LI YONG MING v. CHEN JIAN MING

HCA 1981/2019

[2021] HKCFI 1893

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1981 OF 2019

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J U D G M E N T

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Background

1.  This is an application for default judgment pursuant to Order 88, rule 6 of the Rules of the High Court, for recovery of a debt secured by shares in a listed company and enforcement of the security.

2.  By an oral agreement between the Plaintiff and the Defendant (“Loan Agreement”), the Plaintiff agreed to advance a loan of RMB3 million (“Loan”) on 10 September 2018 to the Defendant on the following terms:

(1)     The Defendant shall pay interest at 3% per month on the Loan;

(2)     The term of the Loan shall be 6 months from the date of advance and may be extended by mutual agreement; and

(3)     The Defendant shall charge his 70,000,000 shares in Superb Summit International Group Limited (“Superb Summit”), a company listed on the Hong Kong Stock Exchange, as security for the total amounts owing under the Loan Agreement.

3.  The Loan Agreement and advance of the Loan are evidenced by a written receipt issued by the Defendant to the Plaintiff on 10 September 2018.

4.  On 10 March 2019, the Loan and contractual interest thereon (being RMB540,000) fell due for repayment.  However, the Defendant had only paid RMB180,000 being part payment of the interest due to the Plaintiff.  The Loan and Outstanding Interest of RMB360,000 remained owing.

5.  By a written agreement dated 23 May 2019 (“Loan Extension Agreement”):

(1)     The parties agreed that the Loan be rolled over for 4 months (“Extended Loan”) from 10 March until 10 July 2019. 

(2)     The Defendant undertook to the Plaintiff that he would repay the Extended Loan with contractual interest at 3% per month calculated daily on a 365-day year basis (Clause 3.1), and the Outstanding Interest. 

(3)     The Defendant agreed to “pledge” his 5,700,000 shares in Superb Summit (“Charged Shares”) and all the dividends received thereon from time to time (“Charged Dividends”) to the Plaintiff as security for his obligations (“Clause 5.4”).

(4)     Clause 4(a) prohibited the Defendant from creating any subsequent security interest over the Charged Shares and Dividends.

6.  The Defendant failed to make any payment under the Loan Extension Agreement.  He also ignored the Plaintiff’s telephone calls and messages except to tell the Plaintiff in one phone call that he was unable to repay and that the Plaintiff should continue to wait for repayment.

7.  The Plaintiff learnt from a third party (Zeng) that the trading of Superb Summit shares had been suspended and that it was difficult for the Defendant to find a lender.  However, the Defendant would try to execute a mortgage over his Superb Summit shares to raise funds and sell those shares when trading resumed to raise funds to repay his creditors.

8.  The Plaintiff obtained an injunction restraining the Defendant from disposing of the Charged Shares, which has been continued till now.

9.  The Plaintiff issued a writ of summons on 29 October 2019.  With leave of the Court, the writ was served on the Defendant out of jurisdiction in Mainland China.  It was not clear from the return forms issued by the Mainland judicial authorities what the exact date of service was, but the Plaintiff was content to take the latest date that appeared on those forms, ie 31 March 2020.

10.  The Defendant has failed to acknowledge service of the writ within 28 days from the date of service, pursuant to Coleman J’s order, ie by 28 April 2020.

11.  The Defendant has failed to file his defence within 28 days thereafter, ie on 26 May 2020, pursuant to Order 18, rule 2 of the Rules of the High Court.

12.  This summons for default judgment was first issued on 2 June 2020, but was later amended to rely on Order 88, rule 2.

13.  The Amended Summons and supporting affirmations have been served on the Defendant, but he had not responded to them. 

14.  From his correspondence with the Court, it was plain that the Defendant had notice of this hearing.  I am satisfied that I can proceed to hear this Amended Summons in the absence of the Defendant.

The reliefs sought

15.  The Plaintiff seeks money judgment and enforcement of the charge by way of sale and application of the Charged Dividends.

Money judgment

16.  As the Defendant has failed to repay the Loan on the due date, the Plaintiff is plainly entitled to judgment in the amount of RMB5,410,517.70 as at 1 February 2021.  The Plaintiff is also entitled to interest pursuant to Clause 3.1 of the Loan Extension Agreement.

Enforcement of the charge

17.  The issues are whether a charge was created and what form the reliefs should take. 

18.  To decide if there was a charge, the approach is as follows:

(1)     It is not possible as a matter of law to pledge the Charged Shares, which are pieces of paper.

(2)     The Court should construe the relevant clauses of the agreement and ascertain the intention of the parties from what they have done in the then existing circumstances to see if a charge was created.

(3)     Where in a transaction for value, both parties evince an intention that property, existing or future, shall be made available as security for the payment of a debt, and the creditor shall have a present right to have it made available, there is a charge.  This is so even though the present legal right which is contemplated can only be enforced at some future date, and though the creditor gets no legal right of property, either absolute or special, or any legal rights to possession, but only a right to have the security made available by an order of the court.

(4)     The intention of the parties may be expressed or inferred.  If the debtor undertakes to segregate a particular fund or asset and to pay the debt out of that fund or asset, the inference may be drawn, in the absence of any contra-indication, that the parties’ intention is that the creditor should have proprietary interest in the segregated fund or asset as will enable him to realize out of it the amount owed to him by the debtor.

See Bank of China (Hong Kong) Ltd v Kanishi (Far East) Ltd [2002] 2 HKLRD 52, §§24-29, Ma J, as he then was; Pine Enterprises Ltd v Lecture Kit Co Ltd, HCCW 593/2001, 14 March 2008, at §§150-152, DHCJ To.

19.  In the present case, under Clause 5.4 (a), the parties had designated the Charged Shares and Charged Dividends as security for the Loan.

20.  On a proper construction of the Loan Extension Agreement, with particular regard to recital (C) and Clause 5.4, it was clear that the parties intended that an equitable charge be created in favour of the Plaintiff.

21.  This construction is fortified by Clause 4(a) of the Loan Extension Agreement by which the Defendant agreed not to execute any subsequent security interest over the Charged Shares and Dividends.  The purpose of this Clause must have been to protect the Plaintiff’s security.

22.  Upon default by the Defendant in repayment, the Plaintiff as equitable chargee is entitled to appropriate the charged assets by way of judicial process to satisfy the secured indebtedness: Lo Kwok Kuen Danny v Secretary for Justice [2017] 2 HKLRD 1193, §6.3, Cheung JA.

23.  At present, the Charged Shares are not in the hands of the Defendant but a securities company called Grand Cartel Securities Co Ltd.  Accordingly, in respect of the form of relief, the first step towards enforcement is to obtain possession of the Charged Shares.  The Defendant should be ordered to execute or procure his nominee holding the Charged Shares to execute the necessary documents to transfer his interest in the Charged Shares to the Plaintiff.

24.  The Defendant has persistently evaded his obligations to repay and to attend court.  He repeated his intention to further encumber the charged assets to the Plaintiff on 23 December 2019, despite having knowledge of the injunction.  It is reasonably anticipated that he will continue to evade his responsibilities under the Loan Extension Agreement.

25.  Further, the present proceedings have been protracted partly due to the need to serve the Defendant out of the jurisdiction as regards the applications for injunction and default judgment.  An anticipatory order will prevent further delays to the Plaintiff in the enforcement of its security.

26.  It is thus appropriate to invoke the Court’s power under section 25A of the High Court Ordinance, Cap 4, to appoint the senior partner of the Plaintiff’s solicitor to execute documents on behalf of the Defendant, should the Defendant fail to do so.

27.  As for the Charged Dividends, there is no evidence that dividends have been declared but not yet paid to the Defendant.  Insofar as dividends were declared but paid to the Defendant, the Plaintiff may have to resort to other procedure like garnishee proceedings to get the money.  I decline to make an order for transfer of the Charged Dividends to the Plaintiff for lack of evidence.

28.  The Plaintiff has obtained a valuation report from FTI Consulting and has properly drawn the following aspects to the Court’s attention:

(1)     Trading of shares in Superb Summit had halted on 20 November 2014.  The company was delisted on 4 June 2020.

(2)     The latest available audited financial statements of Superb Summit for the year ended 31 December 2014 and the latest unaudited financial statements for the period ended 30 June 2015 are found in Superb Summit’s 2014 annual report and the 2015 interim report respectively.  There was a time gap between those financial statements and the valuation date (31 December 2020), and FTI Consulting, the valuer, has taken into account such time gap by applying appropriate projections and discounts based on market data.

(2)     A report was issued by Muddy Waters LLC on 20 November 2014, in which it was alleged that certain claims in Superb Summit’s financial statements were false.  Such allegations appeared to be the reason behind the suspension of trading in Superb Summit’s shares on the HKEX and the ultimate delisting of Superb Summit.  FTI Consulting took into account the lack of marketability of the Charged Shares brought about as a result of such factors and applied a 50% discount to the value of the Charged Shares.

29.  In view of the aforesaid difficulties, FTI Consulting valued the Charged Shares as at 31 December 2020 from HK$795,000 to HK$1,338,000.

30.  Given the uncontested valuation evidence, I give an order for sale at a reserve price of $795,000.

Conclusion

31.  I order that judgment be entered against the Defendant as follows:

(1)     That the Defendant do pay the Plaintiff the sums of RMB3,360,000;

(2)     There be interest on the principal sum of RMB3,000,000 at 3% per month calculated on a 365-day year basis from 10 March 2019 until full payment;

(3)     In default of payment of the sums under paragraphs (1) and (2) above:

(a)   the Defendant do forthwith deliver up the share certificates for the 5,700,000 shares in Superb Summit International Group Limited to the Plaintiff;

(b)   the Defendant do forthwith execute, or procure Grand Cartel or his nominee holding the 5,700,000 shares to execute, all necessary documents (including but not limited to an instrument of transfer, and bought and sold notes) to transfer his interest in the Charged Shares to the Plaintiff or the buyer nominated by the Plaintiff;

(4)     Unless the Defendant do comply with paragraph (3) above within 14 days of the handing down of this judgment, Mr Anthony Siu Yat Fung of Anthony Siu & Co do, pursuant to section 25A of the High Court Ordinance (Cap 4), execute the necessary documents referred to in paragraph (3)(b) above on behalf of the Defendant;

(5)     The Plaintiff is at liberty to sell the Charged Shares at a minimum price of HK$795,000, and apply the sales proceeds towards satisfaction and/or reduction of the sums due under paragraphs (1) and (2) above;

(6)     There be liberty to apply; and

(7)     On a nisi basis, costs of this action, including costs of this application and all costs reserved, be to the Plaintiff, and summarily assessed at $615,000 on the basis of one partner and one trainee.

32.  I thank Mr Brian Lee for his assistance.