BECTIC FINANCE CO LTD v. CALGO ASIA LTD AND OTHERS

HCA2333/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2333 OF 2004

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R U L I N G

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1. This is an appeal against the decision of Master Au Yeung dated 20 July 2005 granting summary judgment against the defendants for $1,040,000.00 with interest and costs.

2. The plaintiff is a money lender.  It claims that on 8 June 2004 it agreed to lend the 1^st defendant $1,000,000.00 which the 1^st defendant agreed to repay on 8 July 2004.  The loan agreement is contained in a loan deed, a promissory note and a memorandum under section 18 of the Money Lenders’ Ordinance.  On the same date the 2^nd and 3^rd defendants entered into personal guarantees for the loan to the 1^st defendant.  The loan, which with interest amounted to $1,040,000.00 on the due date, went unpaid.  The plaintiff claims against the 1^st defendant as borrower and the other defendants as guarantors. 

3. The defendants filed a defence on 24 November 2004, in which they admitted entering into the loan and guarantee agreements but averring that the plaintiff failed to advance the loan. 

4. The plaintiff on 9 March 2004 applied for summary judgment.  The plaintiff’s manager, Chow Lai Fun, made an affirmation in support.  In brief that stated that six loans had been made to the 1^st defendant up to 2003.  The amounts of these loans are not given, though the serial loan numbers are, namely nos. 995, 2013, 2101, 2105, 2108 and 2113.  The 1^st defendant had been unable to repay some or all of the amounts due.  On 14 November 2003 the plaintiff advanced loan no. 2140 for $3,081,459.58 to pay off the balance due under the earlier loans.  Thereafter, monthly up to 14 February 2004 there was a further series of loans.  The first one paid off the outstanding balance of the earlier loans and thereafter each loan paid off the balance due on the previous loan.  The last loan, no. 2156, was due on 14 March 2004 but, according to the plaintiff it was not paid in full and default interest had accrued. 

5. On 8 June 2004 it was agreed that the plaintiff would advance a new loan to the 1^st defendant, to put it in funds to pay off the outstanding amount of $1,000,000.00, which represented the balance of principal and interest of loan no. 2156 less $500,000.00 paid on 30 April 2004 and $1,230,646.85 paid on 8 June 2004.  Loan no. 2168, which is the subject of this action, was made on 8 June 2004 and the guarantees were made in support of it.  Repayment was due, with interest, on 8 July; and it was not made.

6. On 9 April 2004 the 1^st defendant filed an affirmation on his own behalf and that of his co-defendants, setting out an entirely different defence and a counterclaim. 

7. In brief the defendants’ new defence and counterclaim is based on the following which appears in the 2^nd defendant’s affirmation.  First, there was a joint venture agreement for a factory project in the PRC whereby the plaintiff would take up 20% capital of the 1^st defendant for $10 million.  Between January 2001 and the end of November 2002, the plaintiff would finance the preliminary costs of the project in the form of loans up to $10 million.  The plaintiff would pay the price of the shares by the end of November 2002, and the 1^st defendant would use the purchase price to repay the loans. 

8. Between January 2001 and September 2002 the plaintiff and the 1^st defendant entered into seven loan agreements, nos. 995, 2013, 2020, 2060, 2101, 2105, 2108, for a total of $1,510,000.00.  Some of the principal and interest was paid off, up to November 2002.  In that month, the plaintiff asked the 1^st defendant to extend the time for payment of the price of the shares until the PRC authorities issued an approval certificate for the project.  This was expected in about February 2003.  The plaintiff proposed that the amount then due under the seven loans be credited as a part payment against the purchase price of the shares.  To this the 1^st defendant agreed.  As at 30 November 2002, the balance outstanding on the seven loans was $1,395,300.00.  Under this new agreement, this sum was treated as a part payment; so the plaintiff would pay a further $8,604,700.00 for the shares which it was to buy.

9. In early December 2002 the 1^st defendant needed more money for the preliminary costs of the project.  So the parties on 5 December 2002 entered into an 8^th loan agreement, no. 2113, for a loan of $6,525,713.20.  The interest on this loan was to be waived in consideration of the deferment of payment of the price of the shares; but the documentation for the loan was left to contain the plaintiff’s standard interest provisions (for 48% per annum) because “it would be troublesome to upset [the] standard documentation”.  By the end of February 2003, the 1^st defendant was to repay $5 million, so as to reduce the loan amount to $1,525,713.20.  If, by the end of February 2003 the approval certificate had not been issued, this sum was also to be credited against the price of the shares. 

10. Under the 8^th agreement an advance was made on 8 December 2003 and on the same date the 1^st defendant paid $500,000.00 towards it.  On 7 January 2003, the approval certificate was issued and the 1^st defendant proposed that the plaintiff pay the balance of the share price.  However the plaintiff’s director, Mr Pang Kwong Ting, with whom the 2^nd defendant had been dealing, claimed that there was an internal dispute between himself and his partner, a Mr Leung, who was unhappy with the agreement for waiver of interest on the 8^th loan.  He wanted the payment deferred, until this dispute should be resolved; but meantime he also asked the 2^nd defendant to repay $5 million as agreed.  This was agreed, although the 2^nd defendant says that he reserved the right of the 1^st defendant to charge interest on the unpaid balance of the share price.  Between 21 January and 22 February 2003 the 1^st defendant repaid a total of $5,369,577.00. 

11. In February 2003 the plaintiff increased its authorised share capital from $30 million to $50 million.  Ten million new shares were allotted to the plaintiff and the other ten million to a related company of the 1^st defendant.  The return of allotment to the plaintiff was registered at the Companies Registry on 11 April 2003.  In the meantime, Mr Pang asked for further deferment of payment for the shares on the same ground, that the internal dispute was not yet settled.  He volunteered to raise further funds for the project and procured persons related to himself to put up security in the form of mortgages, for the 1^st defendant’s banking facilities with the Dah Sing Bank.

12. By 17 July 2003, according to the 2^nd defendant, further payments had been made and the indebtedness of the 1^st defendant reduced to $156,136.20.  This seems to assume that all payments would be credited entirely to principal and none to interest; but in any event this is the figure he gives. 

13. Then in November 2003, says the 2^nd defendant, Mr Pang told him that his partner was opposed to the plaintiff’s paying for the shares until all the loans were paid off.  He said that the 1^st defendant must treat all eight loans as ordinary loans, attracting interest at the agreed rates and that the agreed waiver of interest on the 8^th loan would be withdrawn.  At that stage, according to the plaintiff the 1^st defendant owed principal and interest amounting in total to $3,081,459.88.  The parties would enter into a 9^th loan in this sum, to be backed by a floating charge on the 1^st defendant’s assets, under the terms of a debenture to be issued in favour of the plaintiff.  To this the 1^st defendant agreed subject to non-registration of the debenture, and the 1^st defendant’s retention of its right to charge interest on the full purchase price of the shares.  The rate was to be the same as that charged by the plaintiff; the figure is not stated but is presumably 4% per month, that being the rate charged on all the loans whose documentation is exhibited.

14. The parties accordingly entered into a 9^th loan and corresponding debenture.  (This would be loan no. 2140 for $3,081,459.58.)  This was followed by a further series of three loans and debentures between 16 December 2003 and 14 March 2004.  The 1^st defendant paid back $1 million in December 2003 and $500,000.00 in April 2004.  However, in March 2004 the 2^nd defendant discovered that, contrary to agreement, the 4^th of the series of debentures had been registered. 

15. Following this the parties had a meeting at the end of May 2004 at which a full and final settlement was agreed.  I do not set this out in full but it involved, inter alia, the issue of a cheque for $1,000,000.00 by the plaintiff in favour of the 1^st defendant and its immediate endorsement back to the plaintiff; the transfer of the shares to a company related to the 1^st defendant : the payment by the 1^st defendant of $1,230,646.85 on 8 June in settlement of the 12^th loan : payment off by the related parties of the sums due by the 1^st defendant to the Dah Sing Bank and the redemption of their mortgages; and the execution of the 13^th loan agreement and related documents, which are the subject of these proceedings.  The 13^th loan would not be enforced but written off against tax. 

16. One of the related parties said to have been procured by Mr Pang of the plaintiff was in fact Chow Lai Fun, the plaintiff’s manager, on whose affirmation in support of the Order 14 application the plaintiff relies.  

17. The 2^nd defendant says that the 1^st defendant paid $1,230,646.85 but the plaintiff breached the final settlement agreement in that it did not arrange the repayment of the sums due to the bank or the redemption of the mortgages.  As a result, the bank sued the 1^st defendant and the related parties under the mortgages.  Finally, the plaintiff breached its agreement further by instituting these proceedings for the recovery of the 13^th loan.  The 2^nd defendant says that the plaintiff now owes it various sums, under various heads, amounting to over $9 million, for which it intends to counterclaim.

18. The plaintiff’s manager Chow Lai Fun had, in the affirmation in support of the application for summary judgment set out the history of the series of loans and exhibited full documentation in respect of those made since 14 November 2003.  The director, Mr Pang, filed an affirmation in answer to that of the 2^nd defendant in which he denied the existence of any joint venture agreement.  He said that the 2^nd defendant had in the beginning asked the plaintiff to subscribe for the shares in order to boost the image of the 1^st defendant, by providing it with an association with the plaintiff which is a reputable finance company.  At that stage, says Mr Pang, he did not agree to this proposal.  Although he goes into a considerable deal of legal argument, on matters which he “understands and verily believes”, Mr Pang does not say when or if the plaintiff agreed to take the allotment of shares, or explain why the allotment was in fact made and registered with the Registry.

19. Mr Pang further denies the full and final settlement agreement alleged by the 2^nd defendant.  He says that the 1^st defendant itself paid off the bank and that the mortgages have been redeemed. 

20. It is rather difficult to disentangle the facts from the legal argument in Mr Pang’s affirmation but it would appear that it is not denied that the shares were later registered in the name of the related company, Calgo Development, or that payments by the 1^st defendant which the 2^nd defendant has defined as “unnecessary payments” were in fact made. 

21. In fact there is an instrument of transfer and a set of bought and sold notes for this transaction which bear to show the transfer of the shares from the plaintiff to Calgo Development Ltd for a consideration of $10,000,000.00.  According to the 2^nd defendant this was to be “paid by Calgo Development to Calgo Asia”.  But that is not what the documents show. 

22. The learned master wrote a judgment which ran to 13 pages.  Having referred to the authorities on the principles applicable to Order 14 applications she considered the evidence at length and in detail and came to the conclusion that the defendant’s case was incapable of belief and further that the counterclaim was based on facts which were incapable of belief.  Counsel for the defendants before me argued in detail as to where, according to him, the master went wrong; but as I have indicated, this was a re-hearing.  While I may adopt the reasoning of the master if I find that course appropriate, I do not have to consider whether or not her reasoning was right.

23. The master relied in particular on the dictum of Bokhary JA in Re Safe Rich Industries Limited [1994] HKLY 83 :

“The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable.  But it must be recognised - because failure to recognise 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.”

24. This of course follows on the dictum of Godfrey JA in Ng Shou Chun v. Hung Chun San [1994] 1 HKC 155 that :

“The issue is not whether the defendant's assertions are to be believed, it is whether those assertions are believable.”

25. There is no doubt that on the face of the documents, the 13^th loan was made, and the guarantees given.  The master said that prima facie the case of the plaintiff had been properly set up.  Mr Chan for the defendant in argument conceded that the plaintiff’s claim was unassailable and that the 13^th loan must result in the plaintiff being entitled to its claim.  But, he said, the defendants had a believable case on the joint venture which would give rise to an arguable set-off and a counterclaim which would extinguish the plaintiff’s claim.

26. Ms Liu for the plaintiff argued that the allegations of oral agreements which contradicted or varied the series of loan agreements, provided by the documents, were inadmissible, as seeking to contradict the terms of a deed, in particular the deed of promissory note.  She relied on Societe Provencale de Constructions Metalliques Navales et Ferroviaires v. Tao-Yih Woo t/a T.Y. Woo and Company [1961] HKLR 394 which was followed in Hennabun Capital Ltd v. Wong Chun Hung Vincent, HCA340/2001. 

27. She also relied on the authority cited by the master, namely Bank of India v. Surtani Murlidhar Parmanand t/a Ajanta Trading Corp.[1994] 1 HKC 7, to the effect that collateral contracts must be strictly proved.  However as Mr Chan pointed out, it was held in China Everbright Holdings Co. Ltd v. Synergy Finance Ltd [2003] that although the defendants have to prove the collateral agreements strictly, they will be able to discharge the burden for present purposes if they satisfy this test of whether their case is believable, rather than to be believed.

28. The 2^nd defendant’s evidence is that the plaintiff was to accept $1,230,646.85 in settlement of what was due on the February loan although, on its reckoning, the 1^st defendant owed a further $1,000,000.00.  In other words, the loan of $1,000,000.00 was no loan at all but some kind of fiction.  That is contrary to the terms of the written documents and on the authorities cited should be inadmissible. 

29. The same, incidentally, would apply to the evidence that, in respect of what is called the eighth loan, it was agreed that, notwithstanding what appeared on the face of the documents, no interest would be charged. 

30. The defendants, having filed a defence which really had no substance, have subsequently come up with a very involved story which is full of matter that provokes in me, as it obviously did in the learned master, a strong reaction of disbelief. 

31. The defence is largely unsupported by any kind of documentary evidence.  There is no documentary evidence to support the alleged joint venture, or the large payments which the 2^nd defendant says was made in part settlement of the 8^th loan.  As I have indicated, evidence relating to interest that contradicts the written documentation would be inadmissible.  There would therefore be no support for the first claim in respect of a “1^st unnecessary payment” which went to reduce that loan.  Nor is there any credible reason for the so-called “2^nd unnecessary payment” (on 30 April 2004) which went to reduce the already overdue loan made in February 2004.  Finally of course there is the totally unsupported allegation of an agreement for interest on the share price.  This would have accrued at $400,000.00 per month. 

32. However, there are various questions left unanswered. In the first place there is the share allotment.  There is no doubt that the shares were allotted to the plaintiff and later transferred to Calgo Development Ltd.  It is not normal for a borrower to allot shares to a money lender, unless perhaps there is some sort of security arrangement.  However, Mr Pang in his affirmation, though he says why the suggestion was made in the first place, and that he rejected it, does not say why or when his objections were overcome and why the plaintiff accepted the allotment.  What we see instead is legal argument about when the plaintiff would be obliged to pay for the allotment.  That is of no use.  It is not for a layman to set out his lawyer’s arguments in evidence.  He should address the facts.  On this matter, Mr Pang does not.

33. Then there is the fact that, although the 2^nd defendant gives lengthy and detailed evidence about what the plaintiff calls the “earlier loans” up to no. 2113, there is nothing from the plaintiff to explain this and indeed no figures given for these loans.  I do not see that all this can be disregarded. 

34. Finally there is the rather strange situation where the plaintiff’s own witness apparently mortgaged property as security for the 1^st defendant’s bank loans.  This is also unexplained.

35. I tend to agree with the learned master’s view of the defence and potential counterclaim which the 2^nd defendant has put forward.  I would certainly regard it as “not to be believed”.  At the same time, I do not see that the whole story of the collateral agreements can be dismissed.  There appears to be a background to this whole case which has not been fully and properly explained.  It seems to me that there are circumstances which require to be closely investigated and for this reason there ought to be a trial; see Miles v. Bull [1969] 1 QB 258.

36. For that reason, I will allow the appeal, set aside the judgment and give the defendant leave to defend.  The leave is unconditional, if only because I have not heard any argument as to whether it should be conditional.  Costs of the appeal be to the defendant in any event.  Costs of the order 14 proceedings be in the cause. Since the judgment is to be handed down the costs orders are nisi.