TIANJIN JINFU EXPRESSWAY CO LTD v. LUCKY MONEY LTD AND OTHERS

CACV 266/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 266 OF 2007

(ON APPEAL FROM HCA NO. 447 OF 2006)

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JUDGMENT

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Hon Le Pichon JA:

1.  This is an appeal from an order of Waung J dated 30 July 2007 made on the plaintiff’s application for summary judgment against the defendants for the repayment of a loan.  The judge granted summary judgment and ordered the defendants to pay the plaintiff the sum of RMB 177,961,986.24 made up of the balance of the loan as at 19 March 2001 of RMB 176,436,334.34 (“the principal sum”) and interest on the principal sum accrued up to 31 December 2005 of RMB 1,525,651.90.  The defendants were also ordered to pay interest on the principal sum at the rate of 2% above prime from 1 January 2006 to the date of the judgment and thereafter at judgment rate until payment.  At the conclusion of the appeal judgment was reserved which we now give.

Background

2.  The plaintiff Tianjin Jinfu Expressway Company Ltd (“the plaintiff”) is one of three joint venture companies formed in May 1997 for the construction and operation of three sections of the Jinbao Expressway.  Each of the joint venture companies consisted of the “Chinese side”, being the Tianjin Highway Development Corporation having a 40% interest in the joint venture and the “Hong Kong/foreign side”, being one of the three defendants (collectively “the Lucky Companies”) having the remaining 60% interest.

3.  On 6 January 1998, the three joint venture companies signed an agreement appointing the plaintiff to represent all three joint venture companies.  On the same day, the Lucky Companies gave Ho Kai Cheong (“Mr Ho”) a general power of attorney to act for them.  Mr Ho was a director of those companies and Mr Ho and members of his family through two BVI companies known as “Golden Tree” and “South Beach” were the majority shareholders.  The minutes of a board meeting of the plaintiff held on 25 February 1998 recorded that the directors of the Hong Kong side unanimously elected Mr Ho as the fully authorised representative of the Hong Kong side and that all decisions made by him in the future would represent the “intents of all the directors of the Hong Kong side”.

4.  When the joint ventures were formed, Kwong Ian (Hong Kong) Construction and Real Estate Development Company Ltd (“Kwong Ian”) was not a shareholder of the Lucky Companies.  The original shareholders of the Lucky Companies who found themselves short of funds for the project invited Kwong Ian to join the project in or around February/March 1998.  The arrangement involved Kwong Ian acquiring 43.33% of the shares in the Lucky Companies, the acquisition of a new company by the name of Inter Ease International (Highways) Ltd (“Inter Ease”) and a loan from Kwong Ian to Inter Ease of RMB 258 million (“the Inter Ease loan”) for injection into the project.  Thereafter, for all practical purposes, the two major shareholders of the Lucky Companies were Mr Ho and Kwong Ian.

5.  Two of the toll stations on the Expressway had opened by mid 2000 and toll fees were being generated although certain construction work remained outstanding.  According to Kwong Ian, by the end of 2000, most of the expenditure for the project had been spent and paid but according to the evidence filed by Mr Ma who was the general manager of the plaintiff for the period between February 1998 and September 2003, construction fees of some RMB 225 million remained to be paid as at the end of 2000 although they were not then due and payable.

6.  Be that as it may, on 17 November 2000, the plaintiff obtained a loan of RMB 500 million from the Citic Bank of which RMB 450 million was drawn down on 20 November 2000 as the first instalment.  According to the terms of the loan agreement, the loan was secured on a fixed deposit of RMB 100 million and the right to receive toll fees from the Expressway.

7.  There are minutes of a board meeting of the plaintiff dated 1 March 2001 recording that:

“   Jin Fu has borrowed RMB 450 million from CITIC Bank Guangzhou branch, including a fixed-term deposit of RMB 100 million.  The bank loan shall, in principle, be used towards expenses of the construction project.

At present, according to the situation regarding the joint venture companies’ progress in paying for construction expenses, RMB 280 million of the loan may be temporarily used by the Chinese Side and the Foreign Side (Chinese Side: Tianjin Highway Development Corporation RMB 30 million; Foreign Side: Hong Kong Lucky Money Limited, Lucky Emotion Limited, Lucky Extend Limited, RMB 250 million).  The Chinese and the Foreign Side shall return the same to the joint venture company(ies) according to the progress in paying for the construction expenses.

1 March 2001”

All seven directors of the plaintiff including the four directors of the Hong Kong/foreign side signed the resolution.  The directors of the Hong Kong side included Mr Ho, Chen Ru Gui (“Mr Chen”) and Shi Yuan Bing (“Madam Shi”).  Mr Chen and Madam Shi were also directors of Kwong Ian and presumably became directors of the plaintiff as part of the arrangement mentioned in § 4 above.  They were certainly directors of the plaintiff by the time of the board meeting of 25 February 1998 referred to in § 3 above.  The three directors nominated by the Chinese side included Mr Ma who had made the affirmation in support of the plaintiff’s application referred to in § 5 above.

8.  It is common ground that on 19 March 2001, a sum of RMB 250 million was withdrawn from the plaintiff’s account with Citic and paid at the direction of Kwong Ian to Guangzhou Chung Kin Engineering Company (“GZCK”).  GZCK as well as Kwong Ian are subsidiaries of Guangzhou Municipal Construction Group Company Ltd.

9.  More or less on an annual basis as from December 2001, the plaintiff served demands on the defendants for repayment of the loan in general terms without stating a precise amount until the letter of 10 February 2006 from its solicitors David Liu & Partners demanding payment of approximately RMB 174.8 million.  On 1 March 2006 these proceedings to recover the principal sum (being the balance of the loan of RMB 250 million) were commenced.

10.  Meanwhile, on 8 February 2006 which was prior to the commencement of these proceedings, Kwong Ian commenced three derivative actions against Mr Ho and others in relation to three Transfer Agreements dated 30 June 2004 whereby each of the Lucky Companies transferred its 60% shareholding in the relevant joint venture to Glorious Sun.  Mr Ho was the signatory for both parties to each of the Transfer Agreements.  Kwong Ian also obtained an ex parte injunction prohibiting the transfers.

11.  On 10 March 2006, Mr Ho on behalf of the Lucky Companies acknowledged the debt.  Shortly thereafter, Kwong Ian obtained leave from Kwan J pursuant to section 168BC of the Companies Ordinance to intervene as a minority shareholder of the Lucky Companies to defend the claim made by the plaintiff.

12.  On the summary judgment application, the judge held in favour of the plaintiff.  Kwong Ian then obtained leave from Kwan J to appeal on behalf of the Lucky Companies to this court.

This appeal

13.  The judge considered that the board minutes of 1 March 2001 identified four key factors namely, the amount advanced of RMB 250 million, the identity of the borrower i.e. the Lucky Companies, the timing of the advance which was March 2001 and most importantly, the advance was expressed as a loan to the Lucky Companies.  He held that no arguable defence had been put forward.  Mr Poon SC who appeared for Kwong Ian submitted that the judge erred in that on the evidence before the court, he should have identified three triable issues, namely:

    (1)   as to whether the loan was repayable since it was made expressly for the repayment of the Inter Ease loan;

    (2)   as to whether the liabilities of the Lucky Companies to the plaintiff had been transferred by novation to Glorious Sun with the consent of the plaintiff; and

    (3)   for ‘some other reason’ under order 14 rule 3(1).

Repayment of the Inter Ease loan

14.  The first point raised by Mr Poon SC has to be put in its proper context.  Two days prior to the withdrawal of the sum of RMB 250 million from the plaintiff’s account, on 17 March 2001, Inter Ease, Kwong Ian, Golden Tree, South Beach and Mr Ho entered into a Debt Restructuring Agreement.  The preamble stated that Inter Ease through the Lucky Companies (collectively the “Foreign Side Companies”) together with the Chinese Side Company had incorporated three project companies to invest in the project of the Jinbao Expressway.  It was further recited that:

By the Debt Restructuring Agreement, the parties to it agreed that the agreements signed between them before the date of the Debt Restructuring Agreement including the personal guarantees executed by Mr Ho in relation to the Inter Ease loan (referred to in paragraph 2 (1) of the preamble) should all be cancelled and void with immediate effect.  Clauses 2 provided as follows:

“[Kwong Ian, Golden Tree and South Beach] through [Golden Tree’s] authorised representative [Mr Ho], arranged for finance from a bank by pledging the total fee income of the Project.  Of [such finance] the amount received [or to be received] by the Foreign Side Companies should be RMB 350 million.  After deducting the RMB 60 million odd injected into the project company, the remaining RMB 250 million shall be used to repay the loan mentioned in paragraph 2 (1) of the Preambles and interest.”

Clause 8 required Inter Ease, after receiving the drawdown receipt of RMB 250 million, to apply the same within five days to repay the Inter Ease loan.

15.  Mr Poon SC referred to § 37 of the affirmation of Lao Yuan Han (“Mr Lao”) (the manager and a director of Kwong Ian and also a director of each of the Lucky Companies until 2 August 2006) filed on behalf of Kwong Ian, which, after referring to the Citic loan, the drawdown of RMB 450 million of which RMB 100 million had to remain on cash deposit as security, stated as follows:

“ …The remaining RMB 350 million was available to the JV Companies at their discretion.  Pursuant to the joint venture agreements between the Chinese Side and the Lucky Companies entered in May 1997 … the Lucky Companies were entitled to use RMB 350 million (and the Chinese Side was entitled to use the remaining RMB 35 million).  RMB 65 million of the said sum of RMB 315 million was paid into the JV Companies as capital injection and the remaining RMB 250 million (ie the 2001 Transfer) was used towards the repayment of the Inter Ease Loan.”

Mr Lao asserted (at § 38) that the payment of RMB 250 million from the plaintiff to GZCK on 19 March 2001 (which Mr Lao referred to as “the 2001 Transfer” in his affirmation) “in fact formed part of a debt-restructuring arrangement”.  Then in § 39 he further asserted that the Debt Restructuring Agreement and the 2001 Transfer “were accepted by all shareholders of the JV Companies, including the Chinese Side”.  The reason he proffered was that the Chinese side could obtain some RMB 35 million as a result of the “debt-restructuring arrangement”.  I pause here to observe that there would appear to be some confusion in the explanation proferred: whatever benefit the Chinese side stood to derive from the Citic loan would only have been a consequence of obtaining the Citic loan and not of the debt restructuring arrangement.

16.  It was said that as the Chinese side well knew, the RMB 250 million to be made available to the Lucky Companies out of the Citic loan was to be used to repay the Inter Ease loan.  That is all very well but it is unclear how that could affect the repayability of the loan.  As I see it, the Achilles’ heel of what is said to be the first triable issue is that it was not the plaintiff’s obligation to repay the Inter Ease loan.  In the course of the appeal hearing, Mr Poon SC, in response to a question from the court accepted that the Inter Ease loan paid to the plaintiff had nothing to do with the plaintiff in the sense that it was not a loan made to the plaintiff; rather, he accepted that it formed part of the Hong Kong side’s contribution to the cost of the project and had nothing to do with the Chinese side.

17.  The Inter Ease loan document was never part of the evidence before the court.  Whilst § 35 of Mr Lao’s affirmation could be read as indirectly suggesting that the plaintiff was the borrower of the Inter Ease loan, as noted earlier, that was clearly disavowed by Mr Poon at the hearing.  Moreover, Mr Lao was not on the plaintiff’s board and whatever was stated said in § 35 was not an unambiguous statement and did not purport to be derived from either personal knowledge or hearsay.

18.  The Debt Restructuring Agreement was an agreement strictly among members of the Hong Kong/foreign side that altered their rights and obligations inter se and to which the Chinese side was not a party.  How the Hong Kong/foreign side chose to restructure their debts was entirely a matter for them: it was not the concern of the Chinese side.  For my part, the fact that the Chinese side was aware of the Hong Kong side’s intention to apply the RMB 250 million available for its use from the Citic loan to discharge the Inter Ease loan does not take matters further and certainly cannot alter the fact that the plaintiff had no obligation to discharge the Inter Ease loan and the RMB 250 million advanced on 19 March 2001 was a loan from the plaintiff which remained repayable.

19.  It is clear that the Citic loan obtained by the plaintiff had to be repaid by the plaintiff and that the Citic loan was secured by the plaintiff pledging its right to receive toll fees.  In the course of argument, Mr Poon SC introduced what appeared to be a new argument by suggesting that the Citic loan was regarded by the parties to the joint venture as a distribution of dividends and should be treated as such.  That the Citic loan was shared between the Chinese side in the Hong Kong side in proportions that might have corresponded to their dividend sharing rights cannot convert what in truth was a bank loan into accrued profits available for distribution.  One cannot ignore the fact that the Citic loan was a real liability that the plaintiff had to discharge in accordance with its terms.  Quite apart from the fact that the notion of a dividend distribution was a new point, there is no evidence, such as the requisite board resolution, to support it.

20.  I agree with the judge that the board minutes of 1 March 2001 are clear.  As to when the board meeting of the plaintiff actually took place, there is the evidence of Mr Ma who was one of the signatories to the board minutes that the meeting did take place on 1 March 2001 but that the minutes were not signed until well after 19 March 2001.  He exhibited an earlier version of the resolution signed by some but not all of the directors of the plaintiff which bore a facsimile transmission mark showing “18- JUN-01 10: 30”.  It would follow that the version containing all seven signatures must have only come into existence after that date.  I mention this because neither Madam Shi nor Mr Chen who were Kwong Ian’s nominees on the plaintiff’s board at that time filed any evidence although there is hearsay evidence from them in § 72 of Mr Lao’s affirmation.  That hearsay evidence sought to explain away that existence of the board resolution: that it was created solely for the purpose of satisfying Citic who required “some sort of authorisation documents in the name of the plaintiff” before permitting the loan to be drawn down.  Given that it is not disputed that the funds were drawn down on 19 March 2001 and given the evidence (which was not challenged) that the board resolution with seven signatures did not come into existence until well after that date, Mr Lao’s explanation for the board resolution does not begin to get off the ground.

21.  For my part, I cannot see that any triable issue arises from the repayment of the Inter Ease loan.

Transfer of liabilities

22.  By way of background, it should be mentioned that Madam Shi and Mr Chen the nominated directors of Kwong Ian on the board of the plaintiff were removed as such directors on 1 February 2004.

23.  On 30 June 2004, more than three years after the RMB 250 million advance was made, Lucky Money and Glorious Sun entered into a Transfer Agreement.  Mr Ho executed that agreement on behalf of each of those parties.  The Transfer Agreement recited that Lucky Money agreed to transfer to Glorious Sun “it’s 60% shareholding in [the plaintiff]”.  For present purposes, the relevant provisions are the following:

“Clause 1 The Condition of the Share Transfer

[Lucky Money] agrees to transfer its 60% shareholding in [the plaintiff] to Glorious Sun for no consideration.

Clause 2 Warranties of Rights

(1) …

(2) After Lucky Money has transferred its shares, all rights which it has originally enjoyed and all liabilities which it shall assume shall, together with the share transfer, be enjoyed and assumed by Glorious Sun.

....

Clause 6 Condition Precedent and Date for the taking effect of this Agreement

This Agreement shall become effective once it is approved by the Board of Directors of [the plaintiff] and signed (and chopped) by the corporate representatives of Lucky Money and Glorious Sun.”

24.  The other two Lucky Companies entered into similar agreements with Glorious Sun.  I should add that Mr Poon SC made the point that the English translation of clause 2(2) was infelicitous and that the phrase “all liabilities which it shall assume” ought to read “all liabilities which it ought to assume”.  Mr Yu SC for his part did not consider that it made any difference to the meaning.

25.  There is a board resolution of the plaintiff dated 25 June 2004 to the following effect:

“Further to a letter issued by [Lucky Money] entitled “Matters concerning the transfer of the Foreign Side’s shares”, and after discussion by the board of directors of [the plaintiff], it has been resolved as follows:

It is approved that [Lucky Money] shall have the Foreign Side’s 60% shareholding in [the plaintiff] in its name, registered in the name of [Glorious Sun] by way of an internal transfer for no consideration.”

26.  Mr Poon SC submitted that it is at least arguable that clause 2(2) of the Transfer Agreement transferred not only the rights but also the liabilities of Lucky Money in the plaintiff and the board resolution approving the transfer was sufficient consent on the part of the plaintiff to bring about a novation which did not require any formal agreement.  I was initially attracted to the argument but on closer consideration of the documentation, I do not consider that any triable issue arises.

27.  So far as the Transfer Agreement is concerned, the recital and clause 1 are consistent and, notably, made no mention of any assumption of liabilities by Glorious Sun.  Mr Yu SC submitted that it is clear from clause 1 that the subject matter of the transfer was the 60% shareholding in the plaintiff and nothing else.  As to clause 2(2), Mr Yu SC submitted that there is a material difference between liability as a shareholder and liability for a loan taken out by a shareholder.  They are entirely different in nature. I am inclined to agree.  So even if what was transferred did extend to liabilities, it would be limited to liabilities qua shareholder and would not include a liability for a loan taken out by a shareholder.

28.  In any event, a transfer of liabilities would require the consent of the creditor i.e. the plaintiff.  As the plaintiff was not a party to the Transfer Agreement, the question is whether it is arguable that the board resolution made five days earlier was sufficient consent.

29.  The minutes recording the board resolution referred to a “letter” from Lucky Money “concerning the transfer of the Foreign Side’s shares” and not to any “Transfer Agreement”.  Pausing there, I would observe that there was a total absence of any mention of any transfer of liabilities.  The resolution itself referred to the transfer of the 60% shareholding but, again, was wholly silent as to any transfer of liabilities.  In those circumstances, I do not regard it as remotely arguable that there was any approval of a transfer of liabilities to Glorious Sun.

30.  Mr Poon SC sought to place reliance on recital 3 to the Revised and Restated Joint Venture Agreement dated the 8 July 2004 as an acknowledgement and confirmation by the plaintiff of the transfer to Glorious Sun:

“3.

Hong Kong Lucky Money Ltd [intends] to transfer all of its 60% shareholding in Tianjin Jinfu Expressway Co. Ltd. to Glorious Sun (Highway Development) Limited, with the shareholder’s rights, obligations and all loans and debts previously of Lucky Money Limited to be succeeded by Glorious Sun (Highway Developments) Limited.  Accordingly, Luck (sic) Money Limited and Glorious Sun (Highway Development) Limited signed the “Transfer Agreement” on the 30th of June 2004.”

31.  I do not consider the recital to be of much assistance.  It is no more than a recital as opposed to being the operative part of the agreement.  Plainly the Revised Joint Venture Agreement could not have had the effect of broadening the scope of the subject matter transferred since Lucky Money (the transferor) was not even a party to it.  For that, one is thrown back onto the Transfer Agreement itself.

32.  For these reasons, I consider that Kwong Ian on behalf of the Lucky Companies has failed to show that the transfer of liabilities is a triable issue.

‘Some other reason’

33.  The thrust of Mr Poon SC’s submissions was that there should be a trial because if summary judgment were granted, the Lucky Companies would inevitably have to be wound up and that would have the effect of stifling Kwong Ian’s derivative actions.  But is that a sufficient reason for the purposes of Ord. 14, r.3 (1)?

34.  Mr Poon referred to the following passage from the judgment of Cairns LJ. in Bank Gemeinwirtschaft v London Garages Ltd [1971] 1 WLR 149 at 158 F-H and relied in particular on the part shown in italics below:

“Finally Mr. Finlay relies on the provision recently introduced into Ord. 14, r. 3 (1) whereby even if there is no issue to be tried the court may give leave to defend for some other reason.  The only reported case in which that provision has been applied is Miles v. Bull [1969] 1 Q.B. 258.  Megarry J. there gave leave to defend because the documents on which the claim was based had some appearance of a sham.  It is not difficult to think of other circumstances where it might be reasonable to give leave to defend although no defence was shown: for example, if the defendant was unable to get in touch with some material witness who might be able to provide him with material for a defence: or if the claim were of a highly complicated or technical nature which could only properly be understood if oral evidence were given; or if the plaintiff’s case tended to show that he had acted harshly and unconscionably and it was thought desirable that if he was to get judgment at all it should be in the full light of publicity.”

35.  Even if one were to assume, for present purposes, that Mr Ho had acted harshly and unconscionably vis-à-vis Kwong Ian, Mr Ho is not the plaintiff.  It may be that there are many issues between Kwong Ian and Mr Ho but they are not issues between the plaintiff and Kwong Ian/the Lucky Companies.  Although Mr Ho is involved in different capacities, being chairman of the plaintiff and the majority shareholder of the Lucky Companies, the plaintiff is a separate entity and cannot be regarded as Mr Ho’s alter ego in the context of the loan of RMB 250 million.

36.  The present action is concerned purely with that loan.  It is not concerned with the broader issues that underpin the derivative actions brought by Kwong Ian. If the loan is made out and no arguable defence has been shown, it is difficult to discern any valid reason for a trial.

37.  So far as it is suggested that granting summary judgment would effectively stifle the derivative actions, as Mr Yu SC pointed out, if the Lucky Companies were wound up, their liquidator as an officer of the court would be subject to the court’s directions and can be ordered to continue with the derivative actions.  Moreover, as Mr Ho well knows, there are provisions under the Companies Ordinance for a shareholder to take action in the name of the company.

38.  In my view, the ‘some other reason’ in Ord. 14, r.3 (1) has to be a reason that goes, or is relevant, to a defence to the summary judgment application.

Conclusion

39.  For the reasons stated, I would dismiss the appeal.

40.  So far as the judge’s order is concerned, I am troubled by its terms because the affirmation of Li Feng Ming made in support of the Ord. 14 summons stated as follows:

“2. …The plaintiff is demanding the 3 Defendants to repay an outstanding debt in the sum of RMB 176,436,334.34 in total.  That sum is the principal of the loan lent by the Plaintiff to the 3 Defendants.  Solely for the purpose of the present application, the Plaintiff is inviting this Court to enter into judgment solely in respect of the payment of the principal but not in respect of interest.”

41.  The judge appeared to have overlooked that the Ord. 14 application concerned the principal sum and nothing else.  For that reason, I do not consider that judgment should have been given for a sum greater than the principal sum which the judge appears to have done.  Given the basis upon which summary judgment was sought, as a matter of principle, it would not be right to award any interest other than interest on the principal sum from the date of judgment to the date of payment at the judgment rate.  Whether and if so what interest is payable from the date of the demand/writ to the date of judgment must be a matter that would have to go to trial should the plaintiff wish to pursue it.

42.  I would therefore vary the order made by the judge by substituting for the order made an order that the Lucky Companies do pay the plaintiff the sum of RMB 176,436,334.34 with interest from the date of judgment at the judgment rate until payment.  I would also propose that there be an order nisi of costs in favour of the plaintiff.

Hon Sakhrani J:

43.  I agree.