BILLION SILVER DEVELOPMENT LTD. v. ALL WIDE INVESTMENTS LTD.

CACV 258/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 258 OF 1999

(ON APPEAL FROM HCA 5046 OF 1999)

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J U D G M E N T

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Mayo, J.A.:

1. This is an appeal from the judgment of Deputy Judge Longley on the Plaintiff's Order 14 application. The Defendant appeals against the condition imposed by the Judge that the Defendant must pay into court US$2,439,763.88 being the amount of claim as a condition to prosecuting its defence. The basis for imposing this condition was that the Judge considered the defence being put forward by the Defendant as being "shadowy".

2. The Plaintiff is pursuing four causes of action against the Defendant.

1. Procuring a breach of duty by an employee of the Plaintiff;

2. Unlawful interference with the economic interests of the Plaintiff;

3. A Constructive Trust; and

4. Return of money under an Agreement dated 28th September 1992.

3. The Plaintiff only placed reliance on the fourth cause of action for the purposes of the Order 14 application.

4. However so far as the claim on the agreement is concerned the Plaintiff proceeded upon the basis that there had clearly been a duty imposed upon the Defendant to pay the amount referred to in the agreement less the amount it admitted it had already been paid by the Defendant and that they were accordingly entitled to judgment for this amount. On the other hand it was the Defendant's contention that it was not open to the Plaintiff to proceed in this way and just select one piece of evidence from all of the surrounding material. The document in question is in this form:

"I.O.U.

To: Billion Silver Development Limited

Our company, All Wide Investments Limited, now borrows from your company five million US dollars (USD 5,000,000.00).

Our company hereby declares and guarantees as follows:

1. Our company declares that the said sum was temporarily lent to our company by your company for use due to moral principles and did not carry the meaning of a loan.

2. Our company guarantees that, six months after the lending of the sum, that is before 28th March 1993, to return the whole sum mentioned above to your company unconditionally, and further guarantees that the said sum shall be returned in the manner required by your company. Our company further declares that our company's responsibility to repay the said sum shall not be affected by any agreements or documents which our company signed with anyone or any enterprise; nor shall this be altered by any change in the financial situation of our company.

3. Our company guarantees that the said sum shall be used lawfully. If any loss or liabilities arises out of the improper use of the said sum, it shall not be related to your company, also will not diminish and exempt our company from the obligation to repay the said sum.

4. Our company agrees that except by a written resolution signed by any two directors of your company, this I.O.U. should not be amended and any other conditions should not be waived either.

5. Our company shall on demand immediately settle or repay all expenses borne by your company and related to the implementation and updating of all rights of your company under this loan document.

6. Our company agrees that your company can compel our company to observe the rights of your company under this I.O.U. in the court of any country or place.

	Borrower
	(Chop of All Wide Investments Limited)
(sg) Wong Yam Chor	(sd) illegible
	28th September 1992 in Hong Kong"

5. The defence do not deny that the moneys referred to in the I.O.U. were paid to Messrs Pang, Wan & Choi solicitors and that the I.O.U was signed by Mr. Vong Wun-man a director of the Defendant's company and that the Defendant's chop had been used. They also do not claim that Mr. Vong was not authorised to sign the document. Nor do they advance a defence of non est factum.

6. What they do say is the moneys were not a loan to the Plaintiff. They say that the Defendant was simply acting as intermediary for the transfer of moneys to Century Liaison Limited a company which was being used as the investment vehicle for a joint venture to develop a shopping arcade at Sham Shui Po. The Plaintiff was one of the joint venture partners. The I.O.U. was alleged to be a sham to conceal the fact that the Plaintiff was investing in an overseas property project contrary to PRC Banking regulations.

7. The Plaintiff is placed in a somewhat invidious position in prosecuting these claims. Mr. Wu Zili who was the managing director of the Plaintiff at the relevant time has not sworn an affidavit in support of the Plaintiff's claim. Indeed it would appear that he is no longer connected with the Plaintiff. The present managing director Mr. Zhong Shao-hui affirmed the affirmation in support of the claims. He frankly admits that he has no knowledge of the background of the events relating to the agreement in question. However Mr. Wong Yam-chor who was general manager of the Bank of China, Guangzhou and the superior of Mr. Wu shortly prior to the agreement being concluded and who appears to have been through his company Hoi On Holdings Ltd., a participant in the joint venture referred to, did affirm a lengthy affirmation giving detailed particulars of the background to the transaction.

8. Although he does not specifically state that the agreement was a sham it is apparent from what he does say that the agreement in no way accurately represents what was agreed between the parties. What is of significance is that the detailed allegations which have been made by Mr. Wong have not been rebutted by evidence from the Plaintiff.

9. Perhaps most significant of all Mr. Wong referred to four documents which were sent to the Plaintiff giving details of the joint venture two of which arguably indicate that the disposal of the proceeds of sale of the shopping centre were to be divided proportionately to the amount invested by the participants. It is evident that the Plaintiff did not protest against this or claim that the moneys which had been advanced were advanced as a loan.

10. All of this lends considerable support to the contentions being advanced by the Defendant.

11. The Judge was mindful of these matters. Indeed in his judgment he attempts to deal very shortly with the shortcomings and deficiencies of the cases being advanced by both sides.

12. He came to the conclusion that the defence being run by the defendant was shadowy. It would appear that he was also not entirely satisfied with the Plaintiff's case. He said this at p.7 of his judgment.

"SIR JOHN has skilfully put forward a number of what he alleges are weaknesses in the plaintiff's case, which he says indicate that there are triable issues in this case. Amongst these are the suggestion that the plaintiff might have been trying to disguise its participation in real property investment in Hong Kong, the peculiar nature of the agreement itself, the fact that others who could speak to these matters have not done so, the fact that three interest payments have been made out not by the defendant company, but Century Liaison, and the staleness of the loan before repayments were sought.

I have carefully considered all the matters raised by the defence. I intend no disrespect to Sir John when I say that his arguments may sow some seeds of suspicion, but they do no more than that. I am satisfied from the arguments of Mr CHANG that there are reasonable explanations for a number of these matters, and that the others remain in the realm of suspicion and speculation."

13. While it is true that the Judge was exercising a discretion reposed in him it would appear that he has fallen into error.

14. If he had suspicions concerning the Plaintiff's case, this was a matter which he could not leave unresolved. The correct course for him to adopt was to give unconditional leave to defend so that all of these matters could be ventilated at the trial. The authority for this proposition is Extraktionstechnik Gesellschaft Für Anlagenbau MbH v. Oskar Vol. 128 Solicitors' Journal 15 June 1984.

"WATKINS LJ, giving the judgment of the court, said that he thought Webster J's approach had been wrong. To try to expose a defendant's vulnerability to the imposition of a condition by artificially regarding a plaintiff as though he were a defendant served no useful purpose and was capable of being misleading. The same applied to tentative assessments of respective chances of success, and relative strengths of good or bad faith, in a case where both sides had a great deal of explanation to make of apparently questionable conduct, including the swearing of affidavits. It was proper to look first at the defence in isolation, to see whether there was lack of good faith or whether the defence was a sham. But if one of those flaws in the defence was found, the decision as to the imposition of a condition could not properly be made before an examination was also undertaken of the plaintiff's case, having regard to any attack made on it by affidavit. If that examination aroused suspicions that the claim might be made in bad faith, that there was something shadowy about it, or that it might be tainted with illegality, no measuring, however approximate, of the respective degrees of possible bad faith should be made, nor should any opinion be expressed, however tentative, as to which case appeared to be stronger at that time. The present case was a classic instance in which, in principle, the court should give unconditional leave to defend. There were features of both claim and defence, as so far explained, which were disturbing because they bore the appearance of falsity and disreputable business dealings."

15. It was not a proper exercise of the discretion to undertake weighing exercise of the nature undertaken by the Judge. In my view this appeal should be allowed.

Ribeiro, J.:

16. I respectfully agree.

17. The Plaintiff has elected to seek summary judgment in respect of one of four alternative causes of action pleaded.

18. It sues for what it says is the outstanding balance of some US$2.5m. on a loan agreement or, as it has been called, an "IOU" dated 28th September 1992, between itself and the Defendant. The original loan is said to have been in the sum of US$5m.

19. The Plaintiff says its case is simple. The document was signed with the Defendant's company seal affixed, the money was duly advanced by a cashier order and, on the terms of the document, the Defendant undertook an unconditional obligation to repay the sum advanced within 6 months. It says that it is wholly irrelevant what, if any, use the Defendant may have put to the money, in particular, whether it used it for investment in any particular project.

20. The Defendant's defence is that the whole of this arrangement was, to the knowledge of both parties, a sham and that the obligations set out in the loan agreement or IOU cannot be taken at face value. That document was entered into in order to conceal from banking regulators on the mainland, the unauthorized investment in Hong Kong real estate by certain sub-branches of the Bank of China, through the Plaintiff.

21. The genuine agreement, so the Defendant alleges, was for the Plaintiff to participate as an investor, with other investors, in the acquisition and eventual sale of a shopping complex in Sham Shui Po.

22. The money purportedly advanced to the Defendant was in fact intended by all concerned to be invested, via a company called Century Liaison Limited, in that project. The Plaintiff, like the other investors, was to fund the project by making the money available to Century Liaison as a long-term loan and, on completion of the project was to participate in a share of the proceeds of sale.

23. The Defendant says that the project went ahead and in fact resulted in a loss. It alleges that the Plaintiff, along with the other investors received a distribution of the proceeds realised on sale of the property and that the amount now claimed as the alleged balance of the loan represents no more than the deficit suffered by the Plaintiff on the project.

24. The judge held that the defence put forward was shadowy. This is certainly understandable when one focuses on the evidence as to the execution of the loan agreement and what he considered to be an unsatisfactory account of the circumstances in which it was signed on the Defendant's behalf.

25. The judge also acknowledged that, in developing his arguments as to weaknesses in the Plaintiff's case, Sir John Swaine S.C. (appearing with Miss Linda Chan for the Defendant) may have sown what he called "seeds of suspicion" in relation to the Plaintiff's case. The judge held that some of these matters could be reasonably explained away but that others which he did not identify, remained "in the realm of suspicion and speculation". However, this did not save the Defendant from having terms imposed on it as a condition of allowing it to defend the case because the judge was not persuaded that such doubts raised the defence beyond the category of "shadowy".

26. With respect, this was not the correct approach to the exercise of the judge's discretion. The importance of there being doubts or suspicion as to the validity of the Plaintiff's case is that such doubts detract from the Plaintiff's right to summary judgement. It was not to the point to dismiss them on the basis that they did not improve the quality of the defence and "raise it" beyond the category of "shadowy". If possibly genuine weaknesses were exposed in the Plaintiff's case, this casts doubt on the Plaintiff's right to invoke the summary procedure in the first place.

27. In my judgment, the judge should have adopted the approach applied by the English Court of Appeal in Extraktionstechnik Gesellschaft fur Anlagenbau mbH v Oskar (1984) 128 S.J. 417. As appears from a Lexis transcript of the judgment made available to us (although, it would seem, not to the judge), Watkins LJ., who gave the judgment of the court stated (after reviewing the evidence) as follows: -

"We have said enough to demonstrate the intricate and, in part, as the hearing of this action may very well reveal, unsavory nature of this litigation. It is, of course, impossible to tell now where the truth lies and how much, if any, of the activity of both Plaintiffs and Defendant is tainted with illegality. What is, in our judgment, abundantly clear is that justice cannot possibly be said to be done until the acute issues which have been raised upon the affidavits have been resolved in a contested action. There appears to be ammunition available to both parties capable of inflicting serious wounds. We would not presume to be capable of assessing the chance of success for one as opposed to the other. Nor is it possible to predict what effect one kind of illegality or another, if established, will have upon the Plaintiffs or Defendant or both.

If those comments are justified, can the imposition of a condition upon the Defendant's right to defend possibly be maintained? We most certainly would not impose a condition upon the Defendant. But that of itself is insufficient reason for declaring that the exercise of their discretion successively by Master Waldman and Webster J. was erroneous."

28. His Lordship pointed out that Webster J. had framed the issue as one of principle, namely: "as to whether leave to defend which would otherwise be made conditional should still be made conditional when there are doubts about the Plaintiff's case".

29. The principle as decided by the English Court of Appeal appears as follows: -

"We agree that it is proper to look first at the defence in isolation, in order to see whether there is a lack of good faith or the defence is a sham and so forth, in the course of considering whether the Defendant can discharge the burden of establishing that he should have leave to defend.

But the decision as to the imposition of a condition, if one or more of those flaws in the defence is found to exist, cannot, in our view, properly be made before an examination is also undertaken of the Plaintiffs' case, having regard to any attack that has been made on affidavit upon it. If that examination arouses suspicions that the claim may be made in bad faith or there is something shadowy about it or, worse, that it may be tainted with illegality, no measuring, however approximate, of the respective degrees of possible bad faith should be made and no opinion expressed, however tentative, as to which case appears to be the stronger at that time.

That in our judgment is a classic instance in which in principle the court should give unconditional leave to defend.

We do (sic) regard this case. On any view of it, including Webster J.'s other observations to which we have not referred, on charge and counter-charge, we fail to see how it can rightly be said other than that there are features of both claim and defence, as they are so far explained, which are disturbing, because they bear the appearance of falsity and disreputable business dealings. It would not be seemly in this judgment to be more expansive than that about those features."

30. In my judgment, while the judge was quite entitled to view as unsatisfactory certain features of the Defendant's defence, the evidence certainly justified his perception that there remain grounds for suspicion in relation to the Plaintiff's case.

31. Such evidence includes a series of documents and other materials, some of which are uncontested, which may tend to support the Defendant's contention that the loan agreement was indeed a sham and that the Plaintiff had in fact participated in the Sham Shui Po project with Century Liaison and others as an investor and not as a lender, looking to Century Liaison and not the Defendant as the party owing payment obligations to the Plaintiff.

32. In the light of the necessity for the matter to proceed to trial (unless settled), it is undesirable that I should go into any detail as to such outstanding issues. Suffice it to say that the relevant evidence includes evidence (i) of Century Liaison (as opposed to the Defendant) making payments characterised as interest and capital payments to the Plaintiff without demur on the Plaintiff's part; (ii) various communications, including financial reports relating to the project, describing the Plaintiff as an investor alongside other investors, and received without exception being taken by the Plaintiff to such description; (iii) the endorsement on one such communication by a highly-placed bank official apparently acknowledging that the sum received from the Plaintiff was in the nature of a capital distribution; and (iv) the peculiar and apparently uncommercial nature of the terms of the loan agreement itself.

33. Sir John furthermore submits that the judge misapprehended the significance of certain important documents and has also drawn attention to the absence of evidence from persons associated with the Plaintiff, mentioned in some of the relevant documents, who might have been expected to refute the Defendant's allegations if they were without substance. He submits, in my view, with some force, that this is an additional source of suspicion as to the viability of the Plaintiff's claim.

34. Mr. Benjamin Yu SC (appearing with Mr. Johnny Mok on behalf of the Plaintiff) invites the court to reject the defence of "sham" on the grounds that no affirmant filing evidence on behalf of the Defendants has said in terms that the loan agreement sued upon is a sham.

35. In my judgment, while it is true that none of the affirmants expressly use the word "sham", that defence arises in the substance of their evidence, which duly condescends to particulars.

36. It is therefore my view that the present case is one in which the evidence discloses difficulties to be faced by both sides at the trial. In the Oskar case, after listening to detailed submissions from counsel on both sides, Watkins LJ. commented that

"they succeeded in persuading us that this action, if and when heard, is likely to produce a hard swearing match, which discovery is likely further to enliven."

He also described the case as one in which "both sides have a great deal of explanation to make of apparently questionable conduct at relevant times ...."

37. In my view, these descriptions are apt to describe the position arising in the present case. I have therefore come to the conclusion that the appeal must be allowed and that the order for conditional leave to defend must be set aside and that the Defendant must have unconditional leave to defend.

Mayo, J.A.:

38. The appeal is accordingly allowed and the Defendant has unconditional leave to defend. The Defendant will have the costs of the appeal and costs in the court below be costs in the cause.