LEO INNOTECH (HOLDING) LTD v. LEE SHUNG CHI

HCA 474/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 474 OF 2015

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D E C I S I O N

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1.  This is an application by the defendant for stay of execution of a summary judgment given by Master J Wong on 5 February 2016. The judgment requires the defendant to repay to the plaintiff loans as advanced under two loan agreements dated 28 February 2014.

2.  The defendant’s appeal against the master’s judgment was dismissed by me on 27 July 2016.  His appeal against my dismissal will be heard by the Court of Appeal on 28 October 2016. 

The legal principle

3.  The principle governing an application for stay of execution can be found in Star Play Development Ltd v Bess Fashion Management Co Ltd, HCA 4726/2001 (7 June 2002) by Ma J (as he then was).

4.  The defendant must justify the application with good reasons which can exist in a variety of forms (§§7 and 8).  The existence of an arguable appeal is the minimum requirement for granting a stay (§9(6)).  If there is no strong likelihood of a successful appeal but only an arguable appeal, then the defendant should provide additional reasons to justify a stay (§9(7) and (8)). If the defendant’s additional reason is that the levying of execution would result in financial ruin, serious financial consequences or a serious deleterious effect in him, the court will require good evidence, such as the production of accounts or other documents to justify the assertion.  A bare assertion is unlikely to meet with much sympathy where more substantial evidence is available (§9(3) and (4)).

Serious deleterious effect of execution of judgment

5.  In this application, the defendant is saying that the execution of the judgment will result in a serious deleterious effect in him. He says that the plaintiff has issued on 17 March 2016 a bankruptcy petition against him based on the master’s judgment.  The hearing of the petition was adjourned to 12 October 2016 before a master.  It is expected that the petition would be adjourned to Monday, 17 October 2016 before the Bankruptcy Judge.

6.  The defendant further says that he is the sole director of two companies which are engaged in various projects.  The two companies are the defendant’s only source of income.  They in turn rely on him to obtain banking facilities to fund their operations.  If he should be adjudged a bankrupt, he would not be able to procure the banking facilities for them and there would be a serious deleterious effect on them.  However, he has not produced a page of financial document to support this assertion.

7.  The defendant can and should produce some accounting and banking documents to substantiate his assertion.  Since he has failed to produce any, I would not accept his assertion.  Therefore, he has to show a strong appeal or a strong likelihood of success in his appeal.

The 1st ground of appeal

8.  The 1st ground is based on the repealed section 47A of the Company (Wing Up and Miscellaneous Provisions) Ordinance (formerly the Companies Ordinance), Cap 32.  This section prohibited a company from providing financial assistance for the purchase of its own shares.

9.  I held in §103 of my judgment regarding the first claim of HK$8,515,263.63 and the interest thereon as follows:

“103. Mr Leung accepted that the loan advanced in the Share Capital Facility Agreement and renewed in the Replacement Loan Agreement was contrary to section 47A and not saved by the exceptions in section 47C as it was provided by the plaintiff to the defendant for him to subscribe for the plaintiff’s shares. However, Mr Leung further submitted that section 47A was for protecting the company’s assets from misuse. Hence, the loan, though advanced illegally, should be recoverable from the borrower. I agree with Mr Leung (see Wallersteiner v Moir [1974] 1 WLR 991 at 1014H-1015B and 1033F-H). The breach by the plaintiff of section 47A of Cap 32 does not affect the liability of the defendant (or the directors of the plaintiff) to repay the loan under the Replacement Loan Agreement.”

10.  Ms Fong, counsel for the defendant submitted that this loan was void and unenforceable.  I agree that the loan was void and unenforceable and, if not advanced to the defendant, the defendant could not have enforced it in court against the plaintiff.  However, this does not mean that after the money was advanced to him, it is irrecoverable from him.  Even if he cannot be sued for repayment as a borrower of a void loan, he would still be liable to repay the money to the plaintiff as a trustee.  The law will not allow him to keep the money as a windfall.  I also cannot see what ground of defence he may have if he should be sued as a trustee holding the money for the plaintiff’s benefit as an alternative to the claim of repayment of loan. I see no merit in this ground.

The 2nd ground of appeal

11.  The defendant complained in the 2nd ground that I had failed to find any tribal issue on whether the plaintiff had advanced HK$8,515,236.63 to him.  This sum together with interest accrued to 10 February 2015 had become HK$8,942,478.82.  I dealt with this loan in §§45 and 55 to 61 of my judgment.

12.  I think it is not exactly correct to say that the plaintiff had advanced HK$8,515,236.63 to the defendant.  The plaintiff’s case is that there was a loan agreement dated 1 January 2010 which I called the Share Capital Facility Agreement.  Under this agreement, the plaintiff agreed to advance no more than HK$8 million to the defendant for his use in the restructuring of the plaintiff’s capital and related matters.  The loan and interest accrued was repayable on 31 December 2014.  The sum of HK$8,515,236.63 was the principal advanced under this agreement in July 2012 plus interest accrued up to 28 February 2014.

13.  The defendant alleged that this sum was never advanced to him under the Replacement Loan Agreement dated 28 February 2014.  This assertion is technically correct as the sum in question was the principle advanced in the earlier Share Capital Facility Agreement dated 1 January 2010 and the interest accrued thereon.  This is so stated in the Replacement Loan Agreement itself.  The Replacement Loan Agreement also provided that it was to supersede the earlier agreement.

14.  Ms Fong submitted that the plaintiff had not produced any breakdown or calculation on how the sum of HK$8,515,263.63 was arrived at. However, the defendant’s defence is not that the sum was inaccurate.  He said no money had been advanced to him and the Replacement Loan Agreement was invalid as it was never intended to be legally binding.  He then set out the alleged scenario in which Mr Leung of the plaintiff had procured his signature on the agreement. Once I find the defendant’s allegation against Mr Leung unbelievable, the defendant would have no defence to the claim.

15.  Ms Fong also submitted that the Share Capital Facility Agreement provided that no more than HK$8 million would be advanced thereunder, but the plaintiff claimed HK$8,515,263.63 from the defendant.  The plaintiff also did not explain why there was the excess.

16.  This point was never taken until it appeared in the grounds of appeal.  But the simple explanation is that the sum of HK$8,515,263.63 included interest accrued from July 2012 when the shares were allotted to the defendant up to 28 February 2014.

17.  Ms Fong then argued also for the first time that it is the plaintiff’s case that the defendant had paid a total of HK$9,707,103 for the 300 shares.  That was in excess of HK$8,515,263.63, but the plaintiff did not explain why there was the difference of HK$1,191,839.37.

18.  I think it is inappropriate to refer to HK$8,515,263.63 as the capital that the defendant had provided for the 300 shares as this sum is not merely the capital but included interest accrued on the money advanced for some 19 months. 

19.  I also note that the defendant has said in §1 of his Chinese Opposing Affirmation made on 26 November 2015 (which was not admitted in evidence) that it was supposed that out of the HK$5.6 million he received by selling his Avanti shares, he would invest HK$2 million for 25% of the plaintiff’s shares.  The sum of HK$9,707,103 less HK$2 million gives HK$7,707,103. 

20.  I understand that the defendant in the next paragraph tried to cast doubt on whether his sale of the Avanti shares and the allotment of 25% (which should be 10%) of the plaintiff’s shares to him had indeed been carried out.  But this doubt cannot stand together with his earlier admission of having owned and then transferred 300 shares of the plaintiff to Leo Paper Group Enterprises Ltd.  I would also add that the point of taking HK$2 million off HK$9,707,103 to result in HK$7,707,103 is not part of the plaintiff’s case on the facts. The plaintiff was never allowed or required to respond to the defendant’s Opposing Affirmation and this attack was never made by the defendant until now.

21.  Finally on this ground, Ms Fong also submitted that the returns of allotment all stated that the defendant had not paid the plaintiff the consideration totalling HK$9,706,803 (which should be HK$9,707,103).  This again is a point taken for the first time on appeal.  I note that the dates of the returns are the same as the dates of allotments.  The consideration could have been paid after the returns had been prepared.  In any case, the consideration, even unpaid, was said to be payable.  The defendant, who produced these returns in his Opposing Affirmation, has not advanced any ground to suggest that they are false in any respect.

The 3rd ground of appeal

22.  This ground attacks the judgment for the sum of HK$640,530.56 advanced under the 2nd loan agreement which I called the Standby Loan Agreement.

23.  Ms Fong’s 1st argument is that the Standby Loan Agreement did not specify the use of the money, but the sum of HK$640,530.56 in fact had a restricted and specific purpose, namely for paying staff salary.  I have already dealt with this argument in §54 of my judgment:

“54. I disagree with this submission. They Standby Facility Agreement was made as part of the steps in the Separation Agreement to effect the parting of ways of the parties. The agreement was obviously to assist the defendant in continuing the operation of LIT HK and LIT GZ which would be transferred to him. It would thus be reasonable for LPG or the plaintiff to agree with the defendant that the money advanced to him should be used to pay the salaries of the two companies. Otherwise, the money could have been spent for purposes unrelated to the two companies.”

24.  Ms Fong then argued that the sum of HK$640,530.56 was said to be “資金” or “capital” and not “loan”.  I disagree with this translation.  The proper translation in context should be “funds” or “funding” which has a neutral meaning.  This argument has no merit.

25.  Finally, Ms Fong submitted that clause 16(c) of the Separation Agreement provided that the loan facility of HK$1 million would only be advanced to the defendant after he had signed all the documents for transferring his 10% shares in the plaintiff to Leo Paper Group Enterprises Ltd.  But part of that sum at HK$250,000 was paid into the defendant’s account on 14 February 2014 well ahead of the date of the share transfer documents which is 25 June 2014.

26.  However, I note that clause 15 of the Separation Agreement also provided that the HK$1 million loan facility was to be dealt with by another agreement and to be advanced in accordance with the terms in that agreement. It is the plaintiff’s case that this other agreement was the Standby Loan Agreement. This agreement also expressly stated that HK$250,000 of the HK$1 million facility had already been advanced prior to the making of the agreement.  Once I held that the defendant’s case on how he was allegedly misled into signing the Standby Loan Agreement was unbelievable, he had no defence to the claim of HK$640,530.56. I find this argument has no merit.

Order

27.  Since I have found that the defendant has no arguable appeal, I dismiss the application for stay of execution.  I further make a costs order nisi that the defendant do pay the plaintiff the costs of this application forthwith.  The amount of costs payable would be assessed by me summarily. 

28.  The plaintiff’s solicitors should file a bill of costs within 14 days.  The solicitors for the defendant should file a list of objections, if any, within 14 days thereafter.  The costs will then be assessed on paper.