CHARM MASTER ENTERPRISES LTD v. GRAND T G GOLD HOLDINGS LTD AND ANOTHER

HCA 397/2011

[2021] HKCFI 119

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 397 OF 2011

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D E C I S I O N

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1.  The Plaintiff and the 2^nd Defendant made a competing claim and counterclaim against the 1^st Defendant on 2 Promissory Notes. The 2^nd Defendant sought summary judgment against the 1^st Defendant.

2.  By a decision dated 12 November 2020 (“the Decision”), DHCJ Raymond Leung SC dismissed the 2^nd Defendant’s application insofar as it was based on the Promissory Notes.  However, he found that there was Acknowledgement of Debts constituting a separate agreement whereby the 1^st Defendant would settle the debt in favour of the 2^nd Defendant as beneficial owner of the debt.  He found the 1^st Defendant’s defence to the separate agreement to be shadowy.  He granted leave to the 1^st Defendant to defend the counterclaim of the 2^nd Defendant on condition that the 1^st Defendant paid HK$12,000,000 into court within 28 days (“the Condition”), as security for the 2^nd Defendant’s counterclaim, failing which the 2^nd Defendant be at liberty to enter judgment against the 1^st Defendant.

3.  The 1^st Defendant sought leave to appeal against the Decision, which will be heard on 26 February 2021.

4.  On 7 December 2020, the 1^st Defendant issued this application for:

(1)     Stay of execution pending determination of the leave to appeal application, only on the ground that the 1^st Defendant has strong prospects of success in the appeal; or

(2)     Time extension of 28 days to comply with the Condition, as the 1^st Defendant is finalizing arrangements in relation to provision of a bank guarantee in lieu of payment into court.

5.  This decision is to be read with the Decision and all the abbreviations used in the Decision will be adopted here.

Legal principles for grant of stay

6.  The applicant for a stay has the burden to justify a stay with good reasons: Star Play Development Ltd v Bess Fashion Management, HCA 4726/2001, 7 June 2002, at §7.

7.  Existence of a merely arguable appeal is the minimum requirement for the court to consider granting a stay, but not sufficient.  Additional reasons have to be given to justify a stay: Star Play, §9(8).

8.  A strong likelihood that the appeal would succeed, ie that “something has grievously gone wrong with the process of law in the court below”, will usually by itself justify a stay: Star Play, at §§9(7); World Trade Centre Group v Resourceful River Ltd, CACV70/1993, 12 May 1993, p 3, Litton JA (as he then was).

9.  The court must not forget to consider the prejudice that would be caused to the respondent in the event that a stay is granted and, if necessary, to impose conditions to minimize the prejudice to him.

10.  Even where a stay is being considered, the Court is entitled to, and very often will, order, as a term of granting the stay, that the applicant should bring some or all of the amount of the judgment awarded against him into court: Honestwin Ltd v Mezely Trading Ltd, CACV 311/1998, 23 April 1999, Godfrey JA.

Legal principles concerning an appeal against conditional leave to defend

11.  If summary judgment were to be granted, it could only be granted on the claims set out in the statement of claim, verified by an affidavit in support. If there were defects in the statement of claim, it had to be amended before one can seek summary judgment: Wong Chow Hoi Sze Elsie v Crown Wine Cellars Ltd, CACV 262/2015, 15 April 2016, at §10, Lam VP.

12.  DHCJ Raymond Leung SC did not grant summary judgment but imposed a condition for leave to defend pursuant to his wide discretionary power under Order 14, rule 4(3) of the Rules of the High Court. 

13.  An appeal against exercise of discretion would only be entertained if it is shown that the discretion was exercised (i) under a mistake of law; (ii) under misapprehension of facts; (iii) by taking into account irrelevant matters; (iv) outside the generous ambit of reasonable disagreement; or that the decision was plainly wrong: Hong Kong Civil Procedure 2021, Vol 1, §59/0/54.

14.  The question is thus whether, DHCJ Raymond Leung SC’s exercise of discretion in imposing the Condition was so wrong that the Court of Appeal should interfere.

Strong likelihood of success in the appeal

15.  The grounds of appeal, which are largely a re-run of the arguments before DHCJ Raymond Leung SC, can be summarized as follows:

16.  Ground 1: the 1^st Defendant contends that DHCJ Raymond Leung SC had erred in law in acting on an unpleaded case:

(1)     The separate agreement was not pleaded by the 2^nd Defendant and was only raised for the first time by the 2^nd Defendant’s counsel in his oral submission, supplemented by written submission.  The 1^st Defendant therefore had no opportunity to properly respond to the unpleaded case;

(2)     The consideration for the separate agreement (which DHCJ Raymond Leung SC found to be forbearance to sue) was not pleaded. Actual forbearance which was not induced by the express or implied request of the debtor was unlikely to be good consideration; and

(3)     The Acknowledgement of Debts indicated the 1^st Defendant’s intention to settle the Debt subject to an indemnity executed by the 2^nd Defendant in favour of the 1^st Defendant in respect of the Plaintiff’s claim in this action (“Indemnity”).  DHCJ Raymond Leung SC found that the 1^st Defendant had breached the separate agreement by failing to prepare the Indemnity when there was no evidence as to what actions had been taken by the 1^st or 2^nd Defendant to prepare the Indemnity and hence no factual basis for the finding of breach.

17.  Ground 2: as a fallback argument, the 1^st Defendant contends that DHCJ Raymond Leung SC had erred in finding that the defence was shadowy when the grant of an Indemnity was either:

(1)     An act of acceptance from the 2^nd Defendant, which was not forthcoming as the 2^nd Defendant had indisputably failed to execute an Indemnity; or

(2)     A condition precedent, which was not satisfied when the 2^nd Defendant issued the counterclaim.

18.  As a corollary, the 1^st Defendant contends that imposing the Condition without taking into account the 2^nd Defendant’s obligation to execute an Indemnity in favour of the 1^st Defendant would expose the latter to the risk of having to pay twice under the Promissory Notes.

Analyses

19.  As there is a pending application for leave to appeal, it is best if I were to make the least comments on the merits of it.

Ground 1 – acting on unpleaded case

20.  The counterclaim of the 2^nd Defendant was recovery of the Debt under 2 Promissory Notes.  Whilst the term “separate agreement” and consideration for it were not specifically used in the pleadings, the amended defence and counterclaim pleaded that 2 Letters constituted Acknowledgement of Debts and admission that the 2^nd Defendant was the beneficial owner.  The 2^nd Defendant pleaded that the 1^st Defendant had breached the Acknowledgement of Debts.

21.  Save for the breach, the 1^st Defendant did not dispute those pleas.  It contended that its intention was to settle the Debt subject to the Indemnity from the 2^nd Defendant, which the 2^nd Defendant had not executed. 

22.  DHCJ Raymond Leung SC took the view that it was “tolerably clear” that the 2^nd Defendant was seeking to rely on the terms of the Acknowledgement of Debt from which the forbearance to sue was “patently clear” (§51 of the Decision).  DHCJ Raymond Leung SC also held that the forbearance to sue was “self-evident” and was upon the specific request of the 1^st Defendant (§59 of the Decision).

23.  It was clear that DHCJ Raymond Leung SC was interpreting the effect of the Acknowledgement of Debts in the light of what he considered to be weighty evidence pointing to the 1^st Defendant’s liability. 

Ground 2 – no acceptance of offer and failure to meet condition precedent

24.  DHCJ Raymond Leung SC held that the 1^st Defendant had undertaken to prepare the Indemnity but failed to do so.  It should not be allowed to benefit from its own wrong.  The terms of the Indemnity were reasonably certain and that it was capable of being enforced even in the absence of a deed being executed.  (§§61-62 of the Decision) 

25.  Further, DHCJ Raymond Leung SC held that the obligation of the 1^st Defendant to pay the 2^nd Defendant under the Acknowledgement of Debts did not depend on the outcome of the dispute between the Plaintiff and the 2^nd Defendant as to the existence or otherwise of a pleaded trust (§57 of the Decision).

26.  In the light of paragraphs 24 and 25 above, it could hardly be said that DHCJ Raymond Leung SC had overlooked the risk of the 1^st Defendant paying the debt twice.

27.  In summary, DHCJ Raymond Leung SC has carefully weighed the evidence before coming to his Decision.  It is a case where the 2 grounds of appeal are, at best, arguable and not a case that something has grievously gone wrong with the process of law in the court below.  The 1^st Defendant falls short of demonstrating that he has such strong prospects of success that the court should grant a stay.

28.  Given DHCJ Raymond Leung SC’s finding that the defence was shadowy and my view in the preceding paragraph, the 1^st Defendant has failed to demonstrate that the Condition imposed as a result of exercise of discretion fell outside the generous ambit within which reasonable disagreement was possible, or that it was plainly wrong.

29.  I am not satisfied that this case calls for stay of execution.

Extension of time for compliance with the Condition

30.  The 1^st Defendant’s solicitors have filed and served 3 affirmations exhibiting 3 un-dated and un-affirmed affirmations of Li Dahong.  They were allegedly signed by Li on 4, 18 and 24 December 2020, respectively.  Over 2 weeks have elapsed by now but Li’s affirmations have not been properly affirmed.  The pandemic might have prevented Li from coming to Hong Kong to affirm but he could at least have the affirmations notarized.  Accordingly, no proper evidence has been laid before the court to consider the time extension. This is sufficient to refuse the extension.

31.  If I am wrong, I have considered the merits of the extension application.  The 1^st Defendant claimed that he had since the Decision endeavoured to comply with the Condition.  It did not currently have sufficient cash reserve to meet the Condition.  However, as of 4 December 2020, a financier had confirmed its willingness to provide the necessary funding for the Company to meet the Condition and the terms of funding were in the process of finalization.

32.  The financier later changed its mind and offered to provide a bank guarantee instead of cash.  The 1^st Defendant has approached the Shanghai Commercial Bank, who indicated that it was prepared to issue the guarantee shortly after internal clearance was obtained.  Upon internal clearance, the 1^st Defendant (i) expected that the bank guarantee could be issued within one week on the basis that the parties have agreed on the wording of the bank guarantee; and (ii) would apply to vary the Condition to allow the use of a bank guarantee in lieu of cash.

33.  The time for compliance with the Condition had fallen due on 10 December 2020.  Even taking the 1^st Defendant’s purported evidence at its highest,

(1)     The 1^st Defendant has had an extra 1 month up to now to arrange the funds.  The funds or the bank guarantee are still nowhere in sight.

(2)     There has been no application vary the Condition to enable the 1^st Defendant to use a bank guarantee instead of cash.

(3)     At no time had the 1^st Defendant even provided a draft bank guarantee to the 2^nd Defendant or the Court to approve the terms.

34.  In my view, this assertion of having a financier ready to provide funds rings hollow, especially in the light of Li’s unaffirmed affirmations.  Li has not shown that he has used best endeavours to comply with the Condition.  I decline to grant extension of time sought.

Conclusion

35.  There is no evidence properly laid before the Court by the 1^st Defendant. There are no good reasons to justify a stay or to grant extension of time to comply with the Condition.  I dismiss the 1^st Defendant’s summons.

36.  On a nisi basis, costs should be to the 2^nd Defendant, summarily assessed at $110,680.

37.  I thank counsel for their assistance.