SILVER UNIVERSE INVESTMENTS LTD v. CHINA TIMES SECURITIES LTD AND OTHERS

HCA 1824/2018

[2020] HKCFI 2508

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1824 OF 2018

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D E C I S I O N

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1.  On 14 August 2020, I handed down a decision (“the August Decision”), in which I dismissed P’s summons dated 23 August 2019 seeking an order for interim payments.  By a summons dated 28 August 2020, P applies for leave to appeal against the August Decision.  I have directed that P’s application for leave to appeal be determined on the papers, and the parties have provided me their respective written submissions.  This decision should be read together with the August Decision.  For ease of reference, the abbreviations used in the August Decision are adopted herein.

The principles

2.  Leave to appeal would only be granted if the appeal has a reasonable prospect of success (which means that the prospect of success is reasonable and more than fanciful, without having to be probable), or there is some other reason in the interests of justice why the appeal should be heard[1].

3.  There is no dispute that the dismissal of P’s application for interim payments is a discretionary decision made by this Court.  In respect of an appeal from an exercise of a discretion by the Court below, the appeal would not be entertained unless it can be shown that the discretion has not been exercised at all, or the discretion has been exercised under an error of law, in disregard of a principle, under a misapprehension of facts or the conclusion reached is outside the generous ambit within which a reasonable disagreement is possible[2].

4.  P is contending that its intended appeal has a reasonable prospect of success, and hence leave to appeal should be granted.  P is not relying upon the “some other reason in the interests of justice” limb in its application for leave to appeal.

The grounds of appeal

5.  Counsel for P submits that leave to appeal should be granted, for I have erred in the following aspects in the August Decision:

Ground 1

Conflating primary obligations (ie Clause 3(g) the redemption clause and the redelivery of the Subject Shares) and secondary obligations (ie damages) under the Loan Agreement.  The Loan Agreement was terminated on 23 May 2018 upon which primary obligations ceased while secondary obligations remain.

Ground 2

Conflating P’s equity of redemption as mortgagor and D2’s equitable duties as a mortgagee in possession owed to P. In effecting the Eden Transaction, D2 breached its duties as an equitable mortgagee to act in good faith, to account the Subject Shares to P, to exercise reasonable care in the custody or preservation of the Subject Shares, and is liable to make good any loss of the Subject Shares to P.

Ground 3

Finding that P has pleaded a secondary or contingent liability against D1 only, and that D1 is unlikely to be liable to P if D2 is not liable to P.  The causes of action relied upon by P against D1 in contract and in tort are separate and distinct from those against D2.

6.  I will examine these grounds in turn in the paragraphs below.

Ground 1

7.  Counsel for P submits that[3]:

“6. With respect, the learned Judge’s findings at §§34(1)-(6) to 35 of [the August Decision] conflates the primary obligations arising under the Loan Agreement (ie Clause 3(g) the redemption clause and the redelivery of the Pledged Shares), with the secondary obligations arising on breach and termination of the Loan Agreement.

7. The Loan Agreement (insofar as it is valid and enforceable) was terminated on 23 May 2018 [D/483] [A/37/§29] upon which P is excused from primary obligations under the Loan Agreement and seek damages against D2 for breach of the Loan Agreement.”

8.  With respect, P has never pleaded a clear case that the Loan Agreement was terminated on 23 May 2018.

9.  The plea in [29] of the Amended Statement of Claim is as follows:

“29. For the reasons set out above and by Mr Zheng’s email dated 23 May 2018 sent on behalf of [P] and by further commencement of the present action on 6 August 2018:-

[P] has rescinded the Financing Documents by conduct or is entitled to rescission and/or damages for misrepresentation and/or damages for by reason of the falsity of the Representations made to them on which they had relied to their detriment in entering into the Loan Agreement; alternatively,

[P] treated and was entitled to treat the Financing Documents as having terminated by reason of [D2]’s repudiation of the same.” (Emphasis added)

10.  With respect, “has rescinded” is one matter, “is entitled to rescission” is another matter. Similarly, “treated the Financial Documents as having [been] terminated” is one matter, “was entitled to treat the Financial Documents as having [been] terminated” is another matter.  Merely being entitled to accept a repudiation to bring the contract to an end, without actually accepting the repudiation, would not have the effect of terminating the contract.  Acceptance of repudiation must be clear and unequivocally.  As said by Ma JA (as he then was) in Chao Keh Lung v Don Xia[4]:

“73. …… All I would add in relation to the aspect of acceptance of breach is that the facts of the present case starkly demonstrate the application of the principle that where a repudiatory breach takes place, in order to terminate the contract, the so-called innocent party must clearly and unequivocally accept the repudiation. If he does not do so, he will run the risk of being in breach himself were he not to perform his side of the bargain and thereby allow the original wrongdoer to ‘turn the tables’ on him: see Frost v. Knight (1872) LR 7 Exch. 111; Avery v. Bowden (1855) 5 E&B 714, (1856) 6 E&B 953. The basis for this conclusion (often ignored in the business world) is that unless a contract is terminated, it remains in existence for the benefit of the wrongdoer as well as the innocent party.

74. I would also take the opportunity again to reiterate the point that there is no halfway situation whereby the innocent party is able to keep the contract alive and yet not perform his obligations arising thereunder.  Any misconceptions in this regard arising from the case of Braithwaite v. Foreign Hardwood Co. Ltd. [1905] 2 KB 543 (and the numerous cases that followed this decision) have now been swept away by the decision of the House of Lords in Fercometal SARL v. Mediterranean Shipping Co. SA [1988] AC 788.”

11.  Further, in [41N(2)] of the Amended Statement of Claim, P claims that “[P] is entitled to redeem and does claim the redemption of all or such part of the Pledged Shares upon payment of sums due to [D2] under the Financing Documents”.  This plea is inconsistent with the stance now adopted by counsel for P, ie the Loan Agreement was terminated on 23 May 2018.

12.  As pointed out in [28] of the August Decision, an application for interim payment must be made on the basis of what is pleaded in the applicant’s pleadings and not merely based on references in evidence. While there is no clear pleaded case that the contractual relationship between P and D2 created by the Financial Documents has been terminated by reason of P’s acceptance of the repudiation committed by D2, there is no room for P to argue that I have conflated primary obligations and secondary obligations.

13.  There is no merit in this ground.

Ground 2

14.  Counsel for P submits that I erred in conflating P’s equity of redemption as mortgagor, and D2’s equitable duties as a mortgagee in possession owed to P.  Counsel argues that by effecting the Eden Transaction, D2 has acted in breach of its duties as a mortgagee in possession and P is entitled to equitable compensation for D2’s breach.

15.  I have said in [33] of the August Decision that by reason of the information disclosed by SCB, it is arguable that D2 might have improperly dealt with the Subject Shares after obtaining the same in mid-February 2018.  However, since P is applying for interim payment, it would not be sufficient for P to demonstrate just an arguable case, or even a strong arguable case.  P has to show it would succeed in its claim against D2 at the trial.  I have explained why P has not met this threshold in [34] of the August Decision.  I am not persuaded that I erred in any aspect in my analysis.

16.  Relying upon Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2)[5], counsel for P submits that equitable compensation to P should be assessed at the time of the wrongful disposal of the Subject Shares.

17.  With respect, as correctly submitted by counsel for D2, I am of the view that P may not derive any assistance from Akai.

(1)  In Akai[6], “until the Shares were actually sold, it was always open to Akai to recover them from the Bank”. It was on this basis that Lord Neuberger said in the preceding sentence that “equitable compensation should be assessed by reference to the value of the Shares at the date when they were sold by the Bank” (ie the date of the breach).

(2)  However, in this case, when D2 rehypothecated the Subject Shares to Eden, it was not open to P to recover the Subject Shares, for P was not ready, willing and able to discharge its repayment obligation under the Loan Agreement at that time. This is unlike Akai where “it was always open to Akai to recover them from the Bank”.

(3)  Based upon P’s pleadings and the evidence now before the Court, this case is materially different from Akai.

18.  With respect to counsel for P, I do not see any merit in this ground.

Ground 3

19.  As to Ground 3 put forward by P, I have not made a finding that “P has pleaded a secondary or contingent liability against D1 only” in the August Decision.  In the August Decision, I said:

“35. D1 is saying that everything done by D1 in respect of the Subject Shares was done pursuant to the instructions from D2, and later pursuant to the instructions from Eden. In that case, if D2 is not liable to P, it is likely that D1 would also not be liable to P.” (Emphasis added)

20.  In her written reply submissions[7], counsel for P states that she does not dispute the factual aspect of my holding in [35] of the August Decision.  Counsel submits that the basis of P’s application for interim payment against D1 is that D1 effected the SCB Transfer on Eden’s instructions.  Counsel argues that by effecting the SCB Transfer on Eden’s instructions, D1 has breached the duties owed to P in contract and in tort. Whether D2 is liable to P has no bearing on D1’s liability to P.

21.  With respect, I am unable to accept these submissions.  P’s contention in relation to the SCB Transfer as pleaded in the Amended Statement of Claim is as follows:

“28(8) [D2] had no intention to redeliver any of [the Subject Shares] to [P], regardless of whether there is an event of default under the Loan Agreement or not: -

(a)  Shortly after [the Subject Shares] were deposited into the Custodian Account, [D2] and/or [D1] gave effect to the Eden Transaction and/or otherwise caused them to be transferred to SCB which in turn made onward transfers, the purpose of which is without any reasonable explanation or commercial basis ……”

22.  According to P’s pleaded case, the purpose of the SCB Transfer is to give effect to the Eden Transaction.  The aim of the SCB Transfer is not to let P have the Subject Shares again regardless of whether there is an event of default under the Loan Agreement or not.  D1 was working together with D2 to achieve this aim at the material time.  That being P’s pleaded case, in the scenario that D2 is not liable to P and all the matters advanced by D2 as summarized in [20] of the August Decision are established at the trial, it is questionable whether D1 would be liable to P in relation to the SCB Transfer in these circumstances.  If the Eden Transaction is within the ambit of “Portfolio Protection Arrangements” expressly permitted under Clause 3(d) of the Loan Agreement as argued by D2, D1 may not be liable to P by effecting the SCB Transfer, even that was done on Eden’s instructions.  It is arguable that P’s consent to the SCB Transfer is from the Loan Agreement.

23.  Further, as rightly submitted by counsel for D1, it is arguable that by executing the Collateral Agreement, P agreed to D1’s compliance with its duties as the agent of the lender (under the Loan Agreement) taking precedence over any duties D1 may owe to P as its customer.  That is, P agreed that any duties that D1 may owe to P would be subject to D1’s compliance with its duties as the agent of the lender.  If everything done by D2 is within the ambit of the Collateral Agreement, it is arguable that D1 should not be liable to P in the circumstances.

24.  In my view, there is also no merit in this ground.

Disposition

25.  With respect, none of the grounds of appeal proposed by P has merit.  Further, P has not explained why my refusal of P’s application for interim payments in the exercise of my discretion is outside the generous ambit within which a reasonable disagreement is possible.  That being the case, I do not see any reasonable prospect of success in the intended appeal.  P’s application for leave to appeal must therefore be dismissed.  I so order.

26.  There be a costs order nisi that costs of the application be paid by P to D1 and D2 forthwith, and those costs be summarily assessed.  There be leave to D1 and D2 to file and serve their respective bills of costs within 7 days, and leave to P to file and serve a written reply to those bills within 7 days thereafter.

27.  Lastly, it remains for me to thank counsel for the assistance provided to the Court.