YAO HUA KANG v. JOE HSIANG LIN

HCA 1926/2020

[2022] HKCFI 3484

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1926 OF 2020

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D E C I S I O N

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1.  This is an appeal on costs arising from the order dated 4 April 2022 made by Master Anthony HK Chan (“the Order”) arising from Yao-Hua Kang’s (“the plaintiff’s”) withdrawal of her O.14 summons issued on 11 August 2021 (the “O.14 summons”) in the action against Joe-Hsiang Lin (“the defendant”). The Master ordered that the costs be in the cause.

2.  At the conclusion of the hearing, this Decision was reserved which I now give.

Background facts

3.  The defendant is a professional fund manager and investor and had set up venture capital funds in Taiwan into which the plaintiff’s husband, Chen Liu (“Liu”), invested via his wife the plaintiff as his nominee investor. According to the defendant, that was Liu’s modus operandi.

4.  Various discussions and negotiations took place between Liu and the defendant in 2017 concerning investments in overseas opportunities including Nexperia Holding BV (“the NXP investment”). The parties have given conflicting versions of the nature of those discussions and the agreement reached.

5.  On 25 December 2017, the plaintiff entered into an agreement with the defendant (“the loan agreement”) whereby the plaintiff agreed to make available to the defendant a US $1 million loan facility (“the facility”) available for a three-month period to be repaid only on the 7^th anniversary of the loan agreement. Prepayment was not allowed in the loan agreement[1]. It is the defendant’s case that his agreement was with Liu and the plaintiff acted as Liu’s nominee.

6.  Bridge Roots Holdings Limited (“the Company”) is an offshore entity with 2 wholly-owned subsidiaries Bridge Roots Capital Limited (“BRC”) and Bridge Roots GP Ltd (“BRG”) which entities are beneficially owned by the defendant.

7.  Apart from the loan agreement, the plaintiff, the defendant and the Company entered into a share charge (“the Share Charge”), a dividends assignment deed (“the Dividends Assignment Deed”) and an option deed (“the Option Deed”) in respect of 50% of the issued share capital of the Company (collectively “the Finance Documents”) on the same day.

8.  The facility was for the purpose of making an equity subscription, inter alia, to the Company for the purpose of the Company making an equity injection into BRG which in turn would use the funds to pay its committed investment in Bridge Roots Fund L.P. (“the Fund”).

9.  The Fund was set up by the defendant with investors investing in the Fund as limited partners. BRC is the manager of the Fund entitled to a management fee of 1% of the total equity of the Fund and BRG is the general partner of the Fund entitled to a performance fee of 10% of the increase in the equity in the Fund.

10.  On 2 January 2018, the plaintiff lent the sum of US$500,000 (“the loan”) to the defendant.

11.  On 6 November 2018, Liu sent an email to the defendant alleging a 50% equity ownership of BRC in which Liu stated that he and the defendant

“had a verbal, handshake, and professional agreement that my wife or I own 50% equity interests in all his legal entities. Furthermore, [the defendant] and my wife executed a “loan and pledge” agreement via Charlton’s (a Hong Kong law firm) in which my wife effectively owns 50% of the equity.”

For convenience, that will hereafter be referred to as “the 50:50 arrangement”.

12.  In the same email, Liu asked for a transfer of 50% of the BRC shareholding and informed the defendant that the plaintiff “now owns 50% of [BRC]”.

13.  The defendant was able to procure the Fund (which has US$170 million worth of investments) to invest in the NXP investment.

14.  The Fund exited the NXP investment at the end of 2019/early 2020 reaping a substantial profit.

15.  On 7 February 2020, the plaintiff was informed by BRC that after distribution of investment capital of the Fund on 10 February 2020, there would be a dissolution and the Fund would be liquidated.

16.  On 13 August 2020 the defendant wrote to the plaintiff stating that the loan the plaintiff made to the defendant had fulfilled its original purpose of investing into 50% of BRC and informing her of the remaining amount for distribution as determined by the liquidation report for the liquidation of the Fund and of BRG and that she would be entitled to 50% of the same.

17.  On 9 September 2020, BRC sent the plaintiff the independent auditors’ report and financial statements of BRG for the period ended 31 July, 2020 showing the amount distributable of (approximately) US$5.96 million. The plaintiff’s 50% share of (approximately) US $2.98 million was remitted to her on 16 September 2020.

18.  On 28 September 2020, the plaintiff’s solicitors (“K&C”) requested financial documents pursuant to clause 11.1 (a), (j) and (k) of the loan agreement in relation to the Company, BRG, BRC and the Fund from the defendant.

19.  On 19 October 2020, K&C sent a notice of event of default[2] to the defendant pursuant to clause 12.2 of the loan agreement.

20.  On 13 November 2020, the plaintiff issued the writ endorsed the statement of claim against “the defendant” seeking, inter alia, specific performance of certain undertakings contained in clause 11.1 of the loan agreement.

21.  The defendant filed his defence on 19 January 2021.

22.  On 28 July 2021, Munros sent a “without prejudice” letter to K & C setting out reasons why the plaintiff’s claim will fail.

23.  On 11 August 2021, the plaintiff took out an O.14 summons for specific performance of the undertakings contained in clause 11.1 (j) and (k) of the loan agreement to provide documents and information.

24.  On 25 November 2021, the defendant filed an affirmation in opposition and took out a summons to amend the defence (“the amendment application”).

25.  On 1 December 2021, K & C consented to the amendment application and stated that “in light of your amendments”, it was the plaintiff’s intention to withdraw the O.14 summons with costs in the cause. Munros did not agree with the costs proposal.

26.  The parties’ failure to agree resulted in a substantive hearing before the Master on costs.

Applicable principles

27.  The issue arising in the present case concerns costs of a withdrawn O.14 summons.

28.  The usual order upon withdrawal of an application or an appeal is for the applicant to pay the costs of the defendant following the principles governing withdrawal of summonses under O.21, r 6. To persuade the court to depart from the usual rule, the onus is upon the party seeking to withdraw to show that discontinuance is for reasons other than an acknowledgement of defeat or likely defeat: see Uni-Creation Investments Limited v Secretary for Justice, HCMP 2166/2015, unrep., 30 June 2017 at §§9-10.

29.  Uni-Creation does not involve an O.14 application. That arose in the recent case of To Yuk Fung v Wu Pun Yan [2020] HKCFI 400 cited by both parties.

30.  While the defendant relied on the entire §40, the plaintiff relied specifically on §40 (3). §40 in its entirety reads as follows:

“40. In respect of the issue of costs in the context where a plaintiff withdraws an Order 14 application, the following should be noted:

(1) The court should be mindful of the need to ensure that the summary judgment procedure is not abused by litigants who attempt to make their cases unrealistically simple in the hope that a rapid result would be achieved via an Order 14 application. Parties should not be encouraged to try their luck by issuing an Order 14 application when such a procedure is inappropriate in view of the nature and complexity of the dispute. As Mummery LJ expressed in Doncaster Pharmaceuticals Group Ltd v The Bolton Pharmaceutical Company 100 Ltd [2006] EWCA Civ 661 at §§10-12[3]…

(2) In other words, an Order 14 application should not be used for issues which should and could only be resolved fully and properly at trial.

(3) If, for example, a defendant, in resisting an Order 14 application in a case which appears to be straightforward, suddenly comes up with a factual allegation which is not evidenced by any documents and such an allegation only appears for the first time in the defendant’s affirmation, the plaintiff is required to consider whether it should still proceed with the application by persuading the court that the allegation is simply unbelievable. If the plaintiff takes the view that it may be too much of a gamble to continue to pursue the application and therefore decides to withdraw the application, it would be harsh in these circumstances to penalise the plaintiff for taking out the application by ordering it to pay costs of the application.

(4) If a plaintiff fails in an application for summary judgment, the court needs to consider if it should be ordered that the Order 14 summons be dismissed or that there be unconditional leave to defend. An order to dismiss should be made where the case is not within Order 14 or where the plaintiff knew, before the issue of the summons, that the defendant was relying on a contention which would entitle him to unconditional leave to defend (see Hong Kong Civil Procedure 2019[4], Vol 1, at §§14/7/2-14/7/3). Normally, a costs order will be made against the plaintiff in the case where the Order 14 summons is dismissed whereas costs will be in the cause if unconditional leave to defend is granted to the defendant.

(5) However, the mere fact that a line of defence was known to a plaintiff does not necessarily mean that he should have known that it was not appropriate to take out the Order 14 application. As Lam VP stated in Greater China Capital Inc v Gbtimes Ltd [2018] 1 HKLRD 210 §8, “[m]uch depends on the available evidence and the assessment of the probity of proceeding by way of O.14 is very often a matter of judgment.”

(6) It should be pointed out that any rigid application of the above factors may not be helpful. After all, each case must be decided on its own facts.

(6) Further, as mentioned above, the Defendant contends that “O.14, r.7 only comes into play if and when the court refuses to grant summary judgment after a contested hearing”. What the Defendant means, if I understand the argument correctly, is that since the Plaintiff has decided to withdraw the O.14 application without proceeding to a contested hearing on merits, the applicable principle is governed by O.21 r.6 as opposed to O.14 r.7. No authority has been cited in support of this proposition. In any event, I cannot accept this argument because in Viatech Engineering Ltd v The Ming An Insurance Co (H.K.) Ltd, HCA 2393/2007 (unrep, 16 October 2008) (cited by the Plaintiff), the court also considered a situation where the plaintiff withdrew the O.14 application before the substantive hearing with the only outstanding issue of costs to be determined by the court. In Viatech, Deputy High Court Judge Au (as Au JA then was) clearly applied O.14 r.7 in addressing the question of costs.”

The defendant’s case

31.  The defendant does not accept the ostensible reason the plaintiff advanced for the withdrawal, attributing it to the amendments made to the defence. Rather, the defendant seeks an order that the costs of the O.14 application be to the defendant on the grounds that the plaintiff knew or ought to have known, at the time of making her summary judgment application, that the defendant had a credible and arguable defence.

32.  Mr Sebastian Hughes, counsel for the defendant, submitted that the Master failed to turn his mind to whether there were triable issues and made no determination in that regard.

33.  It will have become apparent from the background facts set out above that the parties are not ad idem as to what was exactly agreed between Liu and the defendant that led to the signing of the loan agreement. While the plaintiff’s application arises out of clause 11.1 of the loan agreement, the loan agreement and the 50:50 arrangement cannot satisfactorily be considered in isolation: to focus exclusively on the loan agreement is to take an unnecessarily blinkered view.

34.  The loan agreement appears to bristle with difficulties of construction. It is far from clear, for example, whether (i) the Fund was a single project investment specifically tailored for the NXP investment; (ii) the Fund could exit the NXP investment prior to the repayment date of the loan agreement; (iii) if so, whether the Fund could be wound up following the exit and the net profit distributable to the general partners; and (iv) if not, whether the Fund only terminates on the repayment date irrespective of what investments it might have been holding[5].

35.  The issues that emerge from the parties’ submissions and the materials before the court can conveniently be considered under the subheadings below.

(a) The legal effect of a declaration under clause 12.2

36.  Clause 12.2 provides as follows:

“12.2 Declarations

If an Event of Default has occurred the Lender may, by written notice to the Borrower, declare the Loans, accrued interest and all other sums accrued or outstanding under the Finance Documents to be due and payable, whereupon they shall become immediately due and payable without further demand, notice or other legal formality of any kind.”

37.  There is no agreement as to whether the service of a notice merely affirms the loan agreement by accelerating payment (rendering immediately due and payable all accrued interest and other outstanding sums under the loan agreement) which is the plaintiff’s position, or terminates the loan agreement which is the defendant’s position.

38.  It is common ground that the plaintiff served a notice of an event of default on 19 October 2020 pursuant to clause 12.2. The defendant’s case is that the loan agreement was no longer extant after that date. If correct, there would be nothing left of the loan agreement capable of being enforced.

39.  A related issue is whether by serving a notice pursuant to clause 12.2, the plaintiff was thereby repudiating the loan agreement (by calling in the loan instead of waiting for repayment on the repayment date of 25 December 2024) which repudiation was capable of acceptance by the defendant.

40.  It would appear that the Master implicitly accepted the plaintiff’s suggestion that the notice served was an affirmation of the loan agreement.

41.  In my view, it is arguable that the notice had the effect of terminating the agreement. After all, if payment is accelerated (from the repayment date) the plaintiff would have recouped all amounts that could have been due under the loan agreement through the investment made into the Fund. It is unclear what interest the plaintiff could have retained thereafter that could have generated further returns.

(b) What was the true nature of the agreement between Liu/the plaintiff and the defendant

42.  It is unclear if the agreement was for the plaintiff and Liu to be provided with 50% equity in BRC which was to manage the investment in the Fund or whether it was simply a loan governed by the loan agreement, alternatively whether the loan agreement put into effect the 50:50 arrangement.

43.  The answer to this will also answer the related issue of whether the payment of US$ 2.98 million on 16 September 2020 on dissolution of the Fund was made pursuant to the 50:50 arrangement or under the loan agreement. That in turn is relevant to the question whether clause 11.1 may be invoked[6].

(c) Whether the plaintiff has sustained any loss as a result of the defendant’s breach

44.  Even if the defendant were in breach of the loan agreement entitling the plaintiff to accelerated payment of accrued interest and all outstanding sums due, his case is that the plaintiff has suffered no loss resulting from the breach.

45.  The letter dated 28 July 2021 from Munros (“the July letter”) identified the 2 claims made against the defendant, namely, (1) a claim for breach of clause 13.1 of the loan agreement entitling the plaintiff to be indemnified against all losses suffered as a consequence of any event of default or breach of the Finance Documents; and (2) specific performance of positive undertakings under clause 11.1 (j) and (k).

46.  As regards (1) above (the indemnity claim), §§6-11 of the July letter explained why the plaintiff has suffered no loss as a result of the breach. The additional sums to which the defendant is entitled consist of interest and dividends. The interest calculation follows the fixed formula in clause 5.1 of the loan agreement. No further information is necessary to perform that calculation.

47.  The calculation of dividend payments is governed by clause 7.2 which provides that the BR Group companies shall declare dividends of at least 90% of net profits of the relevant company as per its audited accounts as approved by their respective board of directors. The amount is ascertainable only from the audited accounts of the BR Group.

48.  It is the defendant’s position that other than the approved audited accounts of the BR Group companies, no other documents are necessary in order to calculate dividend payments. Audited accounts for 2018 and 2019 of the BR Group as well as for the financial statements for BRG for the period up to 31 July 2020 have been made available to the plaintiff.

49.  Although Mr Derek Hu, counsel for the plaintiff, maintains that the plaintiff is entitled to additional payments which can only be verified from the financial documents sought under clause 11.1 (k), it is unclear what other material or information in addition to what the defendant accepts as necessary[7] for ascertaining whether or not there had been any default in the implementation of the dividend policy as defined in the loan agreement is required. It is to be noted that the plaintiff made the present application without responding to the July letter.

50.  As regards the documents sought, it is the defendant’s position that the payment of US $2.98 million on 16 September 2020 to the plaintiff was more than sufficient to discharge all sums due from the defendant such that no further sums remain owing under the Finance Documents.

51.  As clause 11.1 is predicated on both the loan agreement being extant and a sum remaining owing under the Finance Documents and both are triable issues, the O.14 application is premature.

(d) Whether the plaintiff has any legitimate interest in seeking specific performance

52.  Specific performance being an equitable remedy, the court has a discretion to withhold specific performance, for example, where the plaintiff does not have any legitimate interest in the information sought: see White & Carter (Councils) Limited v McGregor [1962] AC 413[8].

53.  In the present case, it is not apparent how the request made under clause 11.1 (j) for certificates of incumbency can be relevant to the quantification of the sums to which the plaintiff claims she is entitled which is her ostensible reason[9] for seeking specific performance.

Conclusion

54.  I consider those issues highlighted in sub-headings (a) to (d) above to be triable issues which the plaintiff knew or ought to have known at the time the application for specific performance was made.

55.  In the circumstances, if (as is my view) the application should not have been made in the first place, whether or not the withdrawal of the O.14 application was caused by the amendments made to the defence is irrelevant.

56.  Accordingly, there was no basis for ordering that costs be in the cause. Rather, the appropriate costs order is to award the costs of the plaintiff’s summary judgment application (including the costs of the hearing below, and the costs of this appeal) be paid by the plaintiff to the defendant, with certificate for counsel, such costs to be summarily assessed and payable forthwith.

57.  It is further directed that the defendant’s statement of costs be lodged within 7 days of this Decision, the plaintiff’s objections within 14 days thereafter and the defendant’s reply (if any) within 7 days thereafter.

58.  Summary assessment will take place in Chambers.