YIFUNG PROPERTIES LTD AND OTHERS v. MANCHESTER SECURITIES CORP AND OTHERS

HCMP 461/2015, HCMP 462/2015 AND HCMP 463/2015

HCMP 461/2015 AND HCMP 463/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NOS. 461 AND 463 OF 2015

(ON AN INTENDED APPEAL FROM HCA NO. 1359 OF 2014)

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HCMP 462/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 462 OF 2015

(ON AN INTENDED APPEAL FROM HCA NO. 1341 OF 2014)

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(Heard together)

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REASONS FOR JUDGMENT
AND DECISION ON COSTS
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Hon Kwan JA (giving the reasons for judgment and decision on costs of the court):

1.  There are three applications before us, arising out of the decision of Au-Yeung J in two actions (HCA 1359/2014 and HCA 1341/2014) on 17 November 2014 after a three-day hearing (“the Decision”). Leave to appeal was refused by the judge on 12 February 2015 (“the Leave Decision”). By separate summonses issued on 26 February 2015 in HCMP 461/2015, 462/2015 and 463/2015, the applications for leave to appeal are renewed in the Court of Appeal.

2.  In the 1359 Action, the judge refused the application of the plaintiff mortgagors for an interlocutory injunction against the receivers from exercising their powers as such.  The receivers are the 2^nd and 3^rd defendants, the mortgagees (Manchester Securities Corp; “MSC”) and their agents are the 1^st and 4^th defendants.  The plaintiffs sought leave to appeal against this order in HCMP 461/2015.

3.  Also in the 1359 Action, the judge refused the plaintiffs’ application to amend the writ to raise two new issues called the “MLO Point” and the “Agency Point” in the court below.  The judge held in the Leave Decision this is an order “determining in a summary way the substantive rights of a party to an action” under Order 59 rule 21(1)(a), so no leave to appeal is required.  The deadline for filing a notice of appeal against the dismissal of the amendment application expired on 15 December 2014.  By their summons in HCMP 463/2015 issued on 26 February 2015, the plaintiffs sought an extension of time to file their notice of appeal.

4.  In the 1341 Action, the judge granted an interlocutory injunction sought by the plaintiff Yifung Developments Ltd (“YDL”; acting through its new directors) against its former directors to restrain them from holding themselves out as directors of YDL and interfering with YDL’s relationship with its banks and auditors.  The former directors were also ordered to hand over to the new directors the company records and assets, to give access of the business premises to the new directors, and to give certain instructions to YDL’s banks and auditors.  In HCMP 462/2015, the former directors sought leave to appeal against the injunction orders granted.

5.  At the conclusion of the hearing, we refused all three applications.  These are the reasons for our judgment.

HCMP 461/2015

6.  The broad grounds of appeal relate to the judge’s rulings on three issues asserted by the plaintiff mortgagors to found their claims in the 1359 Action.  They are referred to in the Decision as “the Estoppel Point”, “the MLO Point” and “the Agency Point”.  The judge held there is no serious issue to be tried on any of these issues, and that is sufficient to dispose of the plaintiffs’ application for an interlocutory injunction.

7.  The background for present purpose may be briefly stated as follows.

8.  By a facility agreement (“FA”) dated 10 September 2010, MSC lent US$39 million (“the Loan”) to YDL, repayable in three instalments.  The Loan was subject to these security arrangements:

(1) two equitable mortgages by the shareholders of YDL[1] of the entirety of the shares in YDL in favour of MSC;

(2) a legal charge by Capital Metro Group Ltd (“Capital Metro”)[2], the registered owner of a property in Queen’s Road East, Hong Kong (“the Property”) in favour of MSC;

(3) a rental assignment by which Capital Metro assigned to MSC the rights in leases relating to the Property; and

(4) an investor rights deed (“the IRD”) by which MSC is entitled to receive a profit-linked bonus (“the Bonus”) out of YDL’s available profits.

9.  YDL owns a wholly owned foreign enterprise (“WFOE”) in the Mainland and WFOE in turn owns a property development project in Yangjiang City, Guangdong.

10.  YDL repaid the first instalment of the Loan but the second and third instalments (each for US$14.5 million with interest) remained outstanding since 17 March 2014.  MSC declared an event of default and exercised its rights under the security arrangements to appoint receivers over the YDL shares and the Property.  In April 2014, MSC brought proceedings under Order 88 to seek recovery of possession of the Property.  In June 2014, MSC exercised its rights under the equitable mortgages to change the directors of YDL and WFOE.  The new directors are the same persons who had been appointed receivers over the YDL shares and the Property (“the Receivers”).

11.  The plaintiffs brought the 1359 Action claiming that there was no event of default and MSC is estopped from declaring an event of default by virtue of an oral assurance given by James Smith on behalf of MSC to Ricky Liu for YDL.  Hence, the appointment of the Receivers over the YDL shares and the Property is invalid and the exercise by the Receivers of their rights under the equitable mortgages and legal charge is invalid.  This is the Estoppel Point.

12.  The plaintiffs further alleged that the transactions under the FA and IRD are unenforceable for contravening section 24 and/or section 25 of the Money Lenders Ordinance, Cap 163 (“MLO”).  It was contended that the Bonus formed part of the interest under the definition in MLO and there was a “transaction” that should be re-opened under section 25.  This is the MLO Point.

13.  It was also contended that the Receivers, being the agents of the plaintiff mortgagors, had acted in breach of their duties to the mortgagors in that they did not act in the interests of the mortgagors in these three matters: (1) the application for an ex parte injunction in the 1341 Action, which was discharged; (2) the replacement of the board of directors of WFOE; and (3) the commencement of proceedings in the PRC for delivery up of the books and records and WFOE.  This is the Agency Point.

The Estoppel Point

14.  The primary complaint here is that the judge had effectively determined significant disputes of fact on affidavits, the contents of which are “hotly disputed”.  Ms Chan, SC submitted that the judge failed to have regard to the plaintiffs’ case that the oral assurance was consistent with the commercial purposes of the parties, and that in reliance on the assurance YDL did not take steps to repay the second instalment by utilising the assets of Capital Metro and WFOE or to extend the due date of the third instalment by six months without MSC’s consent.  She argued there was no reason for YDL to allow the repayment of the Loan to default.  The judge had relied solely on contemporaneous correspondence and deprived the plaintiffs of the opportunity to explain in oral evidence various maters which the judge took into account in concluding that the case on the oral assurance is demurrable on its face[3], and of the opportunity to cross-examine MSC’s witnesses.  Counsel submitted the judge’s approach was contrary to established principles that it is no part of the court’s function at this stage of the litigation to try to resolve conflicts of evidence on affidavit and that it was sufficient for holding that there was a serious issue to be tried even if the plaintiffs’ case is considered to be “hardly impressive”.

15.  Ms Chan also made a number of miscellaneous points: the judge was wrong in thinking that the plaintiffs had abandoned the relief for an order to restrain the Receivers from holding themselves out as directors of WFOE[4]; the judge erred in holding that there is nothing unique in the Property which was used as an office and that any loss suffered by the sale of the Property could clearly be compensated for in damages[5]; the finding that the terms of the assurance was vague was wrong in law and not justified by the evidence[6].

16.  These submissions had been made to the judge in seeking leave to appeal and were all rejected[7].  They were a re-run of the arguments at the main hearing and the judge was not satisfied any of the grounds would have any reasonable prospect of success to warrant granting leave to appeal.

17.  We agree with the judge, who had correctly applied the principles in holding whether there was a serious issue to be tried[8].  The judge was scrupulous in identifying various matters that were incapable of summary determination on the affidavits.  Nor did she conduct a trial on affidavits.  What she did was to apply common sense and test the plaintiffs’ assertions against objective contemporaneous documents to decide if the plaintiffs’ case is demurrable on its face[9].  She is perfectly entitled to conclude that the plaintiffs’ case on the oral assurance was so contradicted by contemporaneous documents, which all pointed one way, and so inherently improbable that it is demurrable on its face[10].

18.  The judge made a detailed review of extensive contemporaneous communications of both sides in a three-day hearing, and found that viewed against the contemporaneous documents, the grounds advanced by the plaintiffs to oppose MSC’s enforcement actions were but “desperate attempts by a debtor to resist an impossible situation”[11].  There is plainly no substance in the plaintiffs’ contention that the judge had failed to have regard to various aspects of their case.

19.  The plaintiffs were not deprived of any opportunity to present their factual case.  Over 20 affirmations were exchanged in the proceedings below.  Ricky Liu made five affirmations in connection with the injunction summons in the 1359 Action and two more in relation to the 1341 Action.  The inter partes hearing on 22 August 2014 was adjourned to 8 to 11 September 2014 with directions for additional evidence to be filed.

20.  The judge rightly held that the terms of the alleged assurance were vague and fell short of the clarity required to vary a contract[12].  Whether the plaintiffs had abandoned seeking an order to restrain the Receivers from holding themselves out as directors of WFOE is neither here nor there, as this could have no material bearing on the crucial question if there was a serious issue to be tried[13].  The principle that land is unique and damages not an adequate remedy was rightly rejected by the judge as having no application here[14].

The MLO Point

21.  Ms Chan contended that on the basis that the interest charged from 3 April 2013 to 17 March 2014 against the principal of US$29 million was US$21,861,152.07, the effective interest rate for the purpose of the MLO is 79.51%, which exceeds 60% and therefore renders the FA void and unenforceable under section 24.

22.  Further, she submitted there is a serious issue to be tried whether the FA and the IRD are “extortionate transactions” under section 25.  The plaintiffs’ case is that MSC required YDL to pay the “Settlement Sums”, being the Loan under the FA plus the Bonus of US$47 million under the IRD.  As YDL and WFOE were prohibited under the FA from incurring any financial indebtedness without the consent of MSC, it was argued that in reality YDL would have no option but to pay the Settlement Sums notwithstanding that no agreement had been reached on the precise amount of the Bonus.  Ms Chan submitted it is at least arguable that the payment of the Settlement Sums constituted a “transaction” under section 25(2)(a) and (b) of the MLO and the US$47 million is “to be paid or payable” within the meaning of “interest” in section 2.  The judge was wrong to have summarily determined that MSC had not required YDL to prepay any fixed sum for the Bonus[15].  If MSC had required YDL to pay US$47 million as Bonus, the effective interest rate would be 59.71%.

23.  The contention that the effective rate of interest is 79.51% is a new argument raised for the first time in Ricky Liu’s affirmation after the main hearing.  The judge found there was no good reason why this was not put forth at the main hearing and there is no reasonable prospect of success on this contention for leave of appeal to be granted[16].

24.  On behalf of the defendants, it was submitted that the interest rate of 79.51% wrongly assumed that the interest demanded on 17 March 2014 had accrued over an 11-month period (from 3 April 2013) when it had accrued over a much longer period (from drawdown in September 2010).  We think this must be correct.  The plaintiffs’ calculation of interest rate is fundamentally flawed.  It also contradicts Ms Chan’s concession in the main hearing that even adopting US$50.1 million as the amount due under the FA, the MLO was not breached until there was a requirement to pay the Bonus of US$47 million[17].

25.  As to the argument that the effective interest rate would be 59.71% on the premise that MSC had “required” YDL to pay US$47 million as Bonus, we agree with the judge that according to the contemporaneous documents, the Bonus was an uncertain future amount discussed between the parties in the context of the possibility that MSC might exit from the Loan arrangements and no agreement was reached as to the value of the Bonus[18].  There is no basis to interfere with the judge’s finding that MSC had not “required” YDL to pay US$47 million as Bonus, that this sum was not “to be paid or payable” within the definition of “interest” in section 2, and it could not be arguable that the MLO would regard negotiation as a “transaction” that could be re-opened under section 25.

26.  There is no reasonable prospect of success on any of the arguments in the MLO Point.

The Agency Point

27.  On the first complaint against the Receivers (causing YDL to expend funds to apply for an ex parte injunction which was discharged), the judge is correct in applying the law that a receiver cannot be in breach of his duty of good faith to the mortgagor in the absence of some dishonesty, improper motive or bad faith (Medforth v Blake [2000] Ch 86 at 102F and 103D) and there was no evidence to show that the Receivers had acted with dishonesty, improper motive or bad faith[19].  Besides, the 1341 Action, as well as the PRC proceedings, was brought by YDL, not by the Receivers.

28.  For the second complaint (replacing the board of directors of WFOE), we agree with the judge this is misconceived.  YDL is not in receivership, nor have the Receivers been appointed in respect of any part of YDL’s assets, nor have they appointed themselves as YDL’s directors.  The right to change the board of director of YDL was exercised by MSC under clause 17.15(d) of the FA and clause 7.1(b) of the equitable share mortgages, pursuant to pre-executed documents provided as security and held in escrow until there was an event of default.  The new directors of YDL then caused the company to pass a shareholder’s resolution as the sole shareholder of WFOE to change the composition of the board of WFOE[20].  As the judge had noted, once there was an event of default, MSC could take possession of the mortgaged assets and exercise all rights as if it were the beneficial owner[21].  And far from challenging the validity of the appointment of the new directors, Ricky Liu, who owns and controls the plaintiffs, had endorsed it[22].

29.  We agree with the judge that the third complaint (bringing proceedings in the PRC), even if made out, cannot be used to invalidate the appointment of the new directors, and the proceedings should in any event be left to the courts in the PRC to decide[23].

30.  Ms Chan submitted that the Receivers also owed a duty of care imposed in equity to the mortgagors as persons interested in the equity of redemption, citing Fisher & Lightwood, Law of Mortgage (13^th ed) at §§28.8(3) to (5), and although the relevant passages in that work were set out in the Decision[24], the judge had not considered the duty of care owed to the plaintiffs in equity separately and had merely rejected the complaints on the basis there was no breach of duty of good faith.  She submitted there was breach of the duty of care in equity in respect of the three complaints made against the Receivers.

31.  The duties that may be owed by a receiver managing mortgaged property to the mortgagor are not necessarily confined to a duty of good faith but may include additional duties, depending on the facts and circumstances of the particular case (Medforth v Blake, at 102F).  Leaving aside whether there were additional duties arising in the particular circumstances of this case, other than an assertion that there was breach of the duty of care in equity regarding each of the three complaints, there is no viable factual basis to support an allegation of breach of duty, whether this is premised on a duty of good faith or a duty of care in equity.

32.  There is no merit in any of the complaints raised on the Agency Point.

33.  None of the grounds of appeal in the draft notice of appeal could be said to have any reasonable prospect of success, we have therefore refused leave to appeal in HCMP 461/2015.

HCMP 462/2015

34.  Five grounds of appeal were advanced in the draft notice of appeal.  Three are in common to the draft notice of appeal in HCMP 461/2015 (the MLO Point, the Agency Point, and the Estoppel Point) and will not be repeated.  We will just deal with the two remaining grounds.

35.  It was contended that there is a serious question to be tried whether MSC was entitled to demand US$50,136,152.07 from YDL (made up of US$29 million in principal and US$21,136,152.07 as cash and deferred interest) on 17 March 2014, and hence to rely on YDL’s failure to pay that sum to declare an event of default.  The argument was that over the 11-month period from 3 April 2013 to 17 March 2014 when the principal of US$29 million was outstanding, MSC purported to charge interest of US$21,861,152.07 (made up of US$725,000 being cash interest paid by YDL on 16 September 2013 and US$21,136,152.07).  As the judge had observed, the additional sums accrued as interest were disproportionate and there was never any satisfactory explanation from MSC.  The judge had held there is a serious issue to be tried as to what sum under the FA was due to MSC on 17 March 2014[25].

36.  The contention that MSC had purported to charge interest of US$21,861,152.07 over the 11-month period from 3 April 2013 to 17 March 2014 is a new argument not advanced in the main hearing and was based on a flawed calculation as already mentioned.  In any event, it could not be disputed that the principal of US$29 million was due and payable on 17 March 2014.  Even though there may be a serious issue to be tried as to the amount of cash and deferred interest due and payable on that date, the judge is clearly right to hold that by virtue of the definition of “Event of Default” in clause 17.1 of the FA (being non-payment of the borrower “on the due date [of] any amount payable pursuant to [the FA]”), the serious issue to be tried cannot prevent an event of default from occurring[26].

37.  The other ground raised in the draft notice of appeal is that it was not just or convenient to grant the mandatory and prohibitory injunctions against the former directors as the 1341 Action was brought in the name of YDL by the Receivers in the purported exercise of their powers as the new directors of the company and there is a serious issue to be tried on the validity of the purported enforcement of the share mortgages by MSC including the purported appointment of the Receivers and hence the acts of the Receivers.

38.  For the reasons given earlier, we agree with the judge there is no serious issue to be tried on the Estoppel Point, the MLO Point or the Agency Point, by which the mortgagors sought to challenge the enforcement actions of MSC.  The act of YDL in commencing the 1341 Action remains a valid corporate act and would not be rendered invalid by the challenge to MSC’s exercise of the rights under the FA and the share mortgages.

39.  We are satisfied that none of the grounds in the draft notice of appeal would have any reasonable prospect of success.  We therefore dismissed the application for leave to appeal in HCMP 462/2015.

HCMP 463/2015

40.  The notice of appeal against the judge’s dismissal of the application to amend the writ in the 1359 Action by including the MLO Point and the Agency Point (“the amendment application”) should have been filed by 15 December 2014.  The summons seeking leave to file the notice of appeal out of time was issued on 26 February 2015.  There was a delay of close to two and a half months.  This delay cannot be regarded as insubstantial.

41.  In the supporting affirmation of Ricky Liu filed on 26 February 2015, he advanced this explanation for seeking leave to file a notice of appeal out of time.

42.  The judge handed down her decision dismissing the mortgagors’ application for an interlocutory injunction and the amendment application on 17 November 2014.  The mortgagors issued a summons for leave to appeal against the dismissal of the injunction application and the amendment application on 24 November 2014.  The leave summons was fixed to be heard before the judge on 9 February 2015.

43.  On 4 February, the mortgagors served a skeleton submission citing Order 59 rule 21(2)(i), and submitted that they sought leave to appeal against the order dismissing the amendment application insofar as necessary.  This was repeated in the oral submission of Ms Chan at the hearing on 9 February.

44.  In the Leave Decision on 12 February, the judge held that no leave to appeal is required as her refusal to grant leave to amend the writ to plead a new claim is an order “determining in a summary way the substantive rights of a party to an action” under Order 59 rule 21(1)(a)[27].

45.  The mortgagors issued the present summons for extension of time two weeks later, after the intervening holidays in the Chinese New Year.

46.  We do not regard the delay as excusable.  Up to the service of the skeleton submission on 4 February, the mortgagors would appear to have proceeded on the basis that leave to appeal was required.  At all times, they had the benefit of legal advice of their solicitors and counsel.  If they were ever in doubt whether leave to appeal was required, they should have applied to the judge (within the time limit of 28 days) for a direction under Order 59 rule 21(3) whether the order dismissing the amendment application is an order within Order 59 rule 21(1)(a).  The fact that it was in the Leave Decision that the judge held no leave to appeal is required is immaterial.  That the mortgagors and former directors were seeking leave to appeal against other orders made by the judge in the Decision is just beside the point.

47.  On the established principles, as the delay is not insubstantial and is not excusable, the party seeking an extension of time to appeal must show a real prospect of success on the merits of the intended appeal.

48.  The judge refused the amendment application (save to the extent of amending the indorsement of claim to mention the IRD and Equity Pledge, which are non-controversial) because she found it plain and obvious that the proposed causes of action based on the MLO Point and the Agency Point would have been struck out for being frivolous and vexatious[28].

49.  Ms Chan submitted the judge had not applied the correct principles for striking out in that disputed facts are to be taken in favour of the party sought to be struck out and there should be no trial on affidavit.  There were substantial disputes of fact on all main and subsidiary issues relating to the MLO Point and the Agency Point.  Pleadings had not been filed at the time of the main hearing before the judge and the mortgagors should not be deprived of the opportunity of putting their case and seeking discovery of relevant documents from MSC and the Receivers.  She contended that the proposed claims based on the MLO Point and the Agency Point are not obviously unsustainable.

50.  It is trite law there should be no trial on affidavit in a strike out application and disputed facts are generally taken in favour of the party sought to be struck out.  That does not mean disputed facts cannot be gone into in appropriate circumstances.  Where it is shown to be plain and obvious that the disputed assertion was made without evidence or any solid basis, a spurious action may be struck out (Hong Kong Civil Procedure 2015, vol 1, §§18/19/14 and 18/19/21).  Here, the undisputed contemporaneous documents speak for themselves.  For the reasons given earlier, the judge is correct to hold that the MLO Point and the Agency Point are clearly unarguable.  The mortgagors cannot show any real prospect of success on the merits of the intended appeal.

51.  We therefore dismissed the application for extension of time to file a notice of appeal in HCMP 463/2015.

Costs

52.  Costs of the three applications should follow the event.  So the plaintiffs in the 1359 Action should pay the defendants’ costs in HCMP 461/2015 and HCMP 463/2015, and the defendants in the 1341 Action should pay the plaintiff’s costs in HCMP 462/2015.

53.  The 1^st and 4^th defendants in the 1359 Action have put in: a statement of costs for summary assessment in HCMP 461/2015 of $88,081.50 and a supplemental statement of $121,000, making a total of $209,081.50; and in HCMP 463/2015 a statement of costs of $167,962.50 and a supplemental statement of $121,000, making a total of $288,962.50.  The total amount of costs in the two applications came up to $498,044.

54.  The 2^nd and 3^rd defendants in the 1359 Action have put in: a statement of costs for summary assessment in HCMP 461/2015 of $122,770 and a supplemental statement of $54,860, making a total of $177,630; a statement of costs for summary assessment in HCMP 463/2015 of $115,625 and a supplemental statement of $34,860, making a total of $150,485.  The plaintiff in the 1341 Action put in a statement of costs for summary assessment in HCMP 462/2015 of $122,770 and a supplemental statement of $54,860, making a total of $177,630.  The total amount of costs in the three applications came up to $470,885.

55.  We agree with Ms Chan that the costs claimed by the defendants are grossly excessive, and the hourly rates of some of the fee earners are far too high.

56.  We note that in the Leave Decision, the judge made a gross sum assessment in these figures: in the 1359 Action, $200,000 for the 1^st and 4^th defendants; in the 1359 Action, $80,000 for the 2^nd and 3^rd defendants; and in the 1341 Action, $100,000 for the plaintiff.

57.  We take into account that the arguments raised in the three applications before this court are largely a re-run of the arguments in the main hearing and the leave application before the judge, and there are a lot of common arguments in the three applications.  We make a very substantial reduction of the costs claimed and our gross sum assessment is as follows:

(1)In HCMP 461/2015,

To the 1^st and 4^th defendants, $90,000, of which $60,000 are the fees of a senior and two junior counsel.

To the 2^nd and 3^rd defendants, $75,000, of which $45,000 are the fees of a senior counsel.

(2)In HCMP 462/2015,

To the plaintiff, $75,000, of which $45,000 are the fees of a senior counsel.

(3)In HCMP 463/2015,

To the 1^st and 4^th defendants, $110,000, of which $80,000 are the fees of a senior and two junior counsel.

To the 2^nd and 3^rd defendants, $50,000, of which $30,000 are the fees of a senior counsel.

58.  The total fees awarded to the 1^st and 4^th defendants in HCMP 461 and 463/2015 came up to $200,000, and an equal amount of fees is awarded to the 2^nd and 3^rd defendants in HCMP 461 and 463/2015 and the plaintiff in HCMP 462/2015.