CSC SECURITIES (HK) LTD v. ASIA HEALTH CENTURY INTERNATIONAL INC. AND ANOTHER

HCA 1614/2016

[2019] HKCFI 354

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1614 OF 2016

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REASONS FOR DECISION

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1.  This is an appeal by Jin Dongtao (“D2”) from an order of Master K W Wong dated 2 August 2018, granting the plaintiff CSC Securities (HK) Ltd (“CSC”) summary judgment against D2 for payment under a guarantee and striking out D2’s counterclaim. At the conclusion of the hearing the appeal was dismissed with costs. My reasons appear below.

BACKGROUND FACTS

2.  In June 2015, Asia Health Century International Inc (“Asia Health”) opened a margin trading account with CSC, depositing as collateral 25 million shares in Universal Health International Group Holding Limited (“UH”), a Hong Kong listed company, for a trading limit of HK$30 million.  The margin account was governed by CSC’s standard written terms and conditions.  D2 was guarantor of Asia Health’s liabilities under that account. 

3.  Asia Health is a majority shareholder of UH, owning over 50% of its shares as at 31 December 2015.

4.  In January 2016, CSC issued margin calls on Asia Health on 21, 25, 27, 28 and 29 January 2016.  The margin calls were unmet.  The UH shares were sold in the morning of 29 January (“the forced sale”) leaving an outstanding balance in excess of $8 million. 

5.  The present application was made to recover that outstanding balance and interest.

THE DEFENCES

6.  D2 raised three defences: (a) discharge by novation; (b) the prevention principle; and (c) estoppel.  While substantially raised in D2’s affirmation dated 11 June 2018 which was before the master, it is now conceded that they were not clearly stated in that affirmation.

7.  For this appeal, those defences are articulated in a draft amended defence and counterclaim (“the draft defence”) in respect of which a summons for leave to amend is before this court.  Given the outcome of the appeal, leave is refused.

A.   Discharge by novation

8.  D2’s case may be summarised as follows:

   (i)   In January 2016, Asia Health entered into a novation agreement with Zhongrong International Alternative Asset Management Limited (“Z”), subject to obtaining the consent of six securities brokerages including CSC (collectively “the brokers”) with whom Asia Health held margin accounts and had deposited as collateral, shares in UH amounting in the aggregate to 398 million shares.

   (ii)   Under the novation agreement (a) Asia Health would transfer 398 million shares (amounting to 19.9% of its entire shareholding) in UH to Z at the price of $1.25 per share; (b) Z would become the principal debtor in substitution of Asia Health and settle any outstanding balance of Asia Health’s accounts with the brokers.

   (iii)   For that purpose, a multi-party conference (“the conference”) was held on 25 January 2016 attended by D2 and representatives from Z and the brokers including CSC.

   (iv)   According to D2, such consent was obtained and it was further agreed at the conference that (a) Z would open a margin financing account with each of the brokers; (b) Asia Health would transfer to Z the UH shares deposited with each of the brokers; (c) each of the brokers would release D2 from all liability under any guarantee agreements; and (d) Z would become the principal debtor in place of Asia Health and settle any outstanding balance due to each of the brokers.

   (v)   The novation agreement “was reduced” into a written sale and purchase agreement (“the SPA”) on 27 January 2016.

   (vi)   Asia Health and Z signed the SPA at 7 am on 28 January 2016.

   (vii)   On the same day, Asia Health and Z executed settlement instructions using CSC printed forms relating to 25 million UH shares.  Against “Payment Instruction” printed on each of the two forms were the printed words “DVP/RVP HK$” followed by an amount namely “30,040,627.85” that was handwritten. 

   (viii)   It is D2’s case that he was later told by Ms Annie Tse (Z’s representative who attended the conference) that Z had delivered both sets of instructions to CSC on 28 January 2016 but that CSC “refused to accept both instructions”. 

9.  It will be seen that the ‘novation agreement’ referred to in §8(ii) (the subject matter of the conference) evolved into an agreement that encompassed the four-pronged arrangement mentioned in §8(iv) above, said to reflect what was agreed at the conference although D2 cannot recall exactly what was said by the representatives of the brokers at the conference.

10.  It is common ground that the conference was held on 25 January 2016 attended, inter alia, by two representatives from CSC. What is disputed is what transpired at the meeting and, specifically, whether any (and if so what) agreement was reached.

11.  In support of the novation agreement, D2 relied on available documentary evidence said to be consistent with his case that consent from all parties concerned had been obtained at the conference including:

   (i)   UH’s public announcement made on 25 January 2016 (made shortly after the conference) pursuant to the Listing Rules of the intention of its controlling shareholder (D2) to dispose of not more than 20% of the issued capital to Z as a strategic investor;

   (ii)   a further public announcement dated 27 January 2016 to the effect that Asia Health and Z have entered into the SPA and that completion should take place within three days thereafter or such other date as may be agreed; and

   (iii)   the SPA itself including provisions such as §5[1]expressly stating the arrangement and effect of novation.

12.  D2 also relied on actual performance by all the parties who attended the conference except CSC in that he was told by Ms Tse who represented Z at the conference that shortly after the conference, Z opened a security account with each of the other brokers.

13.  The SPA is a lengthy document and its English translation runs to some 77 pages.  For present purposes the material provisions of the SPA are the following:

   (i)   Appendix 1 is a table consisting of four columns listing the broker, the margin account number, the amount of the loan, and the total number of UH shares[2] held as collateral by each of the brokers;

   (ii)   “Relevant Shares” is defined as meaning the 398 million shares representing 19.9% of the target company (UH) as set out in Appendix 1;

   (iii)   §4 provided that completion[3] should take place immediately after the signing of the SPA;

   (iv)   §5, in pertinent part, provided:

“ 5.1 Upon the Completion, the Vendor undertakes to immediately notify each of the brokers listed in column 1 of Appendix 1 that all the shares listed in column 3 of Appendix 1 corresponding to the broker’s name has been sold to the Purchaser, and that the designated persons appointed by the Purchaser shall be added as the authorised persons who operate the margin account listed in the column 2 of Appendix 1 …

5.2   The Purchaser agrees that from 28 January 2016, the Purchaser will be responsible for the relevant outstanding balance owed by the Vendor under the margin accounts listed in column 2 of Appendix 1 with the brokers listed in column 1 of Appendix 1.  If the Vendor receives notices of margin calls from the brokers from the period of 28 January 2016 to the date the Relevant Shares are transferred to the Purchaser’s margin accounts with brokers listed in column 1 of Appendix 1, the Purchaser agrees to pay the brokers the balance involved in the margin call notices upon receiving direct notifications from the brokers.”

Whether the novation defence is arguable

14.  Ms C Chan, counsel for D2, submitted that CSC was at fault in not carrying out and/or refusing to carry out the settlement instructions said to have been given to CSC and that it could have recovered the amount of the margin call from Z had it complied with §5.2 of the SPA. 

15.  At the heart of D2’s defence is his case that “the terms agreed by all concerned parties were finalised in a sale and purchase agreement” (emphasis added), ie the SPA: see §9E (3) of the draft defence and §8(iv) above.  I propose to address this submission before those mentioned in §§11 – 12 above.

16.  At the outset, it is important to note that the only parties to the SPA are Asia Health and Z.

17.  §5.1 of the SPA required Asia Health to immediately notify CSC that the UH shares deposited as collateral had been sold to Z and of thedesignated persons authorised by Z to operate account.  However, no evidence has been adduced to show that the obligations imposed on Asia Health had been discharged.

18.  The effect of §5.2 as regards Asia Health’s margin account liabilities is as follows:

   (a)   Z agreed with Asia Health to be responsible for the relevant outstanding balance owed by Asia Health under its various margin accounts with the brokers from 28 January 2016; and

   (b)   Z agreed to pay the balance involved in margin call notices served on Asia Health from 28 January 2016 to the date the Relevant Shares are transferred to Z’s margin accounts to the firms if during that period Z receives direct notification from the firms.

19.  Logically, before a broker could be in a position to serve Z directly with a margin call notification as contemplated by §5.2, it must have already received the notice of completion from Asia Health under §5.1. As earlier noted, there is no such evidence.

20.  Critically, there is also no evidence before the court that all concerned parties (which necessarily would have included the brokers) agreed at the meeting specifically to the provisions of §5.2 of the SPA.  It is not a case where a finalised draft SPA[4] was available and circulated to the parties who attended the conference.  There is simply no evidence as to when thebrokers were apprised of and agreed to the provisions of §5.2.  Significantly,it does not even feature as part of the four-pronged arrangement pleaded in §9(E) of the draft defence reflecting what was said to have been agreed at the conference.   

21.  It will be seen that nothing in §§5.1 and 5.2 affected the brokers’ contractual right to make margin calls on Asia Health pending the transfer of the Relevant Shares to Z’s margin accounts.

22.  In my view, insofar as reliance is placed on §5.2, the brokers could not have known of the requirement of direct notification to trigger Z’s liability for the balance involved in margin call notices unless they knew of and had agreed to the arrangements contained therein.  From the perspective of the brokers, those arrangements were clearly material. Hence, absent evidence of agreement by the brokers to the specific terms of §5.2, the novation defence raised by D2 is not arguable.

23.  D2 has not adduced corroborative evidence in support of his case given the number of attendees/concerned parties at the conference.  Nor is there any direct and independent evidence of ‘actual performance’ by the other brokerages other than D2’s bare assertion. The opening of accounts by them without specifics is of no assistance.

24.  There are also minor issues arising from the matters on which D2 placed reliance.  It is to be noted the public announcement made on 27 January 2016 is problematic in that, as at the close of business on that day, the SPA had not been signed by Asia Health and Z.  According to D2’s affirmation (§22), it was still being finalised: it was “eventually signed around7 am on 28 January 2016”.  It would follow that the 27 January announcement was premature.

25.  Further, according to the 27 January announcement completion of the SPA was to take place “within 3 days after the execution of the SPA or such other date as agreed between the parties” which is inconsistent with §4 of the SPA under which completion should take place immediately after the signing of the SPA.

26.  As regards the instructions, there was no first-hand evidence of delivery describing how and when it was effected, nor of the acts said to constitute “refusal”.  CSC denied ever receiving those instructions and has adduced evidence to the effect that Z’s margin account with CSC was opened only on 29 January 2016[5].   

27.  CSC made a margin call on 28 January 2016 as it was entitled to do requiring payment on or before 1 pm on 29 January.  This was followed the next morning at 9:25 am by a further margin call requiring immediate repayment.  It was unmet.

28.  For the reasons set out above, I do not consider the defence of discharge by novation to be arguable.

B.   The remaining defences

29.  As those defences stem from the novation defence, they must follow the same fate.  In any event, for the purposes of this appeal, D2 did not rely on the prevention principle defence.