LUSO INTERNATIONAL BANKING LTD v. INTEGRITY FUND LTD PARTNERSHIP AND OTHERS

HCA 1548/2022

[2023] HKCFI 2936

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1548 OF 2022

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DECISION

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Introduction

1.  This is the hearing of the appeal of the 4^th Defendant (“SFund”, “D4”) dated 22 May 2023 against the decision of Master Keith Lam dated 10 May 2023, in which he granted summary judgment in favour of the Plaintiff (the “Bank”).  The Master provided a note of his reasons for decision on 6 June 2023.

2.  D4 has also issued a summons dated 13 October 2023, seeking leave to amend its Defence and Counterclaim (“D&CC”) to plead a further defence of unilateral mistake (the “Unilateral Mistake Defence”) (“Amendment Summons”).

3.  At the hearing on 7 November 2023, I dismissed the Amendment Summons with costs to the Bank, and stated that I would provide my reasons together with the reasons on the appeal.

Background

4.  D4 (SFund) is the indirect shareholder of 40% of the 2^nd Defendant (“Kapok”, “D2”)). Kapok formed a partnership with Grand Generation Belief Virtue Investment Limited (“Grand Generation”) and the 3^rd Defendant (“Xinsheng”, “D3”) in order to acquire shares in a listed company, Midas International Holdings Limited (“Listco”).  The partnership acquired the shares through the 1^st Defendant, (“Integrity Fund”, “D1”), through its subsidiary New Element Investments Limited (“New Element”) whose subsidiary Qingda Developments Limited holds the shareholding in Listco.

5.  The acquisition of shares in 2017 was funded by an issue of bonds by New Element (as borrower) to Great Wall International Investment IX Limited (as lender), secured inter alia by a guarantee from D4.

6.  In 2018, the 2017 arrangement was refinanced by a loan by the Bank to D1 and a raft of guarantee and security documentation provided by D2, D3 and D4 (“the 2018 Financing Arrangement”).

7.  The 2018 Financing Arrangement was refinanced in 2021 by a loan by the Bank to D1 and a raft of guarantee and security documentation provided by D2, D3 and D4 (“the 2021 Financing Arrangement”). The material document for these proceedings is a document in Chinese whose title has been translated as “the agreement for making up the difference”, and has been referred to by the parties as a “top-up agreement” [1], dated 29 September 2021 (“2021 Top-Up Agreement”).

8.  Following an undisputed default by D1, the Bank sought payment of the outstanding indebtedness under the loan from each of D1 to D4.  In the absence of repayment, the Bank issued proceedings on 11 November 2022.  D4 filed its D&CC on 25 November 2022.  Essentially D4 pleaded three lines of defence:

(a)  The 2021 Top-Up Agreement is liable to be set aside on the basis that it was entered into in breach of fiduciary duties by senior management of D4 who received bribes or other benefits from one Mr Xu Mingjun (“Mr Xu”) (“Bribery/ Breach of Fiduciary Duty Defence”).  This was relied on by D4 as the “main defence” at the hearing below.

(b)  On a proper interpretation of the 2021 Top-Up Agreement, P is only entitled to pursue D4 for any outstanding sums after it has exhausted all reasonable efforts to recover the same under the 2021 Facility Agreement and other guarantees and share charges provided by D1-D3 (“Interpretation Defence”).

(c)  P breached its duty to exercise reasonable care to obtain the best possible price of the charged assets and, as such, P’s claim should be reduced by the difference between the price at which the charged assets should have been sold, and the proceeds of sale (“Undervalue Defence”).

9.  The Bank issued its O.14 summons on 19 January 2023 supported by the affirmation of Chen Jinhao dated 18 January 2023 (“Chen 1”).

10.  D4 filed evidence in opposition namely:

(a)  Affirmation of Huang Shan dated 24 March 2023 (“Huang 1”).  In addition to the three pleaded defences, Huang 1 asserted that the 2021 Top-Up Agreement had not been validly executed on the basis that D4’s employee Mr Li did not have authority to apply D4’s rubber chop (“No Authority Defence”).

(b)  Affirmation of Cui Lei dated 27 March 2023 (“Cui 1”).

11.  The Bank filed evidence in reply: namely:

(a)  2^nd affirmation of Mr Chen dated 24 April 2023 (“Chen 2”);

(b)  The affirmation of Pan Yilong dated 20 April 2023 (“Pan 1”).

12.  Master Keith Lam gave judgment in favour of the Bank on 10 May 2023.

13.  D4 appealed therefrom on 22 May 2023.

14.  On 13 October 2023, D4 applied for leave to amend its D & CC to plead the Unilateral Mistake Defence.

Key terms of the 2021 Financing

15.  The principal loan document between the Bank and D1 is the Facility Agreement dated 29 September 2021 (“the 2021 Facility Agreement”).  The 2021 Top-Up Agreement was executed pursuant to that.  Both of these agreements are in Chinese and have been translated into English for the purposes of this hearing.

16.  I note at the outset that, after the parties’ written submissions were lodged, I was provided on the eve of the hearing with new translations of certain documents.  In particular, I was provided with a court-certified translation of part of the 2021 Top-Up Agreement.  Counsel agreed that nothing would turn on the differences between the translations.

17.  Clause 11.3 of the 2021 Facility Agreement (in translation) provides at sub-clauses (6) and (7):

“ (6)  Before the loan disbursement takes effect, [D4] must provide a make up the difference agreement and legal opinion recognised by the [Bank] specifically for this loan. The legal opinion must state that the effectiveness of the make up the difference agreement for this loan is equivalent to a guarantee.

(7)  Before the loan disbursement takes effect, [D2] and [D3] must sign guarantee agreements regarding this loan approved by the [Bank] or make up the difference agreement and indemnity agreement whose guarantee effect is not inferior to the guarantee agreements.”

18.  Clause 1 of the 2021 Top-Up Agreement (in translation) provides:

“ … Party A [i.e. D4], as the make up the difference obligor, shall be responsible for making up the differences in obligations in relation to loan principal, interest and other payable amounts arising under the [2021] Facility Agreement. If the debt repayment under the [2021] Facility Agreement is past due or the Borrower [i.e. D1] is in breach of any provision under the [2021] Facility Agreement or the [2021 Loan] is overdue, Party A [i.e. D4] shall, within 30 days upon having received a written notice from Party B [i.e. P], repay to Party B [i.e. P] any debt that is owed to but not repaid to the Party B [i.e. P], until the debt is fully repaid.

The scope of the make up the difference obligation hereunder shall include the principal sum, interest (including compound interest), financial costs, liquidated damages, and all reasonable expenses reasonably incurred by Party B [i.e. P] to exercise its rights of claim (including but not limited to litigation costs, arbitration fee, property preservation fee, travel expenses, enforcement fee, assessment fee, auction fee, notarisation fee, delivery fee, announcement fee, legal fees, etc.).”

19.  The Bank was provided with a legal opinion dated 30 September 2021 from Sun Lawyers LLP (“the Sun Legal Opinion”).  Essentially:

(a)  It attached a draft top-up agreement which is in exactly the same form as the 2021 Top-Up Agreement; and

(b)  It expressed the opinion at paras 7(a)-(b) thereof that the nature of the obligation of D4 under Clause 1 of the 2021 Top-Up Agreement was akin to providing a guarantee to the Bank for the repayment obligation of D1; and

(c)  Under the 2021 Top-Up Agreement, the actual obligation of D4 and the substantive rights of the Bank are essentially equivalent to a guarantee.

The Amendment Summons

20.  It is common ground (at least at first instance), that unless D4 is allowed to amend its D&CC, the Unilateral Mistake Defence is unpleaded and D4 cannot rely on it to resist summary judgment: Kaefer v Winfield Marine Services Co Ltd [2022] HKCA 807 at paras 28-33 and paras 30-32; Hong Kong Topkey Ltd v Wintac (Hong Kong) Ltd [2023] HKCFI 1711 at para 16.

21.  Accordingly, D4 seeks to amend its D&CC to introduce the proposed amendments being attached to the Amendment Summons.  I set out the key proposed amendments below, with proposed amendments being underlined:

“ Fl. The 2018 Loan

26. In June 2018, Mr YL Pan submitted a proposal on behalf of the project team on an urgent basis to the Investment Committee for its approval of a loan of HK$600 million to be provided by the Plaintiff to Integrity Fund. The project team comprised, inter alia，Mr YL Pan, Ms Janet Au, Ms DM Zhang, Mr C Zhang, MrYang Liu (楊柳)and Mr Choy Wong Hoi Peter (蔡王凱). In the proposal (which comprised inter alia a document titled “簽報表” dated 11 June 2018 and submitted by Mr YL Pan to the 4th Defendant’s Investment Decision Committee on an urgent basis (“the Report Form”) and a report of the 4th Defendant’s project team titled “新元素項目優化融資方案建議書”(“the Proposal Document”)，it was suggested that:

(1) The above loan shall be applied to repay, inter alia, the Great Wall Loan;

(2) The above loan shall be secured by，inter alia, (a) a share charge to be granted by Qingda over the Qingda Listco Shares to the Plaintiff; and (b) a top-up guarantee to be provided by the 4th Defendant in favour of the Plaintiff (“the 2018 Proposal”).

…

27A. In the Report Form, it was stated inter alia as follows:-

“本次貸款，廣州基金國際仍需提供差額補足並簽署差額補足協議(附件3)。極端情況下如果Integrity Fund出現違約，澳門國際將首先追討新盛國際控股有限公司(實際控制人為曾大章)、盛世信德投資有限公司(實際控制人為王錫強)和Kapok Wish,不足部分將由廣州基金國際提供差額補足。”

(translation: ‘For this loan，SFund International still needs to top up the shortfall and sign a shortfall top-up agreement (Annex 3). In extreme cases, if Integrity Fund defaults, Luso Bank will first pursue Xinsheng International Holding Limited (the actual controller is Zeng Dacheng), Grand Generation Belief Virtue Investment Ltd (the actual controller is Wang Xiqiang) and Kapok Wish. In relation to the shortfall, SFund International will “top-up”the balance.’)

27B. At p.16 of the Proposal Document, it was stated inter alia as follows:-

(1)  “本次融資方案的擔保方Kapok Wish、新盛國際、盛世信德在併購基金無法還款的情況下，有責任償還貸款的本息：而廣州基金國際提供差額補足安排，承諾在以上擔保方無法履行責任時，對剩餘貸款本息剩餘不足部門履行償付義務。”

(translation: “The guarantors of this financing plan, Kapok Wish，Xinsheng International, and Grand Generation Belief Virtue, are responsible for repaying the principal and interest of the loan if the buyout fund is unable to repay; SFund International shall provide a shortfall top-up arrangement and promises that in the event that the above guarantors cannot fulfill their obligations, it will fulfill its repayment obligations for the remaining shortfall portion of the loan principal and interest.’’)

(2)  “國際專業評估師AP Access Partner對於原頂目所涉的港幣7.  802億元融資風險進行了評估：在未考慮併購基金LP還款能力的前提下，廣州基金國際承擔差額補足承諾的風險敞口僅為600萬元港幣，而本次壓縮融資額度至港幣6億元後，差額補足風險敞口得以抹平.”

(translation: “AP Access Partner, an international professional appraiser, evaluated the HK$780.2 million financing risk involved in the original project: Without considering the repayment ability of the buyout fund LP, the shortfall top-up risk of SFund International was only HK$6 million, and after the financing limit was reduced to HK$600 million, the shortfall top-up risk exposure would be eliminated.”)

…

30A. By reason of inter alia (i) the matters pleaded in paragraphs 27A and 27B above, and (ii) the fact that the Top-up Payment Agreement was called a “差額補足協議” (as opposed to a “擔保”)，when entering into the 2018 Top-up Payment Agreement, the 4th Defendant was under the belief that under the 2018 Top-up Payment Agreement, the Plaintiff shall only be entitled to pursue against the 4th Defendant for any outstanding sum or shortfall under the 2018 Facility Agreement after it has exhausted all reasonable efforts to recover the same under the 2018 Facility Agreement, the 2018 Share Charge and the 2018 Guarantee. As pleaded below, the 4th Defendant continued to have the same belief in relation to the almost identically worded Top-up Payment Agreement on 29 December 2021.

30B. But for this belief, the 4th Defendant would not have entered the 2018 Top-up Payment Agreement.

…

45A. By reason of inter alia (i) the matters pleaded in paragraphs 27A and 27B above, and (ii) the fact that the Top-up Payment Agreement was called a “差額補足協議”(as opposed to a “擔保’’)，when entering into the Top-up Payment Agreement, the 4^th Defendant was under the belief that under the Top-up Payment Agreement, the Plaintiff shall only be entitled to pursue against the 4th Defendant for any outstanding sum or shortfall under the Facility Agreement after it has exhausted all reasonable efforts to recover the same under the Facility Agreement, the Share Charge and the Guarantees.

45B. But for this belief, the 4th Defendant would not have entered the Top-up Payment Agreement.

45C. For the following reasons, the Plaintiff knew and/or turned a blind eye to the fact that (and/or it ought to have been apparent to any reasonable person in the position of the Plaintiff that) the 4th Defendant entered into the Top-up Payment Agreement under the aforesaid belief:

(1) As pleaded in paragraphs 27A，27B, 30A and 45A above, the source of the 4th Defendant’s belief are the representations made by inter alios Mr YL Pan in the Report Form and Proposal Document. As pleaded in paragraph 41 above, Mr YL Pan joined the Plaintiff prior to the signing of the Top-up Payment Agreement.

(2) In Mainland China, “shortfall top-up”(差額補足)and “guarantee”(擔保)denote two different types of transactions. The Plaintiff would have known this because it was the Guangzhou Branch of the Plaintiff that dealt with the 4^th Defendant.

(3) Under the 4th Defendant’s internal regulations titled “廣州產業投資基金管理有限公司集團對外擔保管理制度”，the maximum guarantee (“擔保”) in respect of one debtor must not exceed 30% of the consolidated net worth of the 4th Defendant in the previous year, and the maximum guarantee given in any individual guarantee must not be more than 10% of the consolidated net worth of the 4th Defendant in the previous year. Mr YL Pan (and hence, the Plaintiff) knew that these internal restrictions had been avoided as a result of the 4th Defendant’s belief that the nature of the “'Top-up Payment Agreement” was different from that of a normal “guarantee”.

(4) … Clause 11.3 (6) of the Facility Agreement provides that a legal opinion stating that the effect of the 2021 Top-up Agreement is equivalent to that of a guarantee must be provided by the 4th Defendant before the Bank would release the 2021 Loan (“本筆貸款生效放款前，廣州基金國際股權投資基金管理有限公司需出具貸款人認可的針對本筆貸款的差額補足協議及律師意見，律師意見須表明本筆貸款的差額補足效力等同於擔保”). However, no such legal opinion was provided by the 4th Defendant.”

22.  RHC O.20 r.5(1) provides:

“ Subject to Order 15, rules 6, 7 and 8 and the following provisions of this rule, the Court may at any stage of the proceedings allow … any party to amend his pleadings, on such terms as to costs or otherwise as may be just and in such manner (if any) as it may direct.”

23.  RHC O.20 r.8(1) and (1A) provide:

“ (1) For the purpose of determining the real question in controversy between the parties to any proceedings, or of correcting any defect or error in any proceedings, the Court may at any stage of the proceedings and either of its own motion or on the application of any party to the proceedings order a pleading or any other document in the proceedings to be amended on such terms as to costs or otherwise as may be just and in such manner (if any) as it may direct.

(1A)  The Court shall not under paragraph (1) order a pleading to be amended unless it is of the opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.”

24.  D4 relies on the summary of governing principles concerning amendments set out by Ng J in Re Hin-Pro International Logistics Ltd [2016] 1 HKLRD 1367 para 8.

25.  D4 must establish that:

(a)  The Unilateral Mistake Defence should be pleaded for the purpose of determining the real dispute between the parties;

(b)  The proposed defence is not bound to fail;

(c)  There is no real prejudice to the Bank by allowing the amendment which cannot be compensated in costs; and

(d)  It is necessary for me to grant the amendment in order to dispose fairly of the matter.

26.  Given the clearly last minute nature of seeking to raise this defence, one might expect an explanation: HKCP 2023 para 20/8/4. D4 has not filed any evidence in support of the Amendment Summons to explain why it is so late in the day.  Mr Lam SC (appearing for D4) submits that the new defence was available on the evidence filed but had not been previously advanced until he joined the legal team.  That is the only explanation offered.  Mr Lam SC accepts the amendment application is late in the day, but he submits that should not be fatal if the amendment will allow the resolution of the real disputes between the parties.

27.  I find that the 11^th-hour raising of the Unilateral Mistake Defence undermines the credibility of D4’s submission that it is the real dispute between the parties.

(a)  If D4 had genuinely believed that the 2021 Top-Up Agreement did not extend to the full debt, one would reasonably expect D4 to have raised that upon receiving a demand for the full debt from the Bank. The Bank made demand on D4 for full repayment on 1 April 2022.  From May to December 2022 the Bank and D4 discussed the repayment of the outstanding amount but at no point did D4 state that its understanding of its liability had been fundamentally different.  Nor did D4 raise the issue of mistake in its D&CC, or its evidence in opposition to the O.14 summons (despite raising a new “No Authority Defence”), nor was it raised in submissions before the Master below. 

(b)  Huang 1 para 85 suggests no challenge was made to the Bank’s requests for full payment throughout the 2022 discussions because there was pending an internal review of senior staff conduct (commenced in August 2021) and/or D4 was obtaining legal advice and/or the Bank had not provided D4 with an original of the agreement to allow it to verify the signatures.  The last two assertions do not meet the point.  As to the first, I agree with Mr Jin Pao SC (appearing for the Bank) that without further explanation, it seems at least questionable that an investigation could be commenced into the conduct of senior management in August 2021 but that the board decided to enter the 2021 Top-Up Agreement in respect of a HK$247 million loan on the basis of (D4 alleges) their reliance on the same senior management.

(c)  Mr Lam SC on behalf of D4 submits that the Unilateral Mistake Defence relies upon the same facts as advanced in the Breach of Fiduciary Defence to the extent that D4 was persuaded by its own senior management to enter the 2021 Top-Up Agreement.  However, a review of Sections F and G of the D&CC shows that D4 only advanced a case that D4’s senior management induced D4 to enter the 2018 and 2021 Top-Up Agreement by virtue of and without disclosing their acceptance of bribes.  There is no plea of D4 being misled as to the nature of the Top-Up Agreement.

(d)  For completeness’ sake, I will add that:

 (i)  D4 pleads an alternative case at para 75(2) of the D&CC that on the proper construction of the 2021 Top-Up Agreement, it only provides for D4 to be liable as a security of last resort rather than a full guarantee.

(ii)  Huang 1 avers (amongst other things, at para 80) that D4 by its board was induced to enter the 2021 Top-Up Agreement by D4’s senior management who failed to disclose that the 2021 Top-Up Agreement was a guarantee; and failed to disclose the Facility Agreement and in particular Clause 11.3(6) thereof which requires the provision of a legal opinion stating that D4’s Top-Up Agreement amounts to a guarantee; and thereby avoided D4’s internal regulations which restrict the approval of guarantees.

(e)  Nevertheless, there is still no case pleaded or in D4’s O.14 evidence to the effect of the current proposed amendment, namely that D4’s senior management misled the D4 board into entering the 2018 Top-Up Agreement by the contents of their 2018 reports and that that the D4 board continued to rely on those representations when entering the 2021 Top-Up Agreement.

(f)  I agree that the goalposts have been constantly shifting and I have sympathy with the Bank’s submission that the late formulation of the Unilateral Mistake Defence, seen in context, smacks of an ex post facto fabrication rather than a genuine claim.

28.  I proceed to consider whether the Unilateral Mistake Defence is bound to fail.

29.  The essential requirements to establish mistake at common law are common ground:

(a)  One party has made a mistake as to the terms of the contract; and

(b)  That mistake is known to the other party.

(i)  See e.g. Eshed Diam (HK) Ltd v Siam Color Gems & Jewelry Ltd[2017] 3 HKLRD 308 at para 25.

30.  On its current evidence, D4 seems to me to be bound to fail in establishing that D4 made a mistake as to the terms of the 2021 Top-Up Agreement.

(a)  There is insufficient evidence to support the defence.

(i)  D4 submits that all relevant facts to support the proposed defence are addressed in the existing evidence i.e. Huang 1 and Cui 1.

(ii)  Huang has only been an employee of D4 since 29 April 2022, and Cui since March 2022, so neither have any personal knowledge of events around 29 September 2021 when the 2021 Top-Up Agreement was executed.

(iii)  Neither Huang nor Cui depose to having obtained information from anyone else who was involved on the part of D4 with the execution of the 2021 Top-Up Agreement, let alone someone who claims to have been labouring under a mistake.

(iv)  By the proposed amendments, D4 essentially now seeks to rely upon the contents of documents written by D4 staff to D4 management prior to D4 executing the 2018 Top-Up Agreement to the effect that D4’s liability would only be as last resort security.  However, there is no evidence from anyone personally involved on behalf of D4 in executing the 2021 Top-Up Agreement as to the understanding of D4 at the time of execution.

(b)  A natural reading of the 2021 Top-Up Agreement alone and/or in the context of the 2021 Financing Arrangement, makes it hard to believe that D4 could have entered it under the mistake alleged by the proposed amendments.

(i)  A simple reading of Clause 1 of the 2021 Top-Up Agreement makes it incredible that D4, when authorizing it by board resolution, or when signing it, would believe its liability to be for anything other than the full principal and interest (inter alia) if the borrower defaulted.

(ii)  Huang 1 effectively speculates as to how D4 could have been mistaken when executing the 2021 Top-Up Agreement by referring to the technical meaning of the document’s title under mainland law and to internal regulations of D4.  However, whether these matters were relevant to any person’s contemporary thought process on behalf of D4 is not known.  As I have said, there is no evidence from anyone personally involved on behalf of D4 in executing the 2021 Top-Up Agreement as to the understanding of D4 at the time of execution to explain how the alleged mistake could have been made.

(c)  Even if D4 was mistaken, I see no merit in D4’s assertion of the requisite knowledge of the Bank.  The defence could only work if the Bank knew or ought to have known of the mistake.

(i)  Clause 11.3(6) of the 2021 Facility Agreement provides that the Bank required (as a pre-condition of giving the loan) a top-up agreement and a legal opinion from D4 stating that the effectiveness of the top-up agreement was equivalent to a guarantee.

(ii)  The Bank was provided with the Sun Legal Opinion that the 2021 Top-Up Agreement was equivalent to a guarantee.  That would appear to be fatal to D4’s allegation that the Bank knew D4 was operating under a mistake.

(iii)  D4 has advanced various arguments (on the basis of Huang 1):

(1)  D4 was not provided with the 2021 Facility Agreement.  In the context of providing some sort of guarantee (full or shortfall), it seems incredible that D4 would not have been provided with the 2021 Facility Agreement and I find Huang 1’s bare assertion to that effect without stating any source of knowledge or information as inadequate to amount to reliable evidence.

(2)  The legal opinion was provided by D1 rather than D4 as required by Clause 11.3(6). Where the provision of the loan was predicated on the provision of a legal opinion as to the effect of D4’s Top-Up Agreement, and all parties proceeded with the loan, I regard it as fanciful to say the Sun Legal Opinion was not provided pursuant to Clause 11.3(6) because it was provided by D1 (the borrower and indirect subsidiary of D4) rather than directly from D4.  I certainly see no evidence that the Bank knew that the opinion provided by D1 was not known to D4 despite it having been used to meet D4’s obligation.  The Bank was surely entitled to believe that all sureties would be aware of the terms of the Facility Agreement that they were supporting.

(3)  The Bank operating out of its Guangzhou branch would have known the mainland meaning of a top-up agreement. As indicated above, the “mainland meaning” is a bare assertion by Huang 1, without supporting evidence as to its truth or of it being relevant to the operating mind of D4 at the material time.  Further, it is clear that the Bank required a legal opinion that the surety document provided by D4 was equivalent to a guarantee.

(4)  The Bank had the requisite knowledge of D4’s misunderstanding of the nature of the 2021 Top-Up Agreement because Mr Pan had been one of the senior management of D4 who had misled D4 in 2018, and he worked for the Bank at the time of the 2021 Top-Up Agreement. The clear evidence of Mr Chen of the Bank and of Mr Pan (now of the Bank) is that Mr Pan had one interaction with D4 (after moving to the Bank in 2020) to urge payment by D1 under the 2018 loan, which was not material to D4 entering into the 2021 Top-Up Agreement.  D4 has no evidence to gainsay that, but simply expresses a wish to challenge it on cross-examination.  (That is not justification to have a trial).  Further, there is no evidence to support a case that Mr Pan’s state of mind could be identified with the Bank’s state of mind according to the principles set out in para 67 of Bilta (UK) Ltd (in liq) v Nazir & Ors[2016]AC 1.  D4 argues that this is a matter to be explored at trial, but I disagree where D4 is unable to establish an arguable case.  Without an arguable case for Mr Pan’s knowledge being attributed to D4, it is irrelevant what Mr Pan knew of D4’s internal thinking.

31.  I consider that to allow the Amendment Summons would cause prejudice to the Bank which cannot be compensated in costs.

(a)  Where the alleged Unilateral Mistake defence was not pleaded, and was not identified in D4’s evidence, the Bank was entitled to file evidence in reply on the basis of the known lines of defence.

(b)  If the Amendment Summons was allowed, the Bank has identified various issues upon which the Bank would wish to file evidence including (1) whether a legal opinion was provided under the 2018 Facility Agreement to the effect that the D4 Top-Up Agreement was equivalent to a guarantee; (2) whether D4 was legally represented in the 2018 or 2021 Financing Arrangements; (3) why the Bank insisted on requesting legal opinions as to the effect of the D4 2018 and 2021 Top-Up Agreements.

(c)  For the Bank to file such evidence would mean there would have to be an adjournment of this appeal hearing.  The Bank submitted that it was then put in the position of having to elect to give up its milestone hearing date so as to be able to file full evidence, or to proceed with the hearing without having filed all the evidence it would wish had the amendments been made months ago.  I accept that to be put into such a position is prejudicial to the Bank and cannot be compensated in costs (see Wise Union Industries Ltd v Hong Kong Science and Technology Parks Corp(HCAL 12/2009, 21.09.2009), at para 9.

32.  On the basis that the proposed Unilateral Mistake Defence is not, in my view, the real dispute between the parties, it is bound to fail, and that to allow it would be prejudicial to the Bank, I cannot be satisfied that the proposed amendment is necessary for the fair and just disposal of the matter.

33.  Accordingly, I dismissed the Amendment Summons at the hearing with costs of and incidental thereto to be paid by D4 to the Bank.

The O.14 Appeal

Legal principles

34.  It is common ground that:

(a)  an appeal from a master to a judge in chambers is a de novo hearing;

(b)  no new evidence may be introduced save on special grounds; and

(c)  no unpleaded issue may be advanced.

35.  Further:-

(a)  As long as the plaintiff’s application is properly constituted, he is prima facie entitled to judgment.  The burden shifts to the defendant to satisfy the court why judgment should not be given against him.

(b)  When the judge is satisfied that there is no defence, it is his duty to give judgment for the plaintiff.

(c)  It is for the defendant to show an arguable defence.  General denials will not suffice.  The defendant’s affidavit must “condescend upon particulars” and should “deal specifically with the plaintiff’s claim and affidavit, and state clearly and concisely what the defence is, and what facts are relied on to support it.” HKCP 2023 (Vol 1) at para 14/4/1, 4, 8.

(d)  Further (eg. See Au-Yeung J in Venetian Coati v Bright & Bright [2021] HKCFI 390 at paras 16-17):

(i)  Order 14 is only for clear cases, and ought not to be applied in cases where there are serious material factual disputes, or a difficult point of law not fit for summary determination, unless it is obvious that the defence put forward is “frivolous and practically moonshine”;

(ii)  The Court should not embark on a mini trial on affidavits.  Where there are factual disputes, the issue is not whether the defendant’s assertions are to be believed; it is whether those assertions are believable;

(iii)  Any alleged defence will not be taken at face value but, rather, have its inherent probability considered and tested against the evidence, including contemporaneous documents, and whether there has been inconsistency in defence, or whether the defence is raised only recently despite earlier opportunity to do so.

(iv)  A “desire to investigate alleged obscurities” or a “hope that something will turn up on the investigation” is not a good reason for refusing to enter judgment.  Leave to defend cannot be obtained by putting forward a defence that is “all surmise and Micawberism”: see Korea Trade Insurance Corp v Fortune Dragon Motors[2019] HKCFI 1824 at para 5 (per Mimmie Chan J).

The Interpretation Defence

36.  D4 claims that there is a triable issue as to the proper meaning of the 2021 Top-Up Agreement.

37.  The legal principles on interpretation of contracts are well established.  As held by Ribeiro PJ and Lord Collins of Mapesbury NPJ in Eminent Investments v Dio Corporation (2020) 23 HKCFAR 487 at para 44, the Court will take into account, inter alia, the natural and ordinary meaning of the provision in question, the purpose of the contract and of the provision, other relevant provisions, the facts and circumstances known or assumed by the parties at the time that the contract was executed, the quality of the drafting of the instrument, and commercial common sense.

38.  Further, as stated by Kwan VP in Achieve Goal Holdings Ltd v Zhong Xin Ore-Material Holdings Company Limited [2020] HKCA 51 at para 16:

(a)  The construction of a contract is an attempt to discover what a reasonable person would have understood the parties to have meant.  This is done by identifying the meaning of the relevant words (a) in light of the natural and ordinary meaning of those words, the overall purpose of the contract, any other provisions of the contract, the facts known or assumed by the parties at the time the contract was made and common sense but (b) ignoring subjective evidence of any party’s intentions.

(b)  The background knowledge which would reasonably have been available to both parties in the situation in which they were at the time of the contract includes anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(c)  Reliance placed on commercial sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision which is to be construed.  Except in a very unusual case, the parties have control over the language they use in a contract and must have been specifically focusing on the issue covered by the provision when agreeing the wording of that provision.  A court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight.

39.  D4 submits that it is arguably the correct interpretation of its obligation under the 2021 Top-Up Agreement that the Bank is only entitled to pursue D4 for any outstanding sum under the 2021 Facility Agreement after it has exhausted all reasonable efforts to recover the same under the 2021 Facility Agreement itself, the 2021 share charge agreement and the 2021 guarantees from D2 and D3.

40.  I agree with the Bank’s submission that the natural and ordinary meaning of Clause 1 is plain.  It makes clear that:

(a)  The triggering event for determining whether D4 has to make any payment to the Bank as “make up the difference obligor” is the occurrence of one or more of the following events: (i) the expiry of the deadline for compliance with the obligations under the 2021 Facility Agreement; (ii) D1’s breach of any term under the 2021 Facility Agreement or (iii) the 2021 loan becoming overdue.

(b)  Once a triggering event has occurred, the Bank is entitled to demand from D4 payment of any sum due but not repaid to it under the 2021 Facility Agreement by way of a written notice. [emphasis added]

(c)  Upon receipt of the said written notice, D4 shall make repayment of such sum as may be outstanding under the 2021 Facility Agreement to the Bank within 30 days.

(d)  The sum for which D4 will be liable includes the principal loan debt, the interest thereon and other specified costs and expenses.

41.  I am prepared to accept that the meaning of “make up the difference” taken in isolation might be arguable.  Taken in isolation, the question would be then “make up the difference from what”? In isolation, it could (at least) be surplus to other recovery channels (as D4 argues) or it could be surplus to what D1 has paid.  However, the express language of both parts of Clause 1 makes it clear that D4’s liability extends to principal and interest.  There is no stated exception or proviso that other recovery options must first be exhausted.  Effectively, the “make up the difference” obligation requires D4 to put the Bank into the position it would be if D1 paid in full.  In other words, as a matter of natural reading, it has the same effect as a guarantee.

42.  Clauses 11.3(6) and (7) of the 2021 Facility Agreement provide important context.  They plainly provide that:

(a)  as a condition precedent to the 2021 loan, the Bank had to be satisfied that D4’s top-up agreement was equivalent to a guarantee; and

(b)  it was open to D2 and D3 to provide their sureties by top-up agreement or guarantee or indemnity but that whatever they provided had to be not inferior to a guarantee.

43.  Mr Lam SC submits that D4 was treated differently from D2 and D3 by the Bank as it gave a top-up agreement whereas D2 and D3 provided guarantees.  However, Clause 11.3(7) suggests that the Bank (at least) treated top-up agreements and guarantee agreements for the purpose of this loan as interchangeable as long as it was satisfied none had an effect inferior to a guarantee.

44.  Huang 1 asserts that D4 could not give a guarantee without meeting D4’s internal regulations, and that this was known to the Bank, so in that context the parties intended to use a top-up agreement and not a guarantee.

45.  Chen 2 responds that:

(a)  It was D4 who asked the Bank if it could provide a top-up agreement; and

(b)  The internal regulations exhibited by Huang appear to relate to a different entity from D4 without that being explained by Huang; and the Bank knew nothing of D4’s internal regulations, and it is not possible to attribute Mr Pan’s knowledge to the Bank.

46.  Mr Lam SC accepted that if D4 had internal regulations restricting it from providing a guarantee, then that would cut both ways i.e. it could equally mean that D4 was motivated to provide a guarantee with a different label such as a top-up agreement.

47.  Any dispute as to D4’s motivation in providing a top-up agreement is irrelevant because that only goes to D4’s subjective intent, and not what the parties agreed.  The evidence of what the parties agreed by Clause 1 of the 2021 Top-Up Agreement in the context of Clause 11.3(6) of the 2021 Facility Agreement and the Sun Legal Opinion is clear: that D4 would provide a top-up agreement that must be equivalent to a guarantee.

48.  I am unable to take account of the quality of drafting as I am asked to interpret the document in translation.  There is no evidence as to whether D4 was or was not legally represented in respect of the 2018 and 2021 Financing Arrangements, so I am also unable to take that into account. On the available evidence, I do not consider that D4 has identified any arguable factual issue of relevance to the interpretation of the 2021 Top-Up Agreement.

49.  The Interpretation Defence is in my view not arguable.

The Bribery/Breach of Fiduciary Duty Defence

50.  This defence is premised upon the allegation that payments made in 2018 described as bonuses totaling HK$1 million (paid to 11 individuals) and reimbursement of expenses totaling HK$111,594.20 were actually bribes made by Mr Xu and channeled through D2 to senior management of D4 to induce wrongful conduct which would benefit Mr Xu at the expense of D4.  Mr Xu is the beneficial owner of D2’s two partners in holding the Listco shares, and effectively 60% indirect beneficial owner of the Listco shares.

51.  Firstly, it is implausible that Mr Xu, as indirect owner of 60% of the Listco shares, would have bribed any senior management to do his bidding when he could have achieved such an end lawfully by virtue of his ownership.

52.  Secondly, D4 claims that the source of the 2018 payments was a HK$6 million deposit into D2’s bank account by Mr Xu.  This is not arguable on the evidence:

(a)  D2’s bank statements show 2 deposits of almost HK$3 million each on 13 September 2017 by a Chen Liying and a Li Li.

(b)  No evidence is adduced as to the identity of the depositors or any connection with Mr Xu.

(c)  No further D2 bank statements are adduced so it is not possible to see whether the bonus payments or expense reimbursements in May 2018 were paid out of the HK$6 million deposits.

53.  Further:

(a)  On 3 May 2018, the investment decision committee of D2 requested approval of the payment of bonuses totaling HK$1 million on the following basis:

“ [D2] has actively promoted the implementation of the New Element and Phoenix projects since their inception. We have successfully completed the acquisition of shares in [Listco] in January 2018, accounting for a total of 61.17%.

During this period, with the support and efforts of our Company’s business and support personnel, the project was successfully implemented and expected results were achieved. Currently, the fund investor intends to apply for bonus for additional services provided by relevant personnel of the company.

We hereby apply for the approval of the board of directors to grant bonus to the relevant personnel a cumulative amount of HK$ 1 million.”[2]

(b) This request was unanimously approved by the board of directors of D2.

(c) There is no contemporaneous documentary evidence nor any evidence from a person involved, to indicate that the bonus payments were anything other than they were said to be.

54.  Similarly, in respect of the relevant expenses:

(a)  On 10 May 2018 the investment decision committee of D2 requested approval of the payment of expenses totaling HK$111,594.20 including HK$76,394.20 for business reception meals and HK$35,200 for accommodation expenses, attaching a table for a detailed breakdown, together with receipts from hotels and restaurants.

“ The Project Team engaged in discussions with [the Bank] on possible financing projects. In the process, investors came to Hong Kong for meetings and negotiations, and incurred a series of reception expenses and conference accommodation expenses, totaling approximately HK$111,594.20, including HK$76,394.20 for business reception meals, and HK$35,200.00 for accommodation expenses. Please see the attached table for a detailed breakdown.”

(b)  The directors of D2 unanimously approved the payment in respect of expenses.

(c)  There is no contemporaneous documentary evidence nor any evidence from a person involved, to indicate that the payments in respect of expenses were anything other than they were said to be.

55.  It is not in my view arguable that these payments were bribes or were payments to induce wrongful conduct by the recipients to benefit Mr Xu at the expense of D4.

56.  I do not need to consider the claims of breach of fiduciary duty further as they are premised on the alleged bribes/payments in disguise.  In any event:

(a)  D4 alleges that the wrongful conduct which followed from such payments was a scheme to dilute D4’s shareholding in Listco. The share dilution came about through a share allotment and a rights issue.  D4 has not provided evidence sufficient to establish an arguable case of any wrongful conduct related to such allotments or rights issues.

(b)  D4 further alleges that the alleged bribes/payments in disguise in 2018 were not disclosed to D4 before it entered the 2021 Top-Up Agreement, and such breach of fiduciary duty vitiates the 2021 Top-Up Agreement.  As held by the Master, D4 has not demonstrated any connection between the alleged 2018 receipt of bribes and D4 entering into the 2021 Top-Up Agreement.  Clearly any breach of fiduciary duty in 2018 will not vitiate any act for D4 thereafter irrespective of any link between the bribe and the act.  As submitted on behalf of the Bank, D4 was already a surety for the prior 2017 financing of the Listco acquisition project before D1 was the Borrower.  That predated the alleged 2018 bribes.

57.  This defence is not in my view arguable.

Undervalue Defence

58.  The defence is premised on the factual allegation that the Bank sold Listco shares at an undervalue to Mr Xu or his associates.  In the face of undeniable evidence that the Bank actually sold the shares on the open market and has no information as to the identity of the buyers, Mr Lam SC conceded at the hearing that this defence was unarguable.  It is trite that a secured creditor may realise its security when it wishes; that his duty is to act in good faith and to exercise reasonable care to obtain the best possible price at the time of sale; and that a sale of an asset on the open market would represent market price for an asset thereby discharging the duty.  See Strong Offer Investment Ltd v Nyeu Ting Company(2007) 10 HKCFAR 529 at para.49.

Other

59.  Mr Lam SC sought to pursue a complaint raised in Huang 1 para 63 that on 20 June 2018, D1 had entered into a financial advisory agreement with the Bank, and that on the same date, a letter was signed confirming that the services under the agreement had already been provided and that payment would be made of HK$36 million.  Huang 1 complained that these matters had not been disclosed to D4.  Huang 1 asserts, with absolutely no corroboration, his belief that these fees were provided with “explicit instructions to label the agreement between [the Bank] and [D4] as ‘Top-Up Payment Agreement’… and turn a blind eye to the misconduct of [D4’s] representatives.”  

60.  The most succinct way to deal with this allegation is to say it is unpleaded and therefore cannot be advanced on the appeal.

Conclusion

61.  In the circumstances, the appeal should be dismissed with costs and certificate for two counsel.