SKY JOY INVESTMENT LTD v. ZHENG DUNMU AND ANOTHER

CACV 205/2017

[2018] HKCA 259

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 205 OF 2017

(ON APPEAL FROM HCA NO 395 OF 2016)

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J U D G M E N T

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Hon Kwan JA (giving the judgment of the court):

1.  This is an application made by Li Chiu Yue (“Li”), who was joined as an interested party in the proceedings, for leave to adduce new evidence in his appeal against the decision of Deputy High Court Judge William Wong, SC on 16 August 2017 (“the Decision”). The summons to adduce new evidence was issued on 28 December 2017. The appeal is to be heard on 6 September 2018. This application is opposed by the plaintiff. The 1^st and 2^nd defendants have not taken part in the hearing below or in the present application.

2.  Pursuant to Practice Direction 4.1 §36, evidence in respect of the application has been filed by Li and the plaintiff.  They have lodged submissions in support and in opposition.  Li’s solicitors have confirmed by letter dated 28 February 2018 that no submissions in reply will be lodged.  Having considered the papers, we think it appropriate to determine the application on paper without an oral hearing.

Background

3.  The relevant background matters have been set out in the Decision at §§3 to 24 and will not be repeated.

4.  By the Decision, the judge ordered Li to be joined as an interested party to the proceedings but dismissed his application to set aside completely the declarations in §§(4) and (5) of the default judgment.  He ordered §(5) to be set aside but replaced §(4) with a declaration that “the Share Pledge and related documents were effective in transferring and did transfer to the Plaintiff the equitable right, title and interest in the 150,000,000 shares of Changgang Dunxin Enterprise Company Limited”.  In effect, he determined summarily that as between the plaintiff and Li – both having an equitable interest in the disputed shares in the listed company aforesaid – the plaintiff’s interest has priority over Li’s under the first-in-time rule.  That is because the share charge in favour of the plaintiff was executed by the 2^nd defendant on or about 30 September 2015 and was enforced in December 2015, whereas Li’s equitable interest in the shares only arose when he exercised his options to acquire 200,000,000 shares1[1] in the listed companyin September and November 2016, upon the default of the 2^nd defendant in repaying the loans advanced by him to the 2^nd defendant.

5.  In the appeal, Li will challenge the judge’s determination that his equitable interest in the shares arose only after the share charge was executed in favour of the plaintiff and therefore ranked after the plaintiff.  His contention is that the 2^nd defendant deposited the share certificates of 200,000,000 shares of the listed company with his former solicitors at the time he entered into a loan agreement with the 2^nd defendant “as security for the debt” owed to him.  By virtue of this deposit of the share certificates, he assumed the position of an equitable mortgagee in respect of the shares since September 2014.  Hence, his equitable interest would take priority over the plaintiff’s interest.

6.  The contention that the deposit of the share certificates in September 2014 was made as security for the loans advanced to the 2^nd defendant was not raised in the court below.  Li changed his legal team after the Decision.  His case before the judge was that the options to purchase the shares were granted to him as security for his loans to the 2^nd defendant and that the share certificates were deposited “as security for the options”.

The application to adduce new evidence on appeal

7.  In the present summons, Li seeks leave to adduce three items of new evidence:

(1)   15 confirmation letters all dated 8 November 2017 issued by Tricor Investor Services Limited (“Tricor”), the share registrar of the listed company, which certified that the 15 share certificates representing 150,000,000 shares held by Li are genuine and authentic;

(2)   the 2^nd affirmation of Chong Mendy, Li’s former solicitor, dated 27 December 2017; and

(3)   the affirmation of Nigel Keith Meeson QC dated 28 December 2017 on the laws of the Cayman Islands, the place in which the listed company was incorporated.

The Ladd v Marshall conditions

8.  There is no dispute that the three conditions established in Ladd v Marshall [1954] 1 WLR 1489 at 1491 should apply.  They are as follows: (1) the evidence could not have been obtained with reasonable diligence for use at the hearing below; (2) the evidence must be such that, if given, it would probably have an important influence on the result of the case, though it need not be decisive; and (3) the evidence must be such as is presumably to be believed or it must be apparently credible, though it need not be incontrovertible.  All three conditions must be satisfied for new evidence to be admitted on appeal.

9.  However, Mr Bernard Mak submitted on behalf of Li that the Ladd v Marshall conditions should not be applied rigidly.  He cited the judgment of Laddie J in Rajinder Singh Saluja v Partap Singh Gill [2002] EWHC 1435 (Ch) at §§23 to 31, in support of his contentions that the conditions may be relaxed in accordance with the justice of the case and there is more reason for relaxing the conditions after the Civil Justice Reform.

10.  He submitted further the “reasonable diligence” requirement (condition 1 in Ladd v Marshall) may vary according to the nature of the hearing below, and prayed in aid Langdale v Danby [1982] 1 WLR 1123 at 1133D to E, in which Lord Bridge stated “it may well be that the standard of diligence required of a defendant preparing his case in opposition to a summons for summary judgment, especially if under pressure of time, will not be so high as that required in preparing for trial”.  He relied on a quotation of the unreported judgment of Butler-Sloss LJ in Hamilton v Brodie Brittain Racing Ltd, English Court of Appeal, 13 December 1995 set out in Saluja at §27 in support of his contention that even if condition 1 is not met, “if allegations are relevant and comply with conditions 2 and 3 of Ladd v Marshall, unless the Appellant has not acted in good faith, the court will look most carefully at whether there has been a miscarriage of justice”.

11.  We reject Mr Mak’s submissions.  On a proper reading of the English cases cited by him, they do not cast doubt on the normal application of the Ladd v Marshall conditions in the great majority of cases.  The passages particularly relied on by him were said in the context in which the courts were considering the “rare cases in which the application of the rules might give rise to injustice and, where that was the case, the courts had the power to exercise their wide discretion so as to permit new evidence to be adduced” (Saluja at §28).  Examples of such rare cases are where a party deliberately misleads the court in a material matter (Meek v Fleming [1961] 2 QB 366); where a strong prima facie case of wilful deception is disclosed (Skone v Skone [1971] 1 WLR 812).  Indeed, the quotation from the judgment of Butler-Sloss LJ in Hamilton v Brodie Brittain Racing Ltd mentioned above was preceded by the words: “Fraud goes to the root of the issue”, and her ladyship went on to say “in case of fraud, condition one is considered with a greater degree of flexibility”.  That is plainly not the situation here.

12.  Similar submissions were made in Wong See Lung v Huang Hua Jiang & Ors, CACV 194 & 196/2014, 22 October 2015, at §9 and were rejected by Chu JA at §23. Further, as noted by Chu JA, whilst in the UK, CRP rule 52.11(2) no longer requires that special grounds be shown, under our Order 59 rule 10(2), it is still necessary to show “special reason” for admitting new evidence on appeal.

13.  In Bank v New York Mellon v Sun Jiangrong [2016] 1 HKC 137 at §§25 and 26, Poon JA rejected the contention that the requirement of reasonable diligence will automatically be relaxed merely because it is an appeal from a summary judgment or proceedings not amounting to a trial.  As for the statement of Lord Bridge in Langdale v Danby mentioned above, Lord Bridge also made it explicitly clear that does not relieve a defendant in an application for summary judgment from his duty to use such diligence as is reasonable in the circumstances to put before the judge below all the evidence he seeks to rely on, albeit in a summary form.  The degree of reasonable diligence which the court expects the defendant to have exercised “must be assessed against the overall circumstances of the case” and “the court will take into account all relevant factors, such as the time available to the defendant to gather the evidence, the nature of the evidence, the difficulty encountered in obtaining the evidence, the effort the defendant had used in gathering the evidence”.  We agree with Poon JA that should be the test to be applied in considering if condition 1 is met[2].

Item 1: the confirmation letters issued by Tricor

14.  Li’s former solicitors had written to Tricor in March 2017 seeking verification from Tricor of the authenticity and genuineness of the share certificates in Li’s possession but to no avail.  In its letter dated 21 March 2017, Tricor declined to provide the verification until Li’s application to set aside the default judgment had been determined.  It was after the Decision was handed down and only in November 2017 that Tricor issued the letters certifying that the share certificates are genuine.  We are prepared to hold that condition 1 has been met in this instance.

15.  We hold that condition 2 is not satisfied and for this reason we decline to admit the confirmation letters issued by Tricor.  We agree with the submissions of Mr Law Man Chung and Ms Cherry Xu for the plaintiff that the authenticity of the share certificates in Li’s possession cannot have any or any important influence on the result of the appeal.  It was held in the Decision at §§31 to 36 that the validity of a share charge does not depend on the genuineness of the share certificates.  This holding is supported by the many authorities cited by the judge and the relevant principles are not challenged by Li in the grounds of appeal.

Item 2: the 2^nd affirmation of Chong Mendy

16.  The material averment in the 2^nd affirmation of Chong Mendy is that it was agreed by the parties at a meeting in September 2014 that “as a security of the due performance of the loan agreement the 2^nd Defendant should produce the said 20 Share Certificates to [Li’s former solicitors] to keep in escrow”.

17.  Mr Mak contended that condition 1 is satisfied as the 2^nd affirmation of Chong Mendy was made on 27 December 2017 and was not in existence at the time of the hearing on 10 August 2017.  Further, the new evidence in the affirmation was not considered relevant because the new argument that Li became an equitable mortgagee in September 2014 when the share certificates were delivered to his former solicitors was not taken by his former legal team.

18.  These submissions miss the point.  We do not think condition 1 is satisfied.  Ms Chong had made a first affirmation on 29 December 2016 in support of Li’s summons issued on 21 December 2016 to set aside the default judgment.  Li had also made his first affirmation deposing to the circumstances in which the loan agreement was made by him as the lender in September 2014 and the circumstances in which the 2^nd defendant delivered 20 share certificates to his former solicitors to keep in escrow.  That the former legal team did not discern from the facts known to them and deposed to in the affirmations made in December 2016 as giving rise to an equitable mortgage is irrelevant.  How and when Li acquired an equitable interest in the shares are obviously crucial to his application to set aside the default judgment.  The plaintiff’s evidence in answer was filed on 3 January and 2 March 2017, Li’s evidence in reply was filed on 20 April 2017 and the hearing before the judge was on 10 August 2017.  There was ample time and opportunity for Li to file further evidence if so wished.  The matters deposed to in Ms Chong’s 2^nd affirmation are plainly evidence that could have been obtained with the exercise of reasonable diligence.

19.  Even more importantly, we do not think condition 2 is satisfied here.  As submitted by the plaintiff’s counsel, the new argument sought to be raised on appeal that the share certificates were deposited with Li’s former solicitors as “security of the loan” and the new evidence in support in Ms Chong’s 2^nd affirmation are apparently inconsistent with the contemporaneous documents adduced by Li and his case advanced below.

20.  According to the loan agreement in Chinese dated 10 September 2014 between Li and the 2^nd defendant, the loan of $45,000,000 was for the period from 10 September 2014 to 9 October 2014 (clause 2.2) and this period could be extended up to ten months (clause 2.3).  Li could require the 2^nd defendant to execute an option agreement to provide to Li option(s) to acquire 200,000,000 shares of the listed company as security for repayment of the loan (1) on 28 June 2015 or after when repayment is due; and (2) when the 2^nd defendant fails to pay the principal or the relevant interest on time (clause 3.1).  Importantly, by clause 4.4, the 2^nd defendant was required to deliver to Li’s former solicitors the share certificates of 200,000,000 shares of the listed company for safe custody (“保管”), so that the shares could be dealt with by Li as and when the option(s) are exercised (“以便買方於買賣股份成交當日能立即交由貸款方處理”).

21.  On 25 August 2016 and 26 September 2016, Li, the 1^st defendant (who owned all the shares in the 2^nd defendant) and the 2^nd defendant executed five “agreements of transfer of option” in Chinese (“認股權轉讓協議”) in relation to the options to acquire shares in the listed company.  Under clause 6.1.2 of these agreements, it was stipulated that prior to the execution of these agreements, the 2^nd defendant (as the vendor) had delivered the share certificates to Li’s former solicitors for safe custody, so that the shares could be dealt with by Li (as the purchaser) on the same day as the completion of sale and purchase (“以便買方於買賣股份成交當日能立即交由買方處理”).

22.  In light of the apparent inconsistency with the above provisions in contemporaneous documents, we do not think Ms Chong’s evidence would have an important influence on the outcome of the appeal.  We also have reservations if condition 3 is satisfied, but there is no need to come to a firm view on this as conditions 1 and 2 are not met and so the 2^nd affirmation of Chong Mendy cannot be admitted.

Item 3: the affirmation of Nigel Keith Meeson QC

23.  Li seeks to adduce expert evidence on the law of the Cayman Islands that under the common law, if there was a deposit of share certificates as security for a loan, that would create an equitable mortgage of the shares from the time of the deposit, and equitable interests in a property that arose first in time have priority over those in the same property which arose later in time.

24.  Mr Mak made the same submission that the affirmation of Meeson QC made on 28 December 2017 was not in existence at the time of the hearing before the judge and is relevant to the new argument which was not run below.  We reject this submission for the same reasons in respect of the second item of evidence.  Condition 1 is not met.

25.  The considerations that condition 2 is not satisfied in respect of the 2^nd affirmation of Chong Mendy are also relevant here.  And as we have refused to exercise our discretion to admit the second item of evidence, there is no or little factual basis for the expert evidence and so we do not think it would have any or any important influence on the outcome of the appeal.

26.  We decline to admit the expert evidence as conditions 1 and 2 are not satisfied.

Conclusion and costs

27.  For the above reasons, we dismiss Li’s summons to admit new evidence on appeal.

28.  There is no reason to depart from the rule that costs should follow the event.  We order Li to pay the plaintiff’s costs of this application.

29.  The plaintiff asked for costs on an indemnity basis, with certificate for two counsel.  We do not think the circumstances warrant an order for indemnity costs.  We also decline to give a certificate for two counsel.  We note that this was sought and refused in the Decision.

30.  We have considered the plaintiff’s statement of costs for summary assessment.  We assess the reasonable costs of the plaintiff at $128,561.

31.  The costs order nisi and gross sum assessment will be made absolute if no application for variation is made by any party within 14 days of the handing down of this judgment.