5. The learned Judge erred in law in holding that it is not arguable that in making the demand of HK$281 million as further collateral, ING BFP was in breach of contract and that, accordingly, the defendant had a right of set-off to the extent of the damages for such breach, in that:

(1) he failed to take account of the fact that NCHK Capital had considered the demand to have been excessive and had communicated the same to ING BFP's representatives;

(2) that on the interpretation of the collateral clause, that was an excessive demand;

(3) that it is the opinion of the defendant's expert, Professor Raymond Chiang, that at most an additional HK$104 would have been payable, as against the demand of an additional HK$281 million (p.13B - C). Professor Chiang's opinion was not disputed by the plaintiff, and was apparently accepted by the learned Judge.

6. In the alternative to 5 above, if, which is denied, it is not arguable that the said demand did constitute a breach of contract on the part of the plaintiff, then, the learned Judge erred in law in holding that it is not arguable that the plaintiff had a legal obligation to mitigate its loss, and had failed to do so. The learned Judge ought to have found that it is arguable that in the circumstances where it was clear to ING BFP that NCHK Capital was unable to meet its obligation and was in anticipatory repudiatory breach of contract, ING BFP had a legal obligation to mitigate its loss, and should have mitigated its loss by unwinding these options between June and September 1997, which it did not need to cover its risks. There was evidence from Professor Chiang and Mr. William Kwong that such could be done without significant market impact, and if this had been done, neither party would have suffered any loss."

49. The Judge dealt with these matters at pages 14 to 16 of his judgment. I agree with his summary of the position and the conclusion he reaches. However there is an even more important reason why this ground must fail. It does not appear to be contested that ING BFP had a legitimate commercial interest in keeping this contract alive. This of itself would have fully justified them in not unwinding the options and is a complete answer to the allegations which are made against them in this connection. This ground is clearly unarguable.

50. The next ground was that ING BFP were guilty of "misrepresentation". It was framed in this way:

"Misrepresentation

7. The learned Judge erred in law in holding that it is not arguable that the defendant would have a cause of action in damages against ING BFP which he can set off against the amounts he owes (if any) in the subsequent guarantee of November 1997. The learned Judge ought to have found that as the defendant signed the first guarantee in June 1997 upon the representation of Mr. Kwong that ING BFP would allow the unwinding of the options, and as Mr. Kwong was the only intermediary between ING BFP and the defendant, it is arguable that he was impliedly instituted an agent of ING BFP."

51. At the hearing before us we had some difficulty in defining the exact nature of the misrepresentation complained of and the contractual nexus out of which it allegedly arose. Mr Neoh informed us that it arose out of an informal agreement to unwind the options as far as this was possible. Professor Chiang had expressed the opinion that they could have done more than they actually did. As pointed out by Mr Fok it was by no means clear how an inference could possibly have been drawn that Mr Kwong was authorised to act for and on behalf of ING BFP.

52. Over and above this the claim is inconsistent with Clauses 14.10 and 14.11 of the Debt Rescheduling Deed.

53. That deals with all of the defences which the defendant has attempted to run. For the reasons given I have no doubt that none of them are arguable and that the Judge was right to enter judgment for the plaintiff in the sum claimed. In my view this appeal should be dismissed.

Hon Keith JA:

54. I agree that this appeal should be dismissed, but I wish to add a few words of my own out of deference to the excellence of the arguments.

The approach of Stone J

55. The principal argument deployed on behalf of the Defendant is that the put option granted by New China Hong Kong Capital Ltd. ("NCHK Capital") to ING Baring Financial Products ("ING BFP") is unenforceable. It is said to have been rendered unenforceable by two statutory provisions:

(i) by section 76(4) of the Securities Ordinance (Cap. 333), because the option was an option to sell to NCHK Capital securities listed on the Unified Exchange and NCHK Capital carried on a business of dealing in securities, and

(ii) by section 3(1) of the Gambling Ordinance (Cap. 148), because the put option constituted gambling and was not a contract for differences of the kind exempted from those provisions of the Gambling Ordinance which render gambling unlawful.

However, it is not the put option on which the Plaintiff is suing the Defendant. The Plaintiff is suing the Defendant on the guarantee contained in cl. 13 of the agreement known as the Debt Rescheduling Deed. It is, of course, well settled that a guarantee is unenforceable if the primary obligation whose performance it guarantees is unenforceable. But even if the put option is unenforceable, its unenforceability will only relieve the Defendant from liability under the guarantee if it was the put option whose performance the guarantee was guaranteeing, rather than some other contractual obligation assumed by NCHK Capital.

56. The judge was "inclined to think" that the put option was not unenforceable. However, he did not reach a concluded view on the arguability of its enforceability because he concluded that it was not arguable that its unenforceability made the obligations assumed by the Defendant in cl. 13 of the Debt Rescheduling Deed unenforceable. He regarded the obligations assumed by the Defendant as "a separate and distinct contractual obligation" which served to crystallise and cap the loss which NCHK Capital incurred under the put option. In order to evaluate this conclusion, an understanding of the relevant agreements is essential.

The relevant agreements

57. The put option was granted to ING BFP by NCHK Capital on 14 October 1996. It related to ordinary shares in Pearl Oriental Holdings Ltd. ("Pearl Oriental"). Pearl Oriental was a public company whose shares were listed on the Stock Exchange. By that option, ING BFP had the right up to 4 September 1997 to require NCHK Capital to purchase up to 200m. ordinary shares in Pearl Oriental from it at a price of $3.08 per share. Subsequently, Pearl Oriental split its existing share stock on a two-for-one basis, following which the put option related to 400m. ordinary shares in Pearl Oriental at a reduced price of $1.54 per share. However, in June 1997, the price of shares in Pearl Oriental began to fall. In order to reduce NCHK Capital's ultimate liability under the put option if the put option was exercised by ING BFP, ING BFP and NCHK Capital agreed that as many of the shares as possible should be sold before the share price dropped even further. A number of the shares were sold pursuant to this agreement.

58. On 4 September 1997, ING BFP exercised its rights under the put option and required NCHK Capital to buy those of the shares in Pearl Oriental which remained unsold. No payments were made by NCHK Capital to ING BFP, but it was nevertheless agreed to continue to sell as many as possible of the shares in Pearl Oriental on a piece-meal basis. The shares which were sold pursuant to these arrangements, whether before or after 4 September 1997, had been sold by ING BFP to NCHK Capital who had then sold them to the ultimate purchasers.

59. By 28 November 1997, 234,414,000 of the 400m. shares in Pearl Oriental had been sold. 165,586,000 of them remained unsold. Accordingly, on that date ING BFP and NCHK Capital entered into two agreements. The first agreement ("the New Trade Confirmation") dealt with the remaining unsold shares. By that agreement, ING BFP agreed to sell the remaining unsold shares to NCHK Capital at $0.40 each. The total sum payable by NCHK Capital was $66,234,400.00.

60. The second agreement made between ING BFP and NCHK Capital on 28 November 1997 was the Debt Rescheduling Deed. It related to NCHK Capital's other indebtedness to ING BFP. That indebtedness consisted primarily of

(i) the sum of $118,768,040.00, being the loss sustained by ING BFP as a result of the 165,586,000 unsold shares being sold to NCHK Capital at $0.40 per share rather than at $1.54 per share (i.e. 165,586,000 x $1.14), and

(ii) the sum of $82,443,464.00, being the loss sustained by ING BFP as a result of some of the 234,414,000 shares being sold to NCHK Capital at less than $1.54 per share (i.e. 234,414,000 x $1.54, less the actual proceeds of sale).

A sum was added to that indebtedness to reflect what has been described as the "Estimated Funding Costs of ING BFP", but credit had to be given to NCHK Capital for the dividends paid on the shares and for the collateral placed with ING BFP by NCHK Capital. The result was that NCHK Capital's indebtedness to ING BFP - in addition to the $66,234,400.00 payable under the New Trade Confirmation - was agreed at $140,317,658.29. That was the sum which the Debt Rescheduling Deed required NCHK Capital to pay to ING BFP.

The obligations which the Defendant was guaranteeing

61. Against that background, it is important to remember what the Defendant was guaranteeing under cl. 13 of the Debt Rescheduling Deed. He was guaranteeing NCHK Capital's performance of "its obligations under the Finance Documents (other than the Existing Guarantee)". The relevant Finance Documents are the New Trade Confirmation and the Debt Rescheduling Deed itself. The critical question, therefore, is whether, by guaranteeing NCHK Capital's obligations under the New Trade Confirmation and the Debt Rescheduling Deed, the Defendant was guaranteeing its obligations under the put option.

62. I do not think that it is arguable that the Defendant was doing that. NCHK Capital's obligations under the put option involved purchasing the 400m. shares in Pearl Oriental from ING BFP at $1.54 per share when required to do so. NCHK Capital did not do so, although it had by then purchased some of the shares, and continued to do so after that. But what the New Trade Confirmation and the Debt Rescheduling Deed did was to impose different obligations on NCHK Capital in substitution for the obligations assumed under the put option. It is true that those obligations were designed to put ING BFP into the position in which it would have been if the put option had been complied with. But the fact remains that wholly different obligations were being assumed by NCHK Capital, and it was the performance of those obligations, not the obligations under the put option, which the Defendant was guaranteeing.

63. One other point arises. Even if, by guaranteeing NCHK Capital's obligations under the New Trade Confirmation and the Debt Rescheduling Deed, the Defendant was not guaranteeing NCHK Capital's obligations under the put option, is it arguable that the New Trade Confirmation and the Debt Rescheduling Deed were unenforceable against NCHK Capital? If they were unenforceable, their unenforceability could taint the Defendant's guarantee in the Debt Rescheduling Deed. Mr Anthony Neoh SC for the Defendant did not suggest that the New Trade Confirmation and the Debt Rescheduling Deed were unenforceable against NCHK Capital. In my view, he was right to take that stance. It had been open to NCHK Capital to refuse to agree to the New Trade Confirmation and the Debt Rescheduling Deed, on the basis that they sought to enforce the put option which was arguably unenforceable. NCHK Capital could have left ING BFP to sue it for breach of the put option, leaving it to the court to decide whether the put option was enforceable against it. However, NCHK Capital decided in effect to compromise the claim which ING BFP had against it under the put option by agreeing to the terms of the New Trade Confirmation and the Debt Rescheduling Deed. There is no suggestion that they were anything other than genuinely entered into without the concealment of essential information or the taking of an undue advantage. Accordingly, it would not then have been open to NCHK Capital to dispute the enforceability of the New Trade Confirmation and the Debt Rescheduling Deed. In this connection, I have found the case of Binder v. Alachouzos [1972] 2 QB 151, which Godfrey V-P drew to the parties' attention, of assistance.

The enforceability of the put option

64. In the light of my complete agreement with Stone J's conclusion on the issue which he regarded as decisive, it is unnecessary for me to address three other contentions which had to be regarded as arguable if the unenforceability of the put option was to render the guarantee given by the Defendant unenforceable. They were that

(i) on its proper construction, cl. 13 of the Debt Rescheduling Deed did indeed impose secondary, not primary, liability on the Defendant,

(ii) even if cl. 13 imposed primary liability on the Defendant, that did not prevent the Defendant from relying on the unenforceability of the put option, and

(iii) the various provisions within cl. 13 which purported to provide for its enforceability even if any of the obligations whose performance cl. 13 guaranteed were unenforceable were themselves unenforceable.

It is equally unnecessary for me to express a view as to the enforceability of the put option, but I should add a few words of my own on that topic since that question has been regarded as decisive of part of the appeal.

65. The put option undoubtedly constituted a dealing of the kind to which section 76(1) of the Securities Ordinance potentially applies: it was a dealing in which NCHK Capital conferred on ING BFP an option to sell to NCHK Capital shares listed on the Unified Exchange. The critical question is whether it is arguable that NCHK Capital was a "dealer" within section 76(1). The term "dealer" is defined in section 2(1) of the Securities Ordinance. That definition, coupled with the definition of the phrase "dealing in securities" also in section 2(1), requires attention to be focused on the nature of NCHK Capital's business in general, rather than the nature of any particular transaction. If the put option which NCHK Capital granted to ING BFP had been the only transaction in which NCHK Capital had dealt in securities, it may be that "the professional exemption" in the concluding words of section 3(1) applied to prevent NCHK Capital being regarded as a "dealer" within the meaning of section 76(1) in relation to that transaction. But the unchallenged evidence of William Kwong, the former Managing Director of NCHK Capital, shows that NCHK Capital had dealt in securities with various persons and companies whose business did not involve the acquisition and disposal, or the holding, of securities (whether as principal or agent): see para. 36 of, and exhibit "WKWT-10" to, his affirmation. Accordingly, for my part, I would have regarded it as arguable that the put option was rendered unenforceable by section 76(1). In the light of that conclusion, it is unnecessary for me to express a view as to whether it is arguable that it would also have been rendered unenforceable by the Gambling Ordinance.

The other defences

66. The Defendant is said to have a number of other defences to the Plaintiff's claim. In my opinion, the judge was right not to regard those defences as arguable for the reasons which he gave and for the additional reasons set out by Mr Joseph Fok SC for the Plaintiff in his skeleton argument.

Hon Godfrey VP:

67. I agree that we should dismiss this appeal. The facts sufficiently appear from the judgments of Mayo VP and Keith JA, which I have had the advantage of reading in draft. Since those judgments, although they arrive at the same conclusion, reach it by routes which are not identical, I will state shortly my own reasons for coming to that same conclusion. In doing so, I wish to make it clear that I express no opinion on any matter which, on the view of the case I have taken, does not arise for decision.

68. For my part, I take precisely the same view of the case as I understand Stone J to have taken in the court below.

69. Mr Joseph Fok, SC, for the plaintiff, had submitted to the judge, as he submitted to us, that the subject-matter of the plaintiff's action was the enforcement of the defendant's guarantee in the Debt Rescheduling Deed; a guarantee of a simple debt formally acknowledged by NCHK Capital. The judge accepted this submission. The judge regarded the put option as no more than "part of the historical background". He treated the Debt Rescheduling Deed as creating "a separate and distinct contractual obligation". He rejected the argument of Mr Anthony Neoh, SC to the effect that, on the contrary, the Debt Rescheduling Deed served, indirectly, to enforce the original obligation under the put option. The judge held that this "separate and distinct contractual obligation" was not one to which either section 76 of the Securities Ordinance or section 3 of the Gambling Ordinance could possibly apply.

70. I agree and can detect no flaw in the judge's reasoning or his conclusions.

71. Mr Neoh, SC sought to revive before us a number of other suggested defences summarily dismissed by the judge, who labelled them "uncertainty"; "economic duress'; "failure to mitigate"; and "misrepresentation". Like the judge, I can discover no substance or merit in any of these suggested defences. All of them savour of the last ditch. The defendant has not satisfied me that there is any question or issue here which ought to be sent for trial. He has no real answer to the plaintiff's claim and the judge was quite right to give judgment against him.

72. The appeal will be dismissed and (subject to the provisions of Order 42 rule 5B(6) of the Rules of the High Court) we will order that the costs of the plaintiff of the appeal be taxed (if not agreed) and paid by the defendant to the plaintiff.