GRADE ONE LTD v. CHOW CHIN YUI, ANGELA AND OTHERS

HCA 494/2021

[2024] HKCFI 49

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 494 OF 2021

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BETWEEN

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REASONS FOR DECISION

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A. INTRODUCTION

1.  On 12th August 2022, I gave summary judgment for the 3rd and 4th Defendants on their counterclaim against the Plaintiffs (“the Judgment”), following a hearing on 28th June 2022 (“the June 2022 Hearing”). The 3rd Defendant had counterclaimed against the Plaintiffs for outstanding principal, interest and default interest under the Facility Agreement^[1] of 29th November 2019. The 4th Defendant had counterclaimed against the 2nd and 3rd Plaintiffs for the outstanding commencement amount, interest and default interest under the Supplemental Deed of 24th April 2020.

2.  On 8th September 2022, the Plaintiffs filed a notice of appeal against the Judgment (“the Notice of Appeal”).

3.  On 8th December 2023, the Plaintiffs issued a summons seeking a stay of execution of the Judgment pending determination of their appeal (“the Summons”).

4.  At the hearing on 22nd December 2023, I dismissed the Summons, and ordered that the costs of and occasioned by the application by paid by the Plaintiffs to the 3rd and 4th Defendants on an indemnity basis, which were summarily assessed. I now give my reasons for doing so.

B. THE PRINCIPLES

5.  The principles governing an application for a stay of execution of a judgment pending appeal are settled and not in dispute.

6.  The starting point is RHC O.59 r.13(1). An appeal does not operate as a stay of execution or of proceedings under the decision of the court below. Thus unless the appellant can justify a stay of execution, one will not be ordered.

7.  In Astro Nusantara International BV v PT Ayunda Prima Mitra (No 2) [2016] 1 HKLRD 591, Chow J (as he then was) summarised the principles set out by Ma J (as he then was) in Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84 as follows (at [15]):

(1) The applicant is required to demonstrate a “good reason” for a stay of execution.

(2) Generally speaking, the existence of merely an arguable appeal cannot by itself amount to a sufficient reason to justify a stay. It is the minimum requirement before a court would even begin to consider granting a stay.

(3) In other words, if the court is not convinced that there exist arguable grounds of appeal, no stay will be granted however exceptional the circumstances may otherwise be justifying a stay of execution.

(4) On the other hand, the existence of a strong appeal or a strong likelihood of success will usually by itself enable a stay to be granted because this would constitute a good reason for a stay.

(5) In most cases, where the court is faced with simply the existence of an arguable appeal, it becomes necessary for the applicant to provide additional reasons as to why a stay is justified.

(6) Commonly, this is done by demonstrating that without a stay the appeal would be rendered nugatory, for example, because of an appreciable risk that the respondent to the appeal would not be able to repay in the event of a successful appeal against a money judgment, or because the failure to grant a stay would have a serious deleterious effect on the applicant.

(7) In considering an application for a stay pending appeal, it would be impractical and even undesirable for the court to go deeply into the merits or strengths of the appeal, although the court must still form a preliminary view of these aspects.

C. THE GROUND OF APPEAL

8.  The Plaintiffs submitted that they have a strong ground of appeal. They pointed out that the Judgment was given on an application for summary judgment on the 3rd and 4th Defendants’ counterclaim, so that in order to show a strong ground of appeal, the Plaintiffs only need to show that they have a strong case to demonstrate an arguable and believable defence, and not that they have a strong case that they will eventually prevail at trial.

9.  The 3rd and 4th Defendants submitted that the ground of appeal is implausible and could not constitute a bona fide defence to their counterclaim.

10.  The Plaintiffs’ ground of appeal is not one of those in the Notice of Appeal.^[2] The ground of appeal is based on the claim that Mr Paul Heffner, a deceased former business partner of Mr Lau (the 3rd Plaintiff), had “in all likelihood”, and unbeknownst to the Plaintiffs, obtained a loan from an entity related to the Defendants to discharge the Plaintiffs’ liabilities under the Facility Agreement and the Supplemental Deed (“the Secret Repayment”). The Plaintiffs were therefore not liable to the 3rd and 4th Defendants.

11.  Mr Sussex highlighted the following evidence relied on by the Plaintiffs as showing the Secret Repayment. He emphasised that the application for a stay of execution was being put purely on the basis of a proposed construction of certain documents which had come to light since the June 2022 Hearing, which was not necessarily the same construction as that advanced by Mr Lau in his affidavit evidence.

12.  First, there was a document headed “Net Effect Facility Summary of Outstanding Items” (“the Summary Document”).

12.1 Mr Lau’s evidence is that Net Effect Limited was Mr Heffner’s entity.

12.2 It was said that the document seemed to be an internal working document for the purpose of preparing a loan agreement. The document was undated, and did not identify the lender. It was said that the document set out a table of items which were outstanding for the preparation of a loan agreement.

12.3 The most important aspect of the document was said to be the items against clause 1.1, as they referred to the indebtedness owed by the Plaintiffs to the 3rd and 4th Defendants. This part of the table read as follows.

Clause	Item	Responsible Parties
1.1	Provide the amount owed by Grade One Limited to Cachet Asset Management Limited as agent, Cachet Multi Strategy Fund SPC (on behalf of Cachet Deep Value Fund SP) and High Point Properties Ltd under the facility agreement dated 29 November 2019	Lender
1.1	Provide the amount owed by Surplus Gain Global Limited to Cachet Multi Strategy Fund SPC (on behalf of Cachet Deep Value Fund SP) the total return put and call option transaction agreement dated 2 August 2019 (as amended by the supplemental deeds dated 24 April 2020 and [*] 2020 respectively)	Lender

12.4 It was said that it was “not unreasonable” to infer from this that the lender was likely to be a “Cachet entity” since it would be unusual for the lender to stipulate how the loan was to be used unless the lender had an interest in the matter.

12.5 Several rows further down the table, there was the following entry, to which I return later.

Clause	Item	Responsible Parties
6.2	Provide the minimum amount of the voluntary prepayment	Borrower / Lender

12.6 It was said that there was to be a guarantor for the loan, as a fax number for the guarantor was to be provided.

12.7 The Summary Document also set out a table of “outstanding documents”, listing out various documents in relation to various companies. They included a “Certificate of Incumbency of Adamas Global Alternative Investment Management Inc” and a “Certificate of Good Standing of Adamas Global Alternative Investment Management Inc”. I return to this below.

12.8 The Summary Document was obtained by Mr Lau in mid- July 2022, after the June 2022 Hearing but before the Judgment was handed down on 12th August 2022.

13.  Second, there was a photograph of a document headed “Notice to Debtor (APCF)” and addressed to Asia Private Credit Fund Limited (in liquidation) as the debtor.

13.1 This was an undated document, referring to a deed of assignment by way of security entered into between Adamas Global Alternative Investment Management Inc as assignor, and Cachet Capital Investment Limited (“CCIL”) as assignee, of all debts and liabilities owing by a particular company to the Adamas Global Alternative Investment Management Inc. It gave notice that the assignor had assigned to the assignee, by way of security, its rights in respect of a receivable owed by the debtor to the assignor.

13.2 The significance of the document was said to lie in the fact that it indicated that Adamas Global Alternative Investment Management Inc, which was one of the companies referred to in the Summary Document as mentioned above, had entered into a deed of assignment by way of security. It was said that it was reasonable to infer that the lender for whose benefit security was being provided was CCIL.

14.  Third, there was a photograph of part of a document which appeared to be a signature page, listing the names of Adamas Global Alternative Investment Management Inc, CCIL and Asia Private Credit Fund Limited (in liquidation). Mr Heffner’s signature appeared under the name of Adamas Global Alternative Investment Management Inc. No signature appeared against the names of the other two entities. Mr Sussex acknowledged that this document had not been found together with the “Notice to Debtor (APCF)” but submitted that it should be inferred that the two pages formed part of the same document.

15.  Fourth, there was another version of the Summary Document which was said to have been created later and which contained struck out items. It was said that this showed that some items had been addressed and some had not.

16.  Fifth, there was evidence that Mr Heffner had made a payment of US$75,000 on 20th October 2020 to CCIL. It was said that this was “not inconsistent with being the prepayment” referred to in the Summary Document (see above). However, Mr Sussex rightly acknowledged that it could also be something else altogether.

17.  Sixth, there was a letter dated 31st December 2020 from CCIL to Mr Heffner (“the 31.12.2020 Demand Letter”), stating that Mr Heffner was in default in his personal guarantee obligations to repay $17m as advanced to him on 28th October 2020, that the amount had been overdue since 27th November 2020, and demanding full payment within five days.

17.1 Mr Sussex submitted that it could be inferred that $17.2m had been advanced to one of Mr Heffner’s corporate entities (since Mr Heffner could not be guaranteeing his own liability) on 28th October 2020.

17.2 This document was exhibited by Ms Chow (the 1st Defendant) in her affirmation of 2nd June 2023 in a related set of proceedings.

18.  Separately, there was a draft facility agreement amongst the documents which Mr Lau had apparently obtained in July 2022. It named Net Effect Limited as the borrower, but Mr Sussex submitted that it could not have been the facility agreement referred to in the Summary Document, as the clauses in it did not tally with the ones in the Summary Document, and the purpose of the loan was different. It was said that this document was irrelevant.

19.  Mr Sussex submitted that had these matters been before the court, the court would have given pause before entering judgment back in August 2022.

20.  I cannot agree that Plaintiffs have shown any arguable, let alone strong, case that the aforesaid documents demonstrate an arguable and believable defence that any Secret Repayment was made, based on these matters.

20.1 The documents themselves do not suggest that any Secret Repayment was made. The Summary Document does not indicate that the loan proceeds (of an unknown amount, to be lent by an unknown lender) were to be used for any particular purpose. If the loan was made, the lender might or might not have been CCIL. The “Notice to Debtor (APCF)” might, or might not, be linked to the Summary Document, or any loan related to the Summary Document, and in any event did not suggest any Secret Repayment either. The fact that a loan had indeed been made to Mr Heffner or an entity under his control might, or might not, be linked to the Summary Document. The amount of the loan ($17.2m) was not the same as the loan principal said to be owed by the Plaintiffs to the 3rd and 4th Defendants (in the region of $25m). Mr Heffner’s payment to CCIL might, or might not, be linked to the loan which might, or might not, have been made.

20.2 The Plaintiffs’ case is that after considering the evidence of a Mr Henry Lee, the former managing director of Cachet Asset Management, together with the Summary Document, Mr Lau “discovered” the Secret Repayment. However, there is nothing in the evidence of Mr Lee^[3] to suggest that there was any Secret Repayment.

20.3 The draft facility agreement, said to be unrelated to the Summary Document, only serves to highlight the speculative nature of the entire “construction” exercise. If there was a loan to Mr Heffner or an entity under his control, what is the basis for the conclusion that it was linked to the facility referred to in the Summary Document rather than that in the draft facility agreement?

21.  Furthermore, as Mr Lau Ka Kin pointed out, the Secret Repayment defence is inconsistent with one of the key defences advanced by the Plaintiffs at the June 2022 Hearing (which defence is still relied on in the Notice of Appeal), namely, that it was represented to the Plaintiffs that the Defendants would not enforce the guarantees given by Mr Lau and SGGL, and the Facility Agreement and Supplemental Deed (termed “the Non-Enforcement Representation” in the Notice of Appeal).^[4] It makes no sense that for a third party to make the Secret Repayment when apparently there was no liability on the part of the Plaintiffs anyway, the Defendants having represented that the Facility Letter and Supplemental Deed were not going to be enforced.

22.  At one point, the Plaintiffs conjectured that Mr Heffner might have done so because it was Mr Heffner who was instrumental in persuading Mr Lau to assume the liabilities under the Facility Agreement and the Supplemental Deed; Mr Heffner and Ms Chow were negotiating behind Mr Lau’s back in relation to Fund IV; it could be inferred that it was their intention to cut Mr Lau out of the deal; it was therefore only fair that Mr Heffner should take on Mr Lau’s liabilities which he had taken on in the expectation that Fund IV would be set up. However, there is simply no evidence to suggest that Mr Heffner had persuaded Mr Lau to assume the liabilities under the Facility Agreement and the Supplemental Deed; it is pure conjecture that Mr Heffner sought to cut out Mr Lau from any deal; and it is self-inconsistent to surmise on the one hand that Mr Heffner was so underhand as to cut out Mr Lau behind his back whilst at the same time being so kind as to secretly repay Mr Lau’s debts.

23.  I therefore cannot agree that had the Secret Repayment defence been advanced at the June 2022 Hearing, this would have assisted the Plaintiffs’ defence.

24.  I would further observe that in order for the Plaintiffs to be able to rely on the Secret Repayment defence now, on their appeal in the Court of Appeal, they would need to persuade the Court of Appeal that the conditions for admission of new evidence in Ladd v Marshall [1954] 1 WLR 1489 at 1491 have been met. As Mr Lau Ka Kin submitted, the court may exercise its discretion to dismiss an application to adduce new evidence on appeal on the ground of delay alone, even if the conditions in Ladd v Marshall are satisfied: Lau Kam Sing Dickie v Lo Hon Kwong [2021] HKCA 1149 at [19] (Kwan VP). Mr Lau Ka Kin pointed out that there were many instances of unexplained delay in the present case, including the fact that Mr Lau was in possession of the Summary Document by July 2022 but did not raise the matter with the court before the Judgment of 12th August 2022, did not include the point in the Notice of Appeal of 8th September 2022 or apply to amend the Notice of Appeal thereafter, and did not make the Ladd v Marshall application itself until 5th December 2023. As Mr Lau Ka Kin demonstrated at the hearing by reference to the evidence, which conclusion was not disputed, Mr Lau in fact had all the information he needed by September 2022 to advance the Secret Repayment defence. Yet the Ladd v Marshall application was not made until December 2023, and no application to amend the Notice of Appeal was made (which remained the case as at the date of the hearing). Even if (as Mr Lau claimed in his evidence) he only learned of the matters in Mr Lee’s affirmation in September 2022 and obtained the 31.12.2020 Demand Letter in June 2023, this still does not fully account for the delay.

25.  As Mr Sussex submitted, it is not for me to second-guess the outcome of the Plaintiffs’ Ladd v Marshall application. The point however is that given the undisputed delay, it cannot be assumed at this stage that it is open to the Plaintiffs to rely on the Secret Repayment defence on appeal; they would have to successfully apply to admit the new evidence relied upon. This is a further hurdle against the arguability of the appeal.

26.  Mr Sussex submitted that even if there was no arguable defence, the prospect of a successful appeal was fortified by there being “some other reason” for a trial (under RHC O.14 r.3(1)), there being matters to investigate and documents to discover. However, reliance on the “some other reason for trial” ground does not absolve a defendant on an O.14 application from showing a credible defence: see Nice Plan Development Ltd v Ke Jun Xiang, unreported, CACV 259/2014, 25th June 2015 at [25] (Chu JA). It is further notable that despite Mr Lau coming into possession of the Summary Document in July 2022, no request for documents or application for discovery was made.

D. WHETHER APPEAL WOULD BE RENDERED NUGATORY

27.  In the light of my view that the Plaintiffs fail to establish the minimum requirement of an arguable appeal, so that no stay of execution should be granted, I do not need to go on to consider whether I would have exercised my discretion in the Plaintiffs’ favour to order a stay of execution pending appeal. I will therefore only set out my brief observations in relation to Mr Lau’s claim that if no stay of execution is granted, it is unlikely that his appeal could be pursued. All that Mr Lau relies on is the fact that the 3rd and 4th Defendants have served a statutory demand against him and that a bankruptcy order could be made against him. There is however no evidence that he could not in fact pay the Judgment debt, such that he will truly face bankruptcy. Mr Lau’s evidence is that he is “under financial distress”, but no details were given, for example of the nature and value of his assets, or his financial needs. This is insufficient to satisfy the court that if no stay is granted, Mr Lau would suffer a serious deleterious effect: see Indian Overseas Bank v Seabulk Systems Inc [2023] 4 HKLRD 125 at [28], [32] (Chow JA); Yip Kim Po v AIG Insurance Hong Kong Ltd [2021] 5 HKLRD 295 at [17] to [23] (DHCJ Le Pichon). One might also question why, if Mr Lau considered that he might suffer “substantial prejudice” in the absence of a stay of execution, the Plaintiffs did not apply for a stay until December 2023, despite their having lodged an appeal in September 2022.

E. DISPOSITION

28.  For these reasons, I dismissed the Summons.

29.  I ordered that the costs of and occasioned by the Summons by paid by the Plaintiffs to the 3rd and 4th Defendants on an indemnity basis. The application was wholly unmeritorious and beset by delay. The Plaintiffs produced affidavit evidence with exhibits of over seven hundred pages, but ultimately the basis for the application was, in substance, conjecture, and based on a few pages.