ZS CAPITAL FUND SPC AND OTHERS v. ASTOR ASSET MANAGEMENT 3 LTD AND ANOTHER

HCA 1157/2020

[2025] HKCFI 324

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1157 OF 2020

BETWEEN

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DECISION

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Background

1.  After this court allowed Ps’ application for interim payment by summons dated 7 June 2023 by the order dated 27 August 2024 (“the Order”), each side took out a summons on 10 September 2024.

2.  D1 applies for leave to appeal against the Order and a stay of execution pending appeal. Ps apply for a variation of the costs order nisi with a view to forthwith payment of their costs by D1.

3.  I heard both summonses together and I shall determine D1’s applications first. I shall refer to my decision dated 27 August 2024 (“the Decision”) for the background facts and, unless otherwise stated, I shall adopt the abbreviations used therein.

Leave to appeal

4.  The principles relating to applications for leave to appeal against an interlocutory judgment are well-settled.

(a) Under s.14AA of the High Court Ordinance (Cap.4), leave to appeal shall not be granted unless the court hearing the application for leave is satisfied that (a) the appeal has a reasonable prospect of success or (b) there is some other reason in the interests of justice why the appeal should be heard.

(b) For this purpose, a reasonable prospect of success means a prospect that is more than “fanciful”, without having to be “probable”: SMSE v KL [2009] 4 HKLRD 125 at §17 per Le Pichon JA.

5.  Attached to the summons of D1 is a Draft Notice of Appeal. In this document, three grounds of appeal are advanced. Firstly, D1 complains that I erred in failing to construe the ASOC as advancing the case that the Loan Proceeds were only secured by Collateralised Shares (“the corresponding portions of the Deposited Shares applying the LTV ratio of 65%) and their pleaded case does not support Ps’ purported right to redeem the entire Deposited Shares.

6.  Secondly, D1 complains that I erred in law and in fact in concluding that Ps’ claim of equity of redemption would very likely succeed after trial in the absence of all evidence relevant to the construction of the terms of SLAs including the contrary evidence of Shi Feng who is the director of P1 in his 1^st, 3^rd and 5^th affirmations.

7.  Thirdly, D1 claims that by reason of my erroneous holding that the Loan Proceeds were secured against the entire Deposited Shares, I erred in my conclusion that, at least in respect of the uncollateralized shares, D1’s exercise of its right of forfeiture under the SLAs would not constitute an arguable defence, or that Ps would obtain a substantial amount of damages.

8.  Mr Pun, together with Mr Lam, for D1, basically rehashed all his arguments at the hearing to advance the three grounds. I agree with Mr Yip, appearing for Ps with Mr Zhang, that I have sufficiently addressed his arguments in §§22 to 38 of the Decision.

9.  For the allegation of my erroneous construction of Ps’ pleadings of Ps, I believe that it is made out of a lack of a full and complete understanding of the pleaded cases of the parties.

10.  In my analysis of the parties’ pleadings, I referred to several material parts of the pleadings in the Decision. I shall not repeat them here. Suffice it to say, the case of Ps is D1 has wrongfully interfered with their right of redemption in respect of all the Deposited Shares including both the Collateralised Shares and the uncollateralised shares (§30 of the ASOC).

11.  D1 pleads that Ps’ rights over the Deposited Shares including their alleged proprietary interest, are as provided for in the Financing Documents (including the SLAs) and any such rights have been waived and/or released by Ps by reason of the occurrence of Events of Default (§17 of the Defence and Counterclaim). D1 claims to be entitled to forfeit the Deposited Shares (and not just the Collateralised Shares) and asks for a declaration to this effect.

12.  Mr Pun submits that I failed to address directly or at all the clear and unequivocal plea at §9 of the ASOC. I do not see that there is anything wrong with this plea and how it would affect the validity of Ps’ claim to any degree.

13.  I do not understand why Mr Pun now merely focuses on §9 and the deleted part of §10 of the ASOC and ignores all other parts of the ASOC. There is no substance in his submission that Ps have put forward two inconsistent cases and I have already given my explanation for my rejection of this submission in the Decision.

14.  Mr Pun submits that I did not provide any explanation as to why the scope of security interest is not limited to the corresponding portions of the Deposited Shares, i.e. the Collateralised Share, and my reasoning is plainly circular. Mr Pun submits that the pleaded case of D1 is not that the entire Deposited Shares are security for the Loan Proceeds.

15.  I believe my reasoning is sufficiently clear. It is noteworthy that the present contention of Mr Pun is in fact inconsistent with the pleaded case of D1 (§78 of the Defence and Counterclaim). D1 claims to be entitled to exercise its rights under the SLAs as the sole and absolute owner of the Deposited Shares, and not just the Collateralised Shares, to take immediate possession thereof.

16.  The correct position is that the entire Deposited Shares were deposited into Ps’ Security Accounts with D2 as security for the loan to be advanced under the SLAs (around US$34 million maximum). The Loan Proceeds in the sum of US$2,750,000 merely represented a small portion of the loan.

17.  D1 does not make any distinction between the uncollateralised shares and the Collateralised Shares in the Defence. D1 simply asserts his purported right to forfeit the Deposited Shares despite the fact that only the Loan Proceeds were advanced to Ps.

18.  Mr Pun submits that Ps’ right of redemption merely covered the Collateralised Shares since the Loan Proceeds were secured against such shares only. He suggests that D1’s forfeiture of the uncollateralised shares of the Deposited Shares could not be prevented by any right of redemption on the part of Ps. This is not the pleaded case of D1 to begin with.

19.  To my mind, any forfeiture of the Deposited Shares by D1 must be made in accordance with the SLAs. Under the SLAs, the Deposited Shares were provided as security. Undoubtedly, Ps had the equity of redemption over the entire Deposited Shares and not just the Collateralised Shares. Ps could surely avoid any forfeiture of the Deposited Shares by the exercise of their equitable right of redemption.

20.  Mr Pun submits again that on the authority of Ding Huirong v China Times Securities Limited and Anor. [2021] HKCA 419, D1 was entitled to forfeit the Deposited Shares in the absence of any equity of redemption. I have explained in the Decision (§39) why Ding Huirong, dealing with an agreement of a different nature, could not assist D1 and I shall not repeat my explanation here.

21.  Mr Pun is also unable to identify any other legal basis on which D1 could legitimately forfeit the uncollateralised shares; and any reason why such forfeiture is not subject to Ps’ right of redemption.

22.  All in all, I am not convinced that I have misinterpreted the parties’ pleaded cases or misunderstood the parties’ respective cases. The first ground has no merit.

23.  I am unable to accept the second ground too. In the first place, I do not find any inconsistencies within the pleaded case of Ps as alleged. The evidence of Shi Feng highlighted by Mr Pun does not begin to cause any confusion if it is to be understood correctly in its proper context.

24.  I further find the provisions of the SLAs to be unequivocal and clear. I have no difficulties in ascertaining the scope of the security provided by the Deposited Shares. The pleaded case of D1 does not raise any issue in this regard. I do not see why there should be any investigation of the relevant facts and circumstances surrounding the execution of the SLAs.

25.  There being no merit in the first two grounds, it follows that the third ground must be dismissed.

Stay of Execution

26.  Mr Yip informs the court that Ps has already obtained payment by reason of the Order and D1’s application for a stay of execution becomes academic.

27.  Ps could be ordered to pay back the monies to the court if a stay is granted However, in light of my conclusion on D1’s application for leave to appeal, there being no arguable appeal, the minimal requirement of a stay is not met and this court even does not need to consider the application. The application must be rejected accordingly.

Ps’ summons

28.  Ps apply for an immediate taxation of the costs order nisi made in their favour. This application is not supported by any affirmation.

29.  Mr Yip pertinently draws my attention to Wing Fai Construction Co Ltd v Yip Kwong Robert (No 2) (2012) 15 HKCFAR 454. In §§7-9, Ribeiro PJ explained the factors to be taken into account as to whether an immediate payment of costs should be ordered in the following terms,

“7. Whether or not the immediate payment of costs should be ordered is quintessentially a matter within the court’s discretion. The former practice was generally to order interlocutory costs to be “in the cause”, to be settled up at the end of the proceedings where orders which may have been made in favour of the respective parties might be set-off against one another and when the overall result of the proceedings can be taken into account. However, it is now generally recognized that such an approach may lead to procedural laxity and a damaging proliferation of interlocutory or satellite litigation. The first four of the underlying objectives are relevant to redressing such tendency by emphasising the need:

“... (a) to increase the cost-effectiveness of any practice and procedure to be followed in relation to proceedings before the Court; (b) to ensure that a case is dealt with as expeditiously as is reasonably practicable; (c) to promote a sense of reasonable proportion and procedural economy in the conduct of proceedings; (d) to ensure fairness between the parties...”

8. In pursuing the underlying objectives, it is of course necessary to factor in any possible unfairness or prejudice which the party against whom an order for immediate payment of costs is sought may suffer in consequence of such an order.

9. In the present case, the application to dismiss for want of prosecution is severable and self-contained from the rest of the action. The outcome of the misfeasance proceedings will not have any impact on the costs orders made at each stage of the dismissed application. The costs involved are of a sufficiently significant amount to justify the expense of a separate taxation. Most importantly, to make the liquidator wait until the end of the proceedings to enjoy the benefit of the costs orders in his favour would undoubtedly have a seriously negative effect on the cash flow of the winding-up and might unjustly inhibit proper determination of the substantive proceedings. Underlying objectives (c) and (d) militate in favour of ordering the immediate payment of the costs orders made in respect of the failed application to dismiss for want of prosecution. Accordingly, in our view, discretionary considerations are substantially in favour of such an order.

30.  Here Ps have succeeded in obtaining a substantial part of their claim before the trial. It is not unreasonable for D1 to oppose their application. There is no evidence that Ps, after receiving the monies under the Order, would experience any cash flow problems in proceeding with the action without recovery of their costs under the costs order nisi.

31.  In my view, there is not sufficient reason to justify the expense of a separate taxation. Therefore, as indicated at the hearing, I refuse to accede to Ps’ application.

Deposition

32.  For the reasons given, I refuse to grant D1 leave to appeal and any stay of execution pending appeal. On the other hand, I refuse to vary the costs order nisi so as to enable P to have immediate taxation.

33.  In conclusion, I dismiss both the summons of Ps and the summons of D1. D1 should pay the costs of its summons to Ps and Ps should pay D1 the costs of their summons, to be taxed if not agreed.