UP ENERGY FINANCE LTD v. CHINA MINSHENG BANKING CORPORATION LTD

HCA 2267/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2267 OF 2015

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REASONS FOR DECISION
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1.  This is an ex parte injunction application by Up Energy Finance Limited (UE Finance) against China Minsheng Banking Corporation Limited (CMBC). CMBC was given notice of the application and was legally represented at the hearing.

2.  At the conclusion of the hearing, I refused the application and ordered that the plaintiff pay the defendant’s costs, to be taxed if not agreed.  I indicated that I would hand down reasons for my decision which I now do.

3.  UE Finance seeks from the Court an injunction order to restrain CMBC from enforcing a Charge on Deposit granted by UE Finance to CMBC (Charge on Deposit), or otherwise transferring or withdrawing all or any part of funds deposited in the UE Finance’s Security Account No. 800016302301 (Security Account) with CMBC.  This is the second time UE Finance has come before the courts in separate proceedings seeking an injunction order in relation to this case. 

4.  UE Finance is a subsidiary of Up Energy Development Group Limited (UE Holding), a company listed on the Hong Kong Stock Exchange Limited.  Mr Qin Jun is a director and chairman of UE Holding and a director of UE Finance who has filed an affirmation on the latter’s behalf in support of the application.  Mr Qin is also a director of Grande Coal Corporation (GCC) which is the general partner of Grande Cache Coal LP (GCC LP).  He became a director of GCC upon the acquisition of GCC and GCC LP by UE Holding through its subsidiary Up Energy Resources Company Ltd (UE Resources). 

5.  The background facts are complex but can be briefly summarised from the material submitted as follows.

6.  The UE Group is principally engaged in mining of coking coal, production and sales of raw coking coal, cleaning coking coal, coking and chemical products.  GCC LP is a limited partnership established under the laws of Alberta, Canada.  It is engaged in the production and sales of premium hard coking coal, and directly holds coal mines in Grande Cache, a town in Alberta, Canada.  The business and affairs of GCC LP is managed and administered by its general partner GCC.  At the material time, GCC LP and GCC were variously owned by 0925165 B C Ltd (Winsway Canada), a subsidiary of Winsway Enterprises Holdings Limited (Winsway), a listed company in Hong Kong, and Marubeni Coal Canada Limited (Marubeni Canada), a subsidiary of Marubeni Corporation (Marubeni), a Japanese corporation.

7.  In September 2014, Marubeni, Winsway, and the UE Group agreed in principle that Marubeni Canada would transfer all of its interest and Winsway Canada would transfer a substantial part of its interest in GCC and GCC LP to the UE Group.  This was set out in a memorandum of understanding between UE Holding and the two companies respectively.  Mr Qin states that in addition to the acquisition arrangements, the parties implemented certain financial measures to ensure that GCC and GCC LP had the necessary cash flow to address financial difficulties they were experiencing.  This was agreed to by the UE Group as it wished to avoid GCC and GCC LP being wound up before completion of the acquisition.

8.  It transpired that Marubeni had entered into coal sales agreements with GCC LP as a customer and the value of the coal delivered was used to offset the outstanding balance of the total advance payments made to it by Marubeni.  As of 1 October 2014, Marubeni’s outstanding advance payments amounted to a total of US$23,065,700 (the Sum).  After negotiations between CMBC, the UE Group and Marubeni, Marubeni agreed to withhold demanding the Sum or delivery of coal arising from the coal sales agreements to reduce the cash flow problems of GCC LP until the UE Group had acquired GCC and GCC LP.  As a condition, Marubeni requested GCC LP to guarantee repayment of the Sum to Marubeni.  In consequence, the UE Group through UE Finance provided a deposit of an equivalent amount of the Sum to CMBC to guarantee that GCC LP was able to repay the Sum to Marubeni.  Mr Qin states that the intention of the UE Group in agreeing to this arrangement was to assist GCC LP in receiving cash from other customers and to maintain its customer base.  Marubeni on the other hand claim that this arrangement was put in place to ensure it receive payment of the Sum upon the completion of the acquisition of GCC LP and GCC by the UE Group.

9.  Five agreements were executed to implement the above arrangement.  They were:

(1) an Advance Payment Guarantee dated 30 September 2014 (as amended on 13 August 2015) issued by CMBC in favour of Marubeni as beneficiary and signed by GCC LP;

(2) an undated Charge on Deposit granted by UE Finance in favour of CMBC;

(3) a Credit Agreement issued by CMBC to GCC LP dated 30 September 2014 which was subsequently amended;

(4) a Supplemental Deed dated 1 October 2014 entered into between Marubeni and GCC LP; and

(5) a Fourth Amendment Deed dated 1 October 2014 which amended various previous instruments entered into amongst the parties which included Marubeni Canada, Winsway Canada, GCC LP, GCC and CMBC. 

10.  The Advance Payment Guarantee and the Supplemental Deed are to the effect that Marubeni would withhold demanding payment prior to the completion of the acquisition of GCC and GCC LP.  The Advance Payment Guarantee was executed by GCC LP as the applicant and CMBC as the guarantor in favour of Marubeni as the beneficiary. 

11.  Clauses 5 to 7 of the Advance Payment Guarantee provide that:

“5. At request of the Applicant, we, China Minsheng Banking Corporation Limited, Hong Kong Branch at 36/F, Bank of America Tower, 12 Harcourt Road, Central, Hong Kong, hereby irrevocably undertake to pay you any sum or sums not exceeding an aggregate amount of US$23,065,700 upon receipt by us of your demand in writing for payment in compliance with terms and conditions of this guarantee.

6. This guarantee is payable upon your written demand for payment to us stating that (i) the Applicant has failed to satisfy its obligations to you under the Supplemental Deed by the delivery of coal and/or the refund of the Advance Payment at any time after the date falling seven days after the end of the Delivery Standstill Period (as such term is defined in the Amendment Deed) and (ii) the amount of such claim represents and covers the unpaid balance of Advance Payments in connection with the Applicant’s obligations under the Supplemental Deed.

7. Upon receipt of your written demand for repayment in compliance with the terms and conditions of this guarantee, we shall, within five Business Days, remit the proceeds to you in accordance with your instructions.”

12.  Clauses 2.1(c) and (d) of the Supplemental Agreement provide that:

“(c) upon the expiry of the Delivery Standstill Period, Marubeni shall be entitled to provide written notification to [GCC LP]: (i) for [GCC LP] to reimburse Marubeni for the advance payments made under the Sale and Purchase Contracts within seven (7) days of the notification …

(d) In the event that [GCC LP] fails to satisfy its obligation to Marubeni under this deed by the delivery of coal and/or the reimbursement of advance payments in an aggregate amount of US$23,065,700 made by Marubeni to [GCC LP] under the Sale and Purchase Contracts at any time after the date falling seven (7) days after the end of the Delivery Standstill Period, Marubeni shall be entitled to make one or more Claims pursuant to the Letter of Guarantee for such amounts not exceeding the aggregate of the advance payments not otherwise satisfied by [GCC LP] in respect of the advance payment transactions under the Sale and Purchase Contracts.  For the avoidance of doubt, Marubeni shall not be entitled to make any Claim pursuant to the Letter of Guarantee prior to the Letter of Guarantee Exercisable Date.”

13.  The Credit Agreement and the Charge on Deposit are to the effect that UE Finance would guarantee repayment of the Sum by GCC LP after completion of the acquisition.  The Charge of Deposit is given to CMBC by UE Finance as the chargor and GCC LP as the principal.  It provides that UE Finance as chargor agrees with CMBC for it to make advances or give credit to GCC LP as the principal and that it will upon demand pay to CMBC and discharge all the Secured Liabilities (all or any money and liabilities due or owing to the CMBC by the principal).  It also provides that in the Event of Default (when the chargor or the principal fails to pay any of the Secured Liabilities when due) CMBC may take the security provided by UE Finance being a deposit equivalent to the Sum.

14.  Under Clause 7 headed “Waiver of Defences” it provides that the chargor agrees that “its liability under this Charge shall not be reduced, discharged or mitigated by” a number of listed circumstances including “(a) any variation, extension, discharge, compromise, dealing with, exchange or renewal of any right or remedy which the Bank may have now or in the future from or against the Principal or any other person in respect of any of the Secured Liabilities” and “(e) any amendment, variation, reinstatement or supplement of or to, ... any document or agreement (whether oral or in writing) relating to the Secured Liabilities...”.

15.  Mr Qin states that the overall effect of the various instruments is that (1) unless and until there is Completion within the meaning of Clause 1.1 of the Amendment Deed, Marubeni would be responsible for maintaining the cash flow of GCC LP by withholding repayment of the Sum from GCC LP; and (2) after Completion, UE Finance would guarantee repayment by GCC LP, and repay Marubeni the Sum and thereby UE Finance would provide a loan of the amount of the Sum to GCC LP.  Hence, if GCC LP was unable to repay the Sum, then Marubeni could demand repayment of the Sum from CMBC which in turn could demand repayment of the Sum from GCC LP, failing which CMBC could demand repayment of the Sum from UE Finance. 

16.  On 14 November 2014, UE Resources, UE Holding and Marubeni Canada entered into a sale and purchase agreement (the Marubeni SPA) in respect of all of Marubeni Canada’s interests in GCC LP and GCC. 

17.  On 2 September 2015, CMBC, Marubeni Canada, Winsway Canada, GCC LP and GCC executed an Amendment Letter which Mr Qin claims altered the meaning of Completion in the Amendment Deed.  It was executed by a director of GCC LP, Mr Max Wang.  It is UE Finance’s case that Mr Wang had received draft versions of the letter in August 2015 but no notice had been given to them and in any event when he signed the Amendment Letter on behalf of GCC and GCC LP, he had a mistaken belief of the true meaning of the implication of the Amendment Letter.  It is also UE Finance’s case that all along it has declined to consent to alter the meaning of Completion in the Amendment Deed. 

18.  It seems that Marubeni relied on the Advance Payment Guarantee to put in train the payments referred to in the Marubeni SPA which was initiated when Marubeni sent the Notification to GCC LP and Demand for Payment to Marubeni on 3 September 2015 to demand repayment of the Sum on the basis that completion had taken place.  UE Finance objected to Marubeni’s actions. 

19.  Mr Qin states that in an attempt to resolve the dispute arising from the meaning of Completion and/or the implication of the Amendment Letter, GCC LP and UE Finance applied for an injunction order in HCA 2136/2015 against Marubeni and CMBC to restrain Marubeni from demanding the Sum under the Advance Payment Guarantee and to restrain CMBC from repaying the Sum to Marubeni.  In the writ, the plaintiffs sought declarations that Marubeni is not entitled to demand CMBC to make payment pursuant to the Advance Payment Guarantee based on a true construction of the Marubeni SPA and that Completion under the Fourth Amendment Deed has not taken place.

20.  GCC LP and UE Finance were granted an ex parte injunction order on 14 September 2015 but it was discharged on 23 September 2015 by Chow J, primarily on the finding that the Advance Payment Guarantee is a performance bond, and CMBC ought to comply (and not be restrained from complying) with the obligations under the Advance Payment Guarantee, regardless of the underlying dispute between the parties.  His Lordship held that:

“… I consider it to be clear that there is no basis for any injunction to be granted to restrain the Bank from making payment under the Advance Payment Guarantee, in the absence of any suggestion that the fraud exception has any application. Further, the existing materials seem to me to be far from sufficient to satisfy the legal or evidential threshold required for granting an injunction to restrain Marubeni from seeking payment under the Advance Payment Guarantee. Further, I agree with Ms Ismail that damages appear to be an adequate remedy and thus there is no sufficient ground for an interlocutory injunction to be granted in the present case. That being so, I consider the ex parte order ought to be discharged.”

21.  Chow J also granted a stay of execution on his order until the close of business on 29 September 2015. 

22.  On 29 September 2015, UE Finance issued a writ against CMBC claiming a declaration that no “Event of Default” within the meaning of Clause 33.1(e) of the Charge on Deposit granted by the plaintiff to the defendant has taken place and that the plaintiff’s liability under the Charge on Deposit is discharged. 

23.  The dispute between UE Finance and CMBC centres very much on the same issue as the previous proceedings, namely, whether Completion for the purpose of the Fourth Amendment Deed (which is defined to mean completion of the transactions contemplated under the Marubeni SPA) has occurred.  UE Finance argues that Completion has not occurred because Clause 3.1 of the Marubeni SPA remains unsatisfied and it did not consent to the Amendment Letter which if valid amounts to a material variation of its position as a guarantor.  Much centres on the Amendment Letter and this has been the subject of comment and dispute between Mr Qin for the plaintiff and Mr Koji Iwama for Marubeni (whose affirmation was filed in the previous proceedings and included in the material submitted in the present application).

24.  I note that Mr Iwama disputes Mr Qin’s claims and states that from all the contemporaneous documents passing between the parties and their legal representatives it was plain that all were aware that Marubeni had no intention of completing the sale of its interest in GCC and GCC LP and transferring management control to the UE Group, and would not have relinquished ownership and control, unless Marubeni received repayment of the Sum in full.  He says it was understood that there was to be one uniform completion date under all the documents in the transaction and that was to take place on 2 September 2015. He says that upon transfer of the ownership of GCC and GCC LP on 2 September 2015 Marubeni was entitled to repayment of the Sum.

25.  Underlying this action is the nature of the agreement between the UE Group and Marubeni in relation to the repayment of the Sum and the terms of the Completion of the acquisition of GCC and GCC LP by the UE Group from Marubeni.

26.  In addressing whether there is a serious issue to be tried as between the parties in respect of the matters as pleaded in the writ, Mr Anthony Houghton SC, leading Mr Norman Nip, for the plaintiff, relies on relevant legal principles in relation to a guarantor when there has been a variation of a contract which he says has occurred in the present case.  As a starting point he refers to Holme v Brunskill (1878) 3 QBD 495 where Cotton LJ held at 505:

“The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self-evidence that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court, will not, in an action against the surety, go into an inquiry as to the effect of the alteration, or allow the question, whether the surety is discharged or not, to be determined by the finding of a jury as to the materiality of the alteration or on the question whether it is to the prejudice of the surety, but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged.”

27.  He goes on to refer to a recent review of the relevant authorities by Clarke J (as he then was) in St Microelectronics NV v Condor Insurance Ltd [2006] 2 Lloyd’s Rep 525, who held that:

“36. The basic principle underlying these cases – which is one of strict application – is that a guarantor will only be liable in respect of the obligation that he guaranteed. Thus if X guarantees a debt agreed to be payable within a specified time he is not liable in at least two cases:

(a) if the creditor advances money or supplies goods on terms that the money is repayable or the price payable immediately; or

(b) if the creditor and his debtor agree a variation of the contract whereby the debtor is bound to pay earlier, unless such an agreement is, on the facts, obviously incapable of prejudicing the surety,

In both cases the transaction between the debtor and creditor which the guarantor is called upon to underwrite is not the one contemplated by the guarantee: in the first case because the transaction with the debtor was never of that character; in the second because the debtor and his creditor have agreed a variation.

…

38. If, however, the debtor has undertaken a binding obligation to pay early the contract will have been varied.  The debtor is no longer free to choose whether to pay at the expiry of the credit period.  He is bound to pay before.  The contractual obligations into which he has entered are not the same as those that the guarantor guaranteed.”

28.  He argues that it is a fundamental requirement that a surety’s actual consent must be given to a variation of contract but where a guarantee contract contains clauses providing that a guarantor would not be discharged by a variation of contract between the creditor and the debtor certain principles apply which are set out in Melvin International v Poseidon Schiffahrt [1999] 2 All ER (Comm) 761.  One of the principles he relies on, is when there is any doubt or uncertainty contracts of guarantee are to be construed in favour of the guarantor. 

29.  He submits that in the present case UE Finance signed an agreement by which, in effect, the indebtedness of GCC LP to Marubeni would be underwritten by UE Finance, on the basis that certain events, including the achievement of Completion, were conditions precedent to UE Finance’s liability.  He further submits that parties other than UE Finance have purportedly agreed to redefine the Completion without consulting, and without the consent of UE Finance, to its detriment. 

30.  He contends there is a serious issue to be tried between UE Finance and CMBC on the basis that there is an arguable case that the lack of consent from UE Finance is not covered by Clause 7 of the Charge on Deposit.  However, Clause 7 provides that UE Finance’s liability cannot be reduced, discharge or mitigated under a number of circumstances, some of which the plaintiff acknowledges are of arguable relevance in the present case.

31.  Mr Houghton elaborated upon his submissions by arguing that the Charge on Deposit is in substance a guarantee contract to guarantee GCC LP’s performance in the Credit Agreement.  The Charge on Deposit was executed pursuant to the mutual understanding that the UE Group would issue a letter of guarantee of an amount just over US $23 million to CMBC.  According to Mr Qin, UE Finance was not a party to, and was not aware of, the execution of the Amendment Letter.  He states that in all written communications to UE Finance, there is no mention of the Amendment Letter or any intention that Marubeni and CMBC intended to amend the meaning of Completion.  Mr Iwama disputes the UE Group were unaware of the terms of the Amendment letter.

32.  Mr Houghton submits that if the meaning of Completion is altered by the Amendment Letter, it materially changes how and when Marubeni is entitled to demand repayment of the Sum under the Advance Payment Guarantee, and hence materially changes how and when GCC LP is to repay the Sum under the Credit Agreement. This in turn, he argues, materially changes how and when UE Finance is to guarantee repayment of GCC LP under the Charge on Deposit.  He argues that Clause 7 of the Charge on Deposit aside, UE Finance has a case to contend that its liability under the Charge on Deposit is discharged because of the Amendment Deed, and hence it is no longer bound by any of the terms of the Charge on Deposit, whether or not any Event of Default within the meaning of the Charge on Deposit took place. 

33.  On the issue of Clause 7, as I understand Mr Houghton’s argument, he submits it is a deemed waiver agreement between UE Finance and CMBC to the effect that if any of a range of matters as listed therein is the subject of an agreement between CMBC and GCC LP, then that matter is deemed to have been waived by UE Finance as regards the reduction, discharge or mitigation of UE Finance’s liability under the Charge on Deposit.  He argues that the deemed waiver can be of no application in the circumstances in which there has been express disagreement by UE Finance to an amendment. 

34.  He notes that Clause 7(a) provides that UE Finance’s liability is not affected by “any variation … in respect of any of the Secured Liabilities.”  He argues that Secured Liabilities as defined is limited to money and liabilities due, owing or incurred and/or payable in whatsoever manner to the Bank by the Principal (GCC LP) under or in connection with any Credit Agreement.  He says it is arguable that the ambit of Secured Liabilities is only limited to the amount of money and liabilities due, owing, or incurred and/or payable, but not when the Secured Liabilities is to be repaid. 

35.  He notes that Clause 7(e) provides that UE Finance’s liability is not affected by “any amendment, variation … of, any document or agreement (whether oral or in writing) relating to the Secured Liabilities…”  He examines the trail of amendments of the various instruments and how they have or could affect each other, and says that it is arguable that the Amendment Deed is not “any document or agreement … relating to the Secured Liabilities.”

36.  He argues that if there is any doubt as to the ambit of the phrases in Clauses 7 (a) and (e), at least at the interlocutory stage, the Court should construe the clauses in favour of UE Finance.

37.  He notes that Clause 7 (n) provides that UE Finance’s liability is not affected by “anything done or omitted by any person which but for this provision might operate to exonerate or discharge or otherwise reduce or extinguish the Chargor’s liability under this Charge.”  He argues that absence of UE Finance’s consent to the amendment cannot discharge its liability because it did not omit to consent, but rather refused to do so and therefore it is arguable that this clause does not apply.

38.  As is apparent from Mr Houghton’s submissions on the plaintiff’s case, much will depend upon the application of relevant legal principles to the proven facts and circumstances which are seriously in dispute, and to the construction of certain terms and conditions of the various instruments, particularly the Charge on Deposit. 

39.  It does come as a surprise, however, that this cause of action did not feature in the first set of proceedings when it could have been quite easily included.  I have to say it presents as an afterthought upon the discharge of the previous injunction order.

40.  Mr Houghton submits that damages will not be an adequate remedy in this case for the following reasons.  UE is a licensed moneylender, and its ability to operate as a moneylender and to borrow funds for its business heavily depends on the amount of current assets as shown in its accounts.  It is claimed that if the funds in the Security Account are withdrawn, that will significantly prejudice UE Finance’s financial position.  It is also claimed that even though UE Finance may seek assistance from the UE Group, given the amount of funds in the Security Account, which is around HK$180 million relative to the market capitalisation of the UE Group which is around HK$1.27 billion, and the UE Group is willing to reimburse UE Finance in full, the UE Group’s financial position will be significantly prejudiced.  Mr Houghton submits that as a result the overall effect is that both the UE Group and UE Finance will face considerable difficulties in raising funds from external creditors.  He adds that even if their withdrawal of the funds from the Security Account does not reduce the operating cash available to the UE Group, the actual and potential implication of the deterioration of the financial position of UE Finance in particular, and the UE Group, will be significant, and may not be sufficiently compensated by damages.  I am not convinced by this submission bearing in mind the nature of the claim that is being made and the contentious factual and legal issues.

41.  Mr Houghton relies on the following two points to argue that the balance of convenience is in favour of the injunction.  First, UE Finance is not seeking an injunction order to release the funds from the Security Account but instead wishes to keep the funds in the Security Account and this will not lead to a dissipation of the funds.  Secondly, CMBC is a much larger company than the UE Group and hence UE Finance, and if the funds in the Security Account are not recorded in the books of the UE Group and UE Finance, the impact on UE Finance and the UE Group will be far more substantial than if the funds in the Security Account are not recorded in the books of CMBC.  I find no substance in the points.  In fact, the argument that CMBC is a larger and more substantial company underscores that damages would be an adequate remedy.

42.  It needs to be borne in mind that Chow J in the related proceedings has lifted the previous injunction order which restrained CMBC from releasing any sum to Marubeni pursuant to the Advance Payment Guarantee.  Mr Houghton rightly acknowledged that as long as the Charge on Deposit is valid, UE Finance is not entitled to withdraw money from the Security Account, and that it cannot be disputed that CMBC has presence in Hong Kong and the value of its total assets far exceeds the amount deposited in the Security Account. 

43.  In my view damages appear to be an adequate remedy, and there is no real risk that judgment in favour of the plaintiff if successful would not be satisfied if the injunction order were refused.  There is no sufficient ground for an interlocutory injunction to be granted in the present case.

44.  I am not satisfied that the injunction order should be granted and the application is refused.