HUANG MUCAI v. CHENG ZHEN SHU

HCA 1237/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1237 OF 2011

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REASONS  FOR  JUDGMENT

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1.  This is an appeal by the defendant against the decision of Master S Kwang on 13 April 2012 ordering, inter alia, that:

(i)  summary judgment be entered against the defendant in the sum of RMB 19,781,269.24 or such Hong Kong dollar equivalent with interest thereon to be assessed; and

(ii)  leave for the defendant to file and serve Defence on the claim for interest.

2.  In the hearing on 1 August 2012, I dismissed the appeal with costs and I now give my reasons.

BACKGROUND

3.  The plaintiff’s claim is for the sum of RMB 26,023,002.16 due under a loan agreement, comprising the principal of RMB 19,781,269.24 and accrued interest of RMB 6,241,732.92.

4.  In or about July 2010, the plaintiff came to know that the defendant was indebted to a Hong Kong company, CASIL Clearing Limited (“CASIL”), in the sum of over HK$100,000,000.  The defendant requested the plaintiff to provide him with a loan so that he could partially settle the aforesaid indebtedness to CASIL.  On 15 July 2010, the plaintiff and the defendant executed a written loan agreement in Hong Kong (“the Loan Agreement”) which provides that:

(i)  the plaintiff shall lend his 144,640,000 shares in Neo Telemedia Limited, a public listed company in the Hong Kong Stock Exchange (“the Shares”), to the defendant;

(ii)  the plaintiff shall transfer the Shares to CASIL on 15 July 2010;

(iii)  the amount of the principal (“the Loan Principal”) lent by the plaintiff to the defendant under the Loan Agreement shall be the total sale proceeds of the Shares to be sold by CASIL;

(iv)  the loan period shall be 30 days, being from 15 July 2010 to 14 August 2010;

(v)  if the defendant should fail to repay the Loan Principal by the end of the loan period, the defendant shall pay interest to the plaintiff at a rate of 4 times the prevailing bank interest rate until full repayment thereof; and

(vi)  the defendant shall repay the plaintiff in Reminbi currency.

5.  The plaintiff, the defendant and CASIL executed a separate agreement in Hong Kong on 15 July 2010 (“the Repayment Agreement”), under which the defendant agreed that, upon the transfer of the Shares from the plaintiff to CASIL, CASIL would be entitled to sell them at a price considered to be reasonable by CASIL.

6.  Pursuant to the Loan Agreement, the plaintiff transferred the Shares to CASIL on 15 July 2010.

7.  In the period from 3 September to 29 December 2010, CASIL sold the Shares in tranches with the total sale proceeds amounting to HK$22,837,400.  Applying the relevant currency exchange rate, it is the plaintiff’s case that the Loan Principal in Reminbi currency repayable by the defendant is RMB 19,781,269.24.

8.  Despite repeated demands made by the plaintiff, the defendant has failed to repay the Loan Principal and interest to the plaintiff under the Loan Agreement.  The plaintiff therefore commenced the present proceedings against the defendant.

9.  The defendant does not dispute the existence and the validity of the Loan Agreement and the Repayment Agreement, and that he had borrowed the Shares of the plaintiff to enable him to repay his indebtedness owed to CASIL.

10.  Despite that, the defendant claims that there was a checkered history of dealings between the parties.  Starting in or about August 2009, the defendant agreed to help the plaintiff’s company called “珠海經濟特區華財(集團)有限公司” (“the plaintiff’s Zhuhai Company”) to recover outstanding contract sum in respect of certain highways construction works owed to the plaintiff’s Zhuhai Company by the Zhuhai Municipal Government (“the Zhuhai Government”) up to the amount of RMB 156,000,000.  The plaintiff originally promised the defendant one-third of the money eventually recovered as reward, ie RMB 52,000,000.  By that time, the plaintiff suggested that he would make a declaration which stated that a loan in the same amount of RMB 52,000,000 was owed by the plaintiff’s Zhuhai Company to a company owned by the defendant, and that the said amount would be deducted from the outstanding contract sum eventually recovered from the Zhuhai Government.  The parties believed that if the defendant had an interest in the outstanding contract sum, it would put more pressure on the Zhuhai Government in the settlement negotiation.  The declaration was eventually made by the plaintiff’s Zhuhai Company on or about 26 August 2009 (“the Declaration”).

11.  The defendant had difficulty in helping the plaintiff to recover the outstanding contract sum from the Zhuhai Government. In mid 2010, the plaintiff requested the defendant to liaise with the relevant leaders of the Zhuhai Government and to arrange a full meeting, which should be attended by all parties involved, so as to provide the plaintiff with an opportunity to finalise and discuss with all the relevant parties, in an official environment, the calculation of the outstanding contract sum.  The plaintiff also said that he wanted to come to Hong Kong but he had not been able to do so for years.  He therefore requested for the defendant’s assistance in this regard.

12.  In the end, it was agreed that as a reward or consideration for the defendant’s successful performance of both the said two conditions (“the Two Conditions”), the plaintiff would settle the defendant’s indebtedness to CASIL by transferring the Shares to CASIL.  However, should the defendant fail, the Shares transferred to CASIL would be regarded as a loan to the defendant and the defendant would be responsible for repaying the Loan Principal and interest to the plaintiff.

13.  It is the defendant’s case that the agreement on the Two Conditions either forms a collateral contract to the Loan Agreement or the oral part of a composite agreement under which the Loan Agreement forms the other written part.  According to the defendant, the plaintiff had expressly acknowledged that he had satisfactorily performed both the Two Conditions under the collateral contract, and so he should be entitled to the reward or consideration.

14.  Further, it is the defendant’s case that in or around the beginning of 2011, the plaintiff complained to the defendant that despite the official meeting with all the parties, he was not able to recover any of the outstanding contract sum from the Zhuhai Government.  The plaintiff then requested the defendant to make a one-off refund of RMB 4,000,000 to the plaintiff in order to solve the cash-flow problem facing the plaintiff by that time.  As a result, on 11 January 2011, the defendant transferred RMB 4,000,000 from “濰坊君恒石材有限公司”, a company substantially owned by the defendant (“the defendant’s Mainland Company”), to “華財興業投资担保有限公司中山分公司”, which was a branch company of “華財興業投资担保有限公司” which in turn was a company substantially owned by the plaintiff (“the plaintiff’s Mainland Company”). 

15.  Finally, the defendant contends that the plaintiff had advanced the loan to him in violation of the provisions in the Money Lenders Ordinance, Cap 163 (“the MLO”).

16.  On the other hand, the plaintiff disputes the existence of the alleged collateral contract.  Further, the plaintiff claims that he had no difficulty in obtaining a visa to come to Hong Kong.  In particular, the plaintiff has given a detailed account, as supported by documentary evidence, of how he came to Hong Kong in July 2010 to sign the Loan Agreement and the Repayment Agreement, using a Cambodian visa and flight ticket with Hong Kong as the transit point without the need for a visa from the Mainland authorities.  In respect of the remittance of RMB 4,000,000, the plaintiff claims that such remittance was related to dealing or transaction between the relevant Mainland companies and it had nothing to do with the Loan Agreement in the present case.

17.  On 13 April 2012, Master Kwang granted summary judgment in favour of the plaintiff.

LEGAL PRINCIPLES

18.  The proper approach of the court in dealing with a summary judgment application is well-established.  Whilst the court will not grant summary judgment based on a mini-trial, it will enter such judgment where the purported defence is unbelievable or unarguable in law (see: Super Town Investments v Ives Developments, unreported, HCA 86/2006, 22 May 2007, per To DHCJ (as he then was) at §6).  The primary obligation remains on the defendant to satisfy the court that there is a triable issue or question or that there ought to be a trial for some other reasons.  The mere assertion of fact by a defendant in an affidavit does not necessarily entitle to have leave to defend.  The threshold onus is on the defendant to show that there is a triable issue in the case by condescending upon particulars.  The court will test the creditability of an affidavit asserting a triable issue against the conduct of the defendant and contemporaneous documents, and may find that the affidavit is incredible or almost incredible by reason of its inherent implausibility or inconsistency with the documents (see: Bhagwandas Kewaleram Murjani & Ors v Bank of India [1990] 1 HKLR 586 (CA), per Hunter JA at 589G-560H).

19.  The defendant here is actually trying to establish a collateral contract the sole effect of which is to vary or add to the terms of the written documents, ie the Loan Agreement and the Repayment Agreement.  The courts will always view such kind of collateral contracts with some suspicion, as any laxity would enable parties to escape from the full performance of the obligations of contracts unquestionable entered into by them.  More especially, it would have the effect of lessening the authority of written contracts by making it possible to vary them by suggesting the existence of verbal collateral agreements relating to the same subject matter (see: Universal Dockyard Ltd v Trinity General Insurance Co Ltd [1989] 2 HKLR 160 (PC), per Lord Goff at 164H-165A).

20.  If the defence in a summary judgment application rests upon a collateral oral agreement, the sole effect of which is to vary the terms of a written existing document, the threshold onus on the defendant is compounded by the onus to strictly prove such an agreement (see: Bank of India v Surtani Murlidhar Parmanand [1994] 1 HKC 7 (CA), per Nazareth JA at 11I-12C).  Although the modern approach is that the courts are more willing to accept pre-contractual assurance giving rise to a collateral contract, the burden remains on the party alleging such a collateral contract to adduce credible evidence to prove its existence (see: Bank of China (Hong Kong) Ltd v Fung Chin Kan (2002) 5 HKCFAR 515, per Litton NPJ at §§53-57).

21.  Further, in a summary judgment application, the court is entitled to find that the terms of the alleged collateral contract are too vague and uncertain so as to render it (even if such exists) to be enforceable.  The court can also find that the alleged collateral contract does not exist with reference to documentary evidence and conduct of the parties (see: Wing Siu Co Ltd v Goldquest International Ltd (No 2) [2002] 4 HKC 420, per Ma J (as he then was) at §19).

22.  With these principles in mind, I turn to the merits of the appeal.

MERITS OF THE APPEAL

(i)  The existence of the collateral contract and the fulfilment of the Two Conditions

23.  The defendant’s first ground of defence is based on the existence of the alleged collateral contract and the fulfilment of the Two Conditions as a consideration for the discharge of the debt under the Loan Agreement.  Although the court should not conduct a mini-trial at this stage, these defendant’s allegations, in my judgment, simply defy common sense and are not capable of being believed.

24.  First, it is the defendant’s case that the discussion about the collateral contract relating to the Two Conditions was made before the signing of the Loan Agreement on 15 July 2010.  The Two Conditions were certainly very important, the fulfilment of which would tantamount to the plaintiff waiving a massive debt of over RMB 19,800,000.  In such circumstances, it beggars belief that the Two Conditions, should they really exist, were not included in the Loan Agreement or otherwise recorded in writing.

25.  In his Reasons for Decision, the learned Master said the following (at pp 4F-5E of the transcripts):

“ ... … … the defendant cannot provide an exact date when those oral discussion [relating to the Two Conditions] was made. But what we can see was that it was some time in the middle of 2010 before the signing of [the Loan Agreement] on 15 July 2010. The reasons why the defendant raised [the Two Conditions] in question is because, according to the defendant, the plaintiff mentioned about his difficulty in obtaining a visa to come to Hong Kong and the plaintiff knew that the defendant owed a large sum of money to CASIL, so the plaintiff offered assistance to the defendant.

… … …

Obviously, [the Two Conditions] were not written in [the Loan Agreement]. I find it rather unexplainable why, on one hand, such conditions will be so important to the defendant, firstly, in order to get the plaintiff to lend [the Shares] and, eventually, the plaintiff would agree to use [the Shares] for the purpose as remuneration to the defendant if he would be able to fulfil [the Two Conditions] and with the effect of discharging all the liabilities of the defendant.

If [the Two Conditions] are so important, I would imagine that a reasonable person must insist, for whatever reason, to include these conditions into the written agreement. [The Loan Agreement] has no single word touching upon [the Two Conditions], not even mentioning any oral discussions between the plaintiff and the defendant on [the Two Conditions]. I find it rather unbelievable. It is devoid of any reasonable commercial sense.

26.  I agree entirely with the dicta of the Master.

27.  Second, in view of the scanty particulars provided by the defendant, I find it incredible that the plaintiff would have agreed to the fulfilment of the Two Conditions as a consideration for the discharge of a massive debt as alleged by the defendant.

28.  I start with the first condition which relates to the assistance allegedly given to the plaintiff to obtain the visa to come to Hong Kong.  According to the defendant, the plaintiff was prepared to offer him a huge reward for helping the plaintiff to get such visa.  Yet, there is no mention in the defendant’s statement (the contents of which were subsequently confirmed by the defendant in his affirmation) as to the nature of the problem which prevented the plaintiff from getting such visa.  In particular, the Statement of Travel Records kept by the Immigration Department (“the Travel Statement”) shows that the plaintiff had visited Hong Kong 15 times during the period from 9 November 2005 to 22 April 2007.  In his statement, the defendant only mentions that he had helped the plaintiff by making some clarifications with the Government officials, and yet there is no mention about the details of the assistance given by him, for example, the officials that he had met, the nature of the problem facing the plaintiff and the details of the clarifications that he had made with the Government officials.  These particulars are all within the defendant’s own knowledge, and yet for some unknown reasons, he is not prepared to disclose such details and the whole truth to the court.  Without such crucial particulars, it is simply impossible for the court to accept that the plaintiff would have prepared to pay such huge reward for the defendant’s assistance.

29.  Further, the objective evidence is that the plaintiff could come to Hong Kong in July 2010 with the use of a Cambodian visa.  In such circumstances, why the plaintiff had to pay such huge sum of reward for the defendant’s assistance in obtaining a visa from the Mainland authorities?

30.  I then turn to the second condition which relates to the assistance allegedly given by the defendant in arranging a meeting with the leaders of the Zhuhai Government.   According to the defendant’s own evidence, the plaintiff agreed to pay the defendant RMB 52,000,000 in 2009 if the defendant could help recover the outstanding contract sum owed to the plaintiff’s Zhuhai Company by the Zhuhai Government.  On the assumption that such evidence is the truth, I cannot think of any logical reason as to why the plaintiff would have changed his stance so much that he would have agreed to remunerate the defendant with an enormous sum of money purely for arranging a meeting with the Government officials without any guarantee that the plaintiff would be able to recover the outstanding contract sum.  This simply defies any common or business sense.

31.  Further, according to the Statement of Outstanding Payment (工程欠款對賬單), the outstanding contract sum for the construction works as at 22 August 2009 was only RMB 12,911,344.21, which is far lower than the said sum of RMB 156,000,000 as alleged by the defendant.  In such circumstances, I do not think that any right-minded person would have agreed to pay over RMB 19,800,000, though it is alleged to cover the fulfilment of both the Two Conditions, for the defendant’s assistance to recover a debt which was much lesser in amount.

32.  In reply to the figures in the Statement of Outstanding Payment, the defendant submits that such document may not represent a complete record.  However, if the defendant was assisting the plaintiff to recover the outstanding contract sum from the Zhuhai Government as alleged, it would be absurd to suggest that the defendant did not have the complete record of the outstanding balance of the contract sum allegedly owed by the Zhuhai Government by that time.  The defendant’s story is simply incredible.

33.  The uncertainties relating to the Two Conditions also cast serious doubt about the existence of the collateral contract. Putting the defendant’s case at the highest, there was no discussion between the parties relating to the following matters:

(i)  the time when the defendant had to successfully help the plaintiff to obtain the visa;

(ii)  the time when the defendant had to arrange a meeting with the Zhuhai Government;

(iii)  which officials from the Zhuhai Government had to attend such meeting; and

(iv)  what other parties the defendant had to procure to attend such meeting.

34.  In my judgment, without agreement or discussion on these issues, it is quite inconceivable that the plaintiff would have agreed to waive such a massive debt.

35.  Third, assuming that the collateral contract and the Two Conditions did exist, the defendant, for the purpose of the summary judgment application, has to produce some credible evidence to show that he had fulfilled both the Two Conditions.  The Travel Statement shows that the plaintiff had no difficulty visiting Hong Kong from 9 November 2005 to 22 April 2007.  In such circumstances, the defendant owes a duty to the court to identity the problem facing the plaintiff in obtaining the visa to visit Hong Kong and to explain the steps that he had taken to help the plaintiff to obtain the visa.  As mentioned above, these particulars are within the defendant’s own knowledge.  Without condescending upon such particulars, it is simply impossible for the court to assess the creditability of the defendant’s allegation about the fulfilment of the first of the Two Conditions.  In my judgment, failure to provide such crucial particulars is fatal to the defendant’s case.

36.  Mr Lee, counsel for the defendant, has advanced a number of arguments to oppose the O 14 application.  Amongst others, Mr Lee relies on the Travel Statement to show that the plaintiff had not visited Hong Kong between April 2007 and July 2010.  According to Mr Lee, the sudden termination of the plaintiff’s regular trips to Hong King would suggest that something had happened which prevented the plaintiff from coming to Hong Kong during that period of time.  Further, the plaintiff’s Zhuhai Company was prepared to execute the Declaration in 2009 acknowledging the existence of a debt of RMB 52,000,000, which was in fact a reward for the defendant in helping the plaintiff to recover the outstanding contract sum.  According to Mr Lee, the execution of the Declaration shows that the parties were content to conduct their dealings with each other on the basis of mutual trust instead of strict adherence to the precise terms in the legal documents.

37.  Despite the able submission of Mr Lee, I cannot accept these arguments.  There might be a lot of reasons as to why the plaintiff did not come to Hong Kong in the period from 2007 to 2010.  As I have mentioned above, if the defendant’s allegations were the truth, the defendant should be able to provide the court with the nature of the problem which prevented the plaintiff from getting a visa and the details of the assistance given by him in obtaining the visa.  Without condescending upon these particulars and telling the court the whole truth, the defendant’s allegations are no more than mere assertions, and the court is not in a position to assess the creditability of the defendant’s case about the existence of the collateral contract and whether the defendant had in fact fulfilled both of the Two Conditions in the collateral contract.

38.  Neither can the Declaration take the defendant’s case any further.  Putting the defendant’s case at the highest, the Declaration was executed for the purpose of exerting pressure on the Zhuhai Government to negotiate.  This is quite different from the arrangement under the Loan Agreement.  In the latter case, the parties were prepared to take the trouble and sign a written agreement to formalise the debt arrangement between the parties.  As the effect of the collateral contract was to waive a massive debt, there is no logical reason as to why the defendant had not put down the contents of the alleged collateral contract in the Loan Agreement or otherwise in writing.

39.  Hence, I come to the conclusion that the defendant’s allegations about the existence of the collateral contract and the fulfilment of the Two Conditions are inherently improbable and not capable of being believed.    

(ii)     The payment of RMB 4,000,000

40.  According to the defendant’s case, the defendant’s Mainland Company made a remittance of RMB 4,000,000 to the branch company of the plaintiff’s Mainland Company on 11 January 2011.  In the hearing below, it was confirmed by the defendant’s counsel that the making of such payment is not a stand-alone defence but would stand or fall together with the aforesaid defence on the Two Conditions.  In other words, the defendant is only relying on such payment to support the existence of the collateral contract.

41.  For myself, I cannot quite understand the true nature of such defence.  According to the submission of Mr Lee, the defendant saw no legal obligation to make such payment and yet he did so with a view to help his friend.  On the other hand, the defendant states in his statement that the making of such payment, according to the understanding of the parties by that time, would discharge the defendant’s liability under the Loan Agreement.

42.  As I see it, the defendant’s evidence about the purpose of such payment is quite inconsistent with his earlier defence.  According to the defendant, the plaintiff had expressly acknowledged to him that he had satisfactorily fulfilled the Two Conditions in the collateral contract.  If that were the truth, there was no need for the defendant to make the payment of RMB 4,000,000 or to have the discussion with the plaintiff about the payment as a discharge of the liability under the Loan Agreement.

43.  Further, I agree with Mr Lo, counsel for the plaintiff, that it is practically moonshine for the defendant to suggest that the plaintiff would have discharged the defendant’s massive liability of about RMB 19,800,000 in return for a mere payment of RMB 4,000,000.  Hence, the defendant’s suggestion is inherently improbable and devoid of commercial sense.

44.  Mr Lee submits that the plaintiff owes a duty to the court to provide more particulars about the background of such payment.  However, one must not lose sight of the fact that the plaintiff’s claim is a simple one based on formal written documents such as the Loan Agreement and the Repayment Agreement.   If the defendant seeks to vary and contradicts the terms in the Loan Agreement, the defendant, in the O 14 application, has the duty to adduce credible evidence about the existence of the collateral contract and the fulfilment of the Two Conditions.  As I have mentioned above, the defendant’s allegations simply defy common or business sense, and I am of the view that the defendant does not even come close to discharge the burden of establishing a triable issue.  It is therefore wrong for the defendant to accuse the plaintiff for failure to supply detailed particulars on some other transaction which, on the face of it, had nothing to do with the Loan Agreement itself.

(iii)    Defence under the MLO

45.  The defendant also complains that the plaintiff had, without a licence, carried on business as a money lender in advancing the loan to him contrary to s 7 of the MLO.  Further, Mr Lee, for the first time in this appeal, submits that the interest charged by the plaintiff under the Loan Agreement is “notoriously high”.

46.  In my judgment, these are only desperate attempts to evade liability under the claim.  S 2 of the MLO defines “money lender” as a person whose business (whether or not he carries on any other business) is that of making loans or who advertises or announces himself or holds himself out in any way as carrying on that business, subject to the exempted persons and the exempted loans under Schedule 1 of the MLO.  Under Schedule 1, Part 2 of the MLO, a loan made by an individual whose ordinary business does not primarily or mainly involve the lending of money, in the ordinary course of that business, is exempted from the provisions of the MLO.  In the present case, the plaintiff personally made the loan to the defendant.  The plaintiff has never conducted any business in making loans, and the defendant has not contended, let alone adduced any evidence, to substantiate his claim that the plaintiff was a “money lender” within the meaning of the MLO.  Hence, this complaint is groundless.

47.  Mr Lee also complains that the agreed interest rate under the Loan Agreement is, according to “common knowledge”, “notoriously high”.  However, this allegation has not been raised in the affirmation in opposition and so the plaintiff is deprived of the opportunity to reply to such allegation.  In any event, the prohibition of excessive interest rates under the MLO applies only to annual rates of 60% per annum or above (s 24 of the MLO).  As pleaded in the Statement of Claim, the plaintiff is only claiming an interest rate of 30.96% based on the interest rate of the Hongkong & Shanghai Bank, which is far below the statutory limit.  In such circumstances, the complaints relating to the violation of the provisions in the MLO are totally without merit.

THE CLAIM ON INTEREST

48.  Although the interest rate charged by the plaintiff does not offend the provisions in the MLO, there is a triable issue as to the exact amount of interest that can be recovered by the plaintiff.  The learned Master, in granting the defendant unconditional leave to defend the claim on interest, said the following in his Reasons (at p. 7J-O):

“On the interest claimed, as I have said, in light of the special features in this case of [the Loan Agreement], there are questionable issues as to when the interest will start to accrue, and also there are questions on the interest rate which is not clear from the terms of [the Loan Agreement].

As put forward by the defendant, there may be arguments whether the interest rate would be the plaintiff’s bank in China or whether it would be any bank in Hong Kong, as put forward by the plaintiff.  In the statement of claim, the plaintiff quoted the rate of the Hongkong & Shanghai Bank.  However, why that rate should be applicable is also open for question.  So in this case, the interest needs to be assessed.”

49.  Again I agree with such dicta of the Master.

50.  Based on the aforesaid, the Master was right in awarding summary judgment in favour of the plaintiff and granting leave to the defendant to defend the claim on interest.  I therefore dismissed the appeal with costs.