XCHRX ING BANK N.V. v. TSUI TSIN TONG

HCCL 305/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL LIST NO. 305 OF 1998

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J U D G M E N T

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The Application

1. This is the Plaintiff's application, by summons dated 12th May 1999, for summary judgment against the Defendant for the amount claimed in the Statement of Claim, together with interest and costs. Mr Fok, SC, who appears for the Plaintiff, has made it clear that the precise sum now sought is $69,579,489.23, which computation represents the amount outstanding as at 10th November, the date of the hearing of this application.

The Nature of the Plaintiff's Claim

2. This case is larded with significant, and at times complex, commercial detail. At bottom, however, the claim against the Defendant is based upon a Guarantee by the Defendant, as contained in a Debt Rescheduling Deed dated 28th November 1997, to which the parties were New China Hong Kong Capital Limited ("NCHK Capital") as Debtor, the New China Hong Kong Group Limited and Mr Tsui Tsin Tong, the Defendant herein, as Guarantors, and ING Baring Financial Products (ING BFP) as Creditor.

3. Clause 13 of this Deed contains the relevant Guarantees, and reads :

"13.1 Guarantee

Each Guarantor irrevocably and unconditionally:-

(a) as principal obligor guarantees to the Creditor prompt performance by the Debtor of all its obligations under the Finance Documents (other than the Existing Guarantee);

(b) undertakes with the Creditor that whenever the Debtor does not pay any amount when due under or in connection with any Finance Document (other than the Existing Guarantee), it shall forthwith on demand by the Creditor pay that amount as if it instead of the Debtor were expressed to be the principal obligor; and

(c) indemnifies the Creditor on demand against any loss or liability suffered by the Creditor if any obligation guaranteed by it is or becomes unenforceable, invalid or illegal.

13.2 Continuing guarantee

Each guarantee under this Clause 13 (Guarantee) is a continuing guarantee and will extend to the ultimate balance of all sums payable by the Debtor under the Finance Documents, regardless of any intermediate payment or discharge in whole or in part."

4. This guarantee, as entered into by the Defendant, covers the liability of NCHK Capital to ING BFP including obligations under two documents, namely (1) the New Trade Confirmation and (2) the Debt Rescheduling Deed.

5. These obligations represented two distinct elements : First, the sum owned by NCHK Capital to ING BFP in respect of accrued losses on the sale of part of a total parcel of shares in Pearl Oriental Holdings Limited ("Pearl Oriental") over which NCHK Capital had sold to ING BFP a put option, and which ING BFP had permitted NCHK Capital to sell in the market before the option expiration date in order to alleviate the effect of the falling price of that share; and second, the crystallised loss on the sale of the balance of the shares which NCHK Capital had bought from ING BFP at the fixed price of $0.40 per share, thereby fixing the price of the balance of the shares and also the loss on the sale of the balance with reference to that price as compared with the strike price under the put option.

6. How did this situation arise?

The Factual Background

7. As a matter of background there were differing sets of contractual relations involving ING BFP and NCHK Capital, NCHK Capital and Mr Wilfred Lam (one of its clients), and ING BFP and Mr Lam.

8. The basic transaction was the purchase by Mr Lam of warrants over shares in Pearl Oriental, such purchase being effected by Mr Lam through NCHK Capital, which in turn subscribed for the warrants through ING BFP. As the result, Mr Lam had the right to call on ING BFP to sell him a specified number of Pearl Oriental shares on a particular date and at a pre-agreed price.

9. This transaction caused ING BFP to do two things : first, to cover or 'hedge' the warrant contracts by buying in Pearl Oriental shares so as to minimise the risk of the warrant contract moving against them should the price of the underlying shares rise in the market; and second, to cover the converse possibility of the price of the underlying shares falling, ING BFP required NCHK Capital to sell it a Put Option over the shares, thereby giving ING BFP the right to require NCHK Capital to purchase the shares from it on a particular date and at a pre-agreed strike price.

10. The put option sold by NCHK Capital to ING BFP in turn was mirrored by a similar Put Option sold by Mr Lam (through his company Poweract Ltd.) to NCHK Capital, thereby minimising NCHK's risk as against Mr Lam.

11. What happened in fact was that there was a sharp fall in the Pearl Oriental share price in the market from June 1997, which in turn led to an agreement between ING BFP and NCHK Capital that the Pearl Oriental shares which were the subject of the ING BFP/NCHK Capital Put Option should be sold to protect against further falls in the share price. Nevertheless, when the Put Option was exercised by ING BFP on 4th September 1997, a total of 383,586,000 of the original 400,000,000 shares remained unsold, and NCHK Capital was obliged to purchase these under the Put Option at the agreed price. No payment was made, however, which resulted in further piecemeal sales of the shares during September and October 1997.

12. It is against this background that, on 28th November 1997 the parties entered into the two agreements which stand at the forefront of this application :

(i) the New Trade Confirmation, whereby ING BFP sold the then remaining 165,586,000 unsold shares the subject of the Put Option to NCHK Capital for $0.40 each, making a price of $66,234,400; and

(ii) the Debt Rescheduling Deed, which contains the guarantee provisions which found this application.

13. Pursuant to these commercial arrangements, various payments of principal and interest under the New Trade Confirmation and the Debt Rescheduling Deed were made from time to time by NCHK Capital; in fact, the schedule which has been prepared in this connection itemises repayments made or attributed since 1st December 1997, which repayments include, for example, not only cash repayments but also the credit to the ING BFP/NCHK Capital running account, on 25th January 1999, of the proceeds of sale of Paliburg and Pearl Oriental shares in the sum of $42,977,631.28.

14. The rights of ING BFP under the New Trade Confirmation and the Debt Rescheduling Deed were assigned to the Plaintiff by a Supplemental Deed dated 19th August 1998, as to which there is no dispute. Nor in historical terms is there any dispute as to the broad sequence of events set out above. The figures relating to the computation of the indebtedness of NCHK Capital to the Plaintiff have not been the subject of challenge, whilst the demands for payment served upon both NCHK Capital and the Defendant herein, Mr Tsui, are similarly uncontroversial.

Order 14 - Relevant Principles

15. There is no difference between Counsel in terms of applicable principle. The burden is on the Defendant to establish that there is an issue or dispute which ought to be tried, or that for some other reason there ought to be a trial of the action. Mr Neoh, SC, for the Defendant, has referred me to the judgment of Godfrey JA in Man Earn Ltd. v. Wing Ting Fong [1996] 1 HKC 225, and in particular the approval therein of the statement of Lord Lindley to the effect that unless it is obvious that the defence put forward is "frivolous or practically moonshine", Order 14 ought not to be applied.

16. In turn, Mr Fok, SC, referred the Court, inter alia, to the observations of Bokhary JA (as he then was) in Re Safe Rich Industries Ltd., (CA No.81 of 1994) :

"The test at the summary stage is indeed as simple as whether the defendant's assertions are believable. But it must be recognized - because failure to recognize it would create a debt-dodgers' charter - that whether the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute."

17. Perhaps also relevant in the context of the present case are the observations of Bingham LJ (as he then was) in Crown House Engineering v. Amec Projects Ltd. (1990) 6 Const. LJ 141 at 154 :

"... Order 14 is for clear cases; that is, cases in which there is no serious material factual dispute and, if a legal issue, then no more than a crisp legal question as well decided summarily as otherwise ..."

18. Nor, it is agreed, should there be any question of a mini-trial on affidavits, Godfrey J (as he then was) observing in Hutchison Asia Ltd. v. Asia Television Ltd. (1993) 2 HKC 510 at 514 :

"... what unfortunately has happened is that more and more often practitioners have attempted, in proceedings for striking out and/or summary judgment to persuade the court to embark on a mini-trial by affidavits of the allegations made respectively by the plaintiff against the defendant and vice versa."

19. With these strictures in mind, can it be said realistically that this case provides an appropriate vehicle for Order 14? To this rhetorical question (and in the face of a degree of initial judicial resistance), Mr Fok, SC, for the Plaintiff was undaunted, maintaining that complex though it appeared at first blush, this case was in fact an appropriate candidate for summary judgment.

The Proposed Defences

20. At the outset, Mr Fok, SC, pointed out that the defences as pleaded in the Defence filed in this case did not mirror those that are now to be found in the evidence opposing this application. In fact, the main lines of defence relied upon by Mr Neoh, SC, may conveniently be divided into two broad groups : first, the illegality/unenforceability of an OTC American style Put Option, and second, a group of miscellaneous defences which arise for consideration, said Mr Neoh, SC, only in the event that the Court is against him upon his primary submission.

(a) The Unenforceability Issue

21. Mr Neoh's central premise is that although this claim is couched in terms of the enforcement of the agreements evidenced by the New Trade Confirmation and the Debt Rescheduling Deed, both documents seek to enforce the terms of an ISDA Master Agreement for an OTC American style Put Option on 400,000,000 shares of Pearl Oriental conferred on ING BFP by NCHK Capital on 14th October 1996 at a strike price of $3.08 per share (that is, the price at which NCHK Capital would pay ING BFP for each share 'put' by the latter to the former). And that, in so acting, NCHK Capital, which entity, Mr Neoh submitted, was at all material times a 'dealer' within the meaning of the Securities Ordinance, Cap.333, conferred an option on a share listed in the Unified Exchange in contravention of section 76 of the Securities Ordinance, as a result of which the transaction is and was unenforceable either by NCHK Capital or ING BFP.

22. In addition, as an alternative string to the unenforceability bow, the legal result of this transaction is that, regardless of its status, in so acting NCHK Capital entered into a "contract for differences" with ING BFP, and as such is and was unlawful under the Gambling Ordinance, Cap.148, and thus unenforceable by other parties.

23. The Defendant, continued Mr Neoh, SC, became the guarantor of the obligations of NCHK Capital under the Put Option on 17th June 1997, and in fact the Trade Confirmation and Debt Rescheduling Deed of 28th November 1997 also sought to enforce the obligations under this Put Option. This being the case, the Defendant therefore prayed in aid the line of authority to the effect that, where the primary obligation is unenforceable, a guarantor thereof is not liable.

24. The development of this detailed argument touched upon the provenance of the present Securities Ordinance, namely, the second reading of the Securities Bill 1973, and further involved the examination of the Securities Miscellaneous Rules (which disapplied section 76 from stock borrowing and stock returns, and also disapplied section 76 when the traded options market began). It also involved an examination of the meaning of the term "dealer" and "dealing in securities". Whilst in terms of the Gambling Ordinance argument, the bold submission that the transaction constituting the Put Option was gambling involved the argument that a "contract for differences" in the form of a Put Option is a wagering contract because it is not a transaction for the sale and purchase of shares, but rather a device to ensure that a party in the transaction is compensated for fluctuations in the price of Pearl Oriental shares.

25. The proposition that the hedging of its position by ING BFP via the Put Option transaction runs foul of the regulatory legislation or alternatively constitutes wagering may, I suspect, cause eyebrows to be raised within Hong Kong's financial markets.

26. For my own part, I do not think that this argument is worth powder and shot, although whether in itself this represents the type of "crisp legal question" suitable for Order 14 judgment is moot. At the end of the day, however, I do not think that the illegality/unenforceability argument, so persuasively crafted by Mr Neoh, in fact assists his client on this application.

27. Mr Fok strongly disputed the applicability either of section 76 of the Securities Ordinance, or of section 3 of the Gambling Ordinance, submitting that the argument that the Put Option comes within either rubric is plainly unsustainable. As to this, I am inclined to think he is correct. But this was not, Mr Fok submitted, the main issue. The plea of illegality/unenforceability is misconceived, he asserted, because the subject matter of this action is the enforcement of the Defendant's guarantee in the Debt Rescheduling Agreement, a guarantee of a simple debt formally acknowledged by NCHK Capital, so that no question of the application of section 76 or section 3 arises. Moreover, section 13(4)(e) of the guarantee provisions provides as follows :

"Waiver of defences

The obligations of each Guarantor under this Clause 13 (Guarantee) will not be affected by any act, omission, matter or thing which, but for this provision, would reduce, release or prejudice any of its obligations under this Clause 13 (Guarantee) or prejudice or diminish those obligations in whole or in part, including (whether or not known to it or the Creditor):-

...

(e) any unenforceability, illegality or invalidity of any obligation of any person under any Finance Document or any other document or security, to the intent that each Guarantor's obligations under this Clause 13 (Guarantee) shall remain in full force and its guarantee be construed accordingly, as if there were no unenforceability, illegality or invalidity; ..."

28. In my view, Mr Fok's primary argument is well founded, and I decide this issue on this basis, notwithstanding Mr Neoh's argument that a waiver in terms of Clause 13.4 of the Debt Rescheduling Deed should not, by a side-wind, enable the enforcement of a secondary obligation notwithstanding the enforceability of the primary obligation. I do not consider this to be the position in this case. Whilst the Put Option forms part of the historical background, I fail to see why this fact should now infuse the debate, in terms of unenforceability/illegality arguments, so as to preclude enforcement of a separate and distinct contractual obligation enshrined in the Debt Rescheduling Deed which serves, inter alia, to crystallise and to cap NCHK Capital's "Agreed Loss".

29. In short, I can identify no illegality tainting the obligation now sought to be enforced. The Debt Rescheduling Deed, like the collateral documentation, is no doubt a serious commercial document entered into by serious businessmen with eyes open. This is not a "widows and orphans" scenario. If such commercial documentation is to mean anything it must, it seems to me, be seriously regarded, both by the parties and by the Court which is now being asked by the Defendant not to enforce its provisions on the basis of an elaborately-crafted argument as to the enforceability of antecedent transactions. I decline to accept this argument. In the particular circumstances of this case, I can see no justification for permitting this case to go to trial on this basis.

30. In light of this conclusion, it becomes necessary to consider the other proposed lines of defence.

(b) The Other Defences

31. These are four in number :

(i) Uncertainty

32. Mr Neoh, SC, argues that the Put Option is void for uncertainty because the collateral clause is "unworkable" in that it "cannot be marked to market".

33. I do not think that this collateral clause is uncertain, nor do I grasp why the absence of a definition of the 'Calculation Amount' should be significant, given that this figure can be readily extrapolated. In the circumstances, I do not consider that this argument has any merit.

(ii) Economic Duress

34. It is alleged that this guarantee was signed under duress. The point taken here is that ING BFP, through its agents in Hong Kong, had made a demand for collateral which was extremely large as compared with the drop in price of the underlying shares. In this regard, Mr Neoh, SC, prayed in aid the lately-tendered expert evidence of a Professor Raymond Chiang, who is apparently prepared to state that in his opinion at most an additional $104 million would have been payable, as against the demand of an additional $281 million. It is further said that Mr Tsui had the survival of the group, his personal reputation, and Hong Kong's larger interest at risk when he was asked to sign the Guarantee, and that ING BFP "well knew" of NCHK Capital's predicament, that NCHK Capital and Mr Tsui had "no alternative and ING BFP knew it".

35. In response, Mr Fok basically made two points : first, that this defence has been advanced very late in the day, in that at no stage prior to service of the affirmation in opposition had this aspect been mentioned, and it had certainly found no place in the Defence which has been filed in this case; and second, that not only was it incorrect in fact, but that in any event the allegation was wholly at odds with the express (and unprotested) terms of the Debt Rescheduling Deed, Clauses 14.10 and 14.11 providing :-

"14.10 Independent legal advice

Mr. Tsui Tsin Tong has been advised by the Debtor and the Credit to seek independent legal advice in relation to his obligations and liabilities under the Finance Documents and Mr. Tsui Tsin Tong fully understands the nature and extent of his obligations and liabilities under the Finance Documents.

14.11 No undue influence

Mr. Tsui Tsin Tong has acted independently and free from any undue influence by any person."

36. In terms of the threat of legal proceedings, Mr Fok did not accept that this can constitute duress vitiating contractual consent as a matter of law, but noted that in any event the alternative was always open to NCHK Capital to formally notify ING BFP of an event of default pursuant to Clause 5(ii) of the ISDA Master Agreement.

37. When placed in its legal and factual context, this very late plea is manifestly unimpressive, and in my judgment does not assist the Defendant to surmount the summary judgment hurdle.

(iii) Failure to mitigate

38. Under this head, Mr Neoh, SC, posited two scenarios : the first is based on a breach of contract by ING BFP in demanding an additional $281 million for collateral, and the second, on the basis (which is denied) that ING BFP's demand was not such a breach as would enable NCHK Capital to terminate the contract.

39. I find it difficult to understand how the making of a legitimate contractual demand could place ING BFP in breach of contract, albeit the initial demand via the fax :

"My Tamagotchi has been gotchered. We will be asking for HKD281,863,274.00 for Pearl put."

possibly merits a place in the emerging folklore of modern financial institutions. In any event, there was subsequent (and more orthodox) correspondence on the subject, and it is noteworthy that when NCHK Capital received the formal detailed letter of demand in this regard, no complaint was apparently made, either in terms of the same constituting a contractual breach (nor, for that matter, any assertion that this was unwarranted economic duress), instead confining itself to a letter to its customer, Mr Lam, requesting an indemnity. So that on the evidence it is difficult to take seriously the suggestion that in making this demand ING BFP was in breach of contract; moreover, had such been the case, NCHK Capital had the option of specifying the same as an Event of Default, which it did not do.

40. However, Mr Neoh, SC, maintained that, on the assumption that the demand did not represent a breach, nevertheless ING BFP "should still have unwound the bulk of the Options" and that once it was clear that NCHK Capital could not come up with the additional $281 million in further collateral, "it must have been clear to ING BFP that NCHK Capital was unable to perform its obligations and as it did not meet the full amount of underlying shares for good risk management, it no longer had any legitimate interest in keeping the contract on foot". Accordingly, argued Mr Neoh, ING BFP could have unwound all of the Options between June and September 1997 without significant market impact, and if this had been done, neither party would have suffered any loss, and indeed NCHK Capital would have been entitled to a small refund.

41. To this, Mr Fok, SC, asserted that ING BFP was not obliged to exercise the Put Option at any time before the option expiry date and that "the whole purpose of the Put Option was to hedge ING BFP's holding of the shares to satisfy the warrants in the event that they were exercised". And in any event, said Mr Fok, the evidence shows, as a matter of objective fact, that ING BFP did assist NCHK Capital by permitting the sale of some of the Pearl Oriental shares before the option expiry date, albeit that on 4th September 1997 NCHK Capital was obliged to purchase 383,586,000 Pearl Oriental shares at the strike price of HK$1.54, thereby making a total of HK$590,722,440. Mr Fok further commented that the Defendant's approach in this regard serves to ignore the fact that his client is a financial institution which was not engaged in playing the market but in hedging the warrants, that ING BFP had the contractual right to choose when to put the shares to NCHK Capital, and that until that option was exercised there could be no breach that his client may have had to consider mitigating.

42. I agree. The "failure to mitigate" argument is, in my view, analytically unsound. The premise that ING BFP should have taken a view as to the low probability of the warrants being exercised by Mr Lam and thus caused an early unwinding of its hedging position when there was no commercial advantage in so doing (and possibility some residual risk) is in my view neither realistic commercially, nor does it constitute a legal obligation so to do.

43. Accordingly, I reject this argument also as constituting a reason to take the case to trial (albeit in this instance any such trial would be confined to the issue of quantum only).

(iv) Misrepresentation

44. This line of argument appeared first in the skeleton argument for this application. It is based on the proposition that whether or not the pressure on Mr Tsui amounted to duress, he signed the first guarantee in June 1997 upon the representation by Mr Kwong that ING BFP would allow the unwinding of the Options, and that little loss would be incurred. And that, as Mr Kwong was the only intermediary between Mr Tsui and ING BFP, and that there was no correspondence, "it is possible to infer from the circumstances that ING BFP had allowed Mr Tsui to think that it would unwind the Options" and that, as ING BFP had communicated through Mr Kwong, "it is possible to infer from the circumstances that Mr Kwong had acted as its agent".

45. On the evidence ING BFP appears not to have appreciated any such alleged status on the part of Mr Kwong, which argument, as I have indicated, emerged but at the eleventh hour, and if I may say so, clearly smacks of 'reaching'. The fact is that Mr Tsui did not purport to rescind either the first guarantee or the present one, and I do not accept Mr Neoh's proposition that, as the result of Mr Kwong's misrepresentation on behalf of the Plaintiff, "he would have a cause of action in damages against ING BFP which he can set off against the amounts which he owes (if any) in the subsequent guarantee of November 1997".

46. In the circumstances, therefore, I accord no significance or weight to this argument either.

Order

47. At the end of the day, and notwithstanding the considerable amounts of paper and the forensic expertise which have been brought to bear on this case, I have been driven to the conclusion that no issue has been raised by the Defendant which would justify this case in being permitted to proceed further. In my view, the defences raised by the Defendant are fanciful and constitute no more than a smoke screen which fails to withstand detailed scrutiny in terms of establishing a real or bona fide defence such that the case should be permitted to proceed to trial.

48. Accordingly, my Order on this application is that there is to be judgment for the Plaintiff against the Defendant in the sum claimed, namely HK$69,579,489.23, with interest to accrue on such sum at the judgment rate from time to time prevailing until payment.

49. I make an order nisi that the costs of the action, including the costs of this application, are to be to the Plaintiff, to be taxed if not agreed.

50. In so far as such be necessary, I give liberty to apply as to the form of the Order and as to any matter arising as the result of this judgment.

51. I thank Counsel for their assistance.