NOBLE FIELD OVERSEAS LTD v. UNITED BEST DEVELOPMENTS LTD AND ANOTHER

HCA 1549/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1549 OF 2013

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REASONS FOR JUDGMENT

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Introduction

1. The trial of this claim came on for hearing on 24 October 2016.  The parties were given notice of this date as long ago as 17 December 2015.  At the outset of the trial, Mr Joshua Choy, counsel for the 2^nd defendant (“Mr Chen”), applied for an adjournment of 3 months.  I was told that the application was made on instructions received on Saturday 22 October 2016.  Those instructions were that Mr Chen did not have permission to come to Hong Kong to attend the trial.  Mr Chen is a citizen of and resident in the PRC and permission to visit Hong Kong must be obtained from the PRC authorities.  The application was not supported by any evidence but two colour photocopies, possibly of the two sides of a single document or card, were put before the court that appeared to show that permission had been granted to Mr Chen to visit Hong Kong as part of a group but this permission had expired on 23 August 2016.

2. The application was opposed by Ms Bonnie Cheng, counsel for the plaintiff, who drew my attention to Order 25, rule 1B (3) of the Civil Procedure Rules that provides that the court shall not grant an application to change a “milestone date” (such as the trial date) unless there are exceptional circumstances.

3. Having heard Mr Choy in reply I refused the application holding that there was a complete absence of exceptional circumstances and expressing scepticism whether Mr Chen truly did not have permission to come to Hong Kong to participate in the trial.

4. Mr Choy then informed the court of the following instructions he had from Mr Chen that were to apply in the event that the adjournment application were refused.  There would be no cross‑examination of the plaintiff’s witnesses; none of the witnesses due to be called by Mr Chen would be called; there would be no submissions whether as to the facts or to the law advanced on behalf of Mr Chen; and the Written Opening Submissions that had been served by Chen pre‑trial were withdrawn.

5. Ms Cheng then called the following witnesses on behalf of the plaintiff who, having affirmed to tell the truth, confirmed the truth of their various witness statements and adopted them as their evidence in chief: Ms Angela Chen (“Ms Chen”); Ms Chan To Kuen (“Ms Chan”); Mr Tang Kam Wing (“Mr Tang”); Mr Mok Tsan San (“Mr Mok”); Mr Cheung Man Leung (“Mr Cheung”).

6. Consistently with his instructions, Mr Choy did not challenge the evidence of any of these witnesses.

7. Ms Cheng, relying on her written Opening Submissions, then asked for judgment in accordance with the prayer pleaded in the Statement of Claim with submissions as to the up‑to‑date interest claim to follow.

8. I proceeded to give judgment with written reasons to follow and after a short adjournment I dealt with the amount of interest to be awarded down to the date of trial and thereafter until payment.

9. The sums I awarded were:

(1)  HK$635,278,213.90 made up from:

(a) HK$500,000,000.00 principal on the loan notes referred to below;

(b) HK$33,333,333.00 representing the second instalment of interest due on 21 April 2013 after 12 noon;

(c) HK$33,333,333.00 representing the third instalment of interest due on 21 July 2013 (after 12 noon);

(d) default interest at 31.67% on the second instalment of interest accruing from 21 April 2013 (after 12 noon) to 21 July 2013 (before 12 noon);

(e) default interest on the principal amount (HK$500,000,000.00) and the total of the second and third instalments of interest (ie HK$66,666,666) accruing from 21 July 2013 (after 12 noon) to 22 August 2013 (whole day); and

(f) the administrative fee of HK$50,000,000.00;

(2)  HK$569,857,542.71 being the contractual interest on the sum of HK$566,666,666.00 calculated from 23 August 2013 to 24 October 2016 (the date of trial) at the contractual rate of 31.67% per annum; and

(3)  continuing interest of HK$491,680.36 per day at the rate of 31.67% per annum on HK$566,666,666.00 from 25 October 2016 until full payment.

Reasons for judgment

10. The plaintiff is a BVI company controlled by Ms Chen.  The 1^st defendant is a BVI company the share capital of which at the time the agreements sued on were executed was owned by Mr Chen. Subsequently, pursuant to a share charge referred to below, the plaintiff acquired all the issued shares in the 1^st defendant and thereafter caused it to enter a Defence to the plaintiff’s claim that was a bare non‑admission of liability.

11. At a Pre‑Trial Review held on 25 July 2016, the 1^st defendant undertook to be bound by the judgment of the court following trial and was excused from attendance at the trial.

12. On 21 October 2012, the plaintiff as purchaser, the 1^st defendant as issuer and Mr Chen as guarantor executed a written purchase agreement (“the loan notes purchase agreement”) under which the 1^st defendant agreed to sell and the plaintiff agreed to purchase secured convertible loan notes at aprice of HK$500,000,000.00.  This agreement was expressed to be governedby the law of Hong Kong and contained a clause (clause 13(3)) providing that it constituted the entire agreement and understanding between the parties in respect of the Loan Documents viz the loan notes purchase agreement, the aforesaid share charge and a share pledge and any other documents to be issued on completion.

13. The following day on 22 October 2012, the 1^st defendant issued a loan notes instrument to the plaintiff in respect of loan notes for a principal amount of HK$500,000,000. Under this instrument, five loan note certificatesdated 22 October 2012 each in the amount of HK$100,000,000.00 were issued.

14. The loan notes purchase agreement and the loan notes instrument were financing transactions by which the plaintiff provided a bridging loan to the 1^st defendant at Mr Chen’s request to enable it to purchase the share capital of a Thai company, Surapanthavanij Co Ltd (“SCL”) which owned a 70% interest in a PRC joint venture company, Beijing Hua Mao Surapan Hotel Development Co Ltd (“the JV Co”).  The PRC joint venture companyowned two five star hotels in Beijing, the Ritz Carlton and JW Marriot.  The plaintiff was introduced to the possibility of advancing this bridging loan to the 1^st defendant by Mr Mok who carries on business as a financial intermediary.

15. In consideration of the plaintiff entering into, inter alia, the loan notes purchase agreement, each of the 1^st defendant and Mr Chen granted a purchase option to the plaintiff to purchase up to 95% of the then issued share capital of the 1^st defendant on a fully diluted basis at a price based on the agreed valuation of HK$2,000,000,000 of the 1^st defendant and its subsidiaries (on a debt‑free and cash‑free basis).

16. The liabilities of the 1^st defendant and Mr Chen under the loan notes purchase agreement and the loan notes issued under the loan note instrument were secured by a share charge dated 22 October 2012 executed by Mr Chen over all his shares in the 1^st defendant in favour of the plaintiff (“the share charge”) and a share pledge dated 22 October 2012 executed by the 1^st defendant over all of its shares in SCL in favour of the plaintiff (“the share pledge”).

17. The loan notes instrument and each of the loan notes issued thereunder provided that the same were governed by the law of Hong Kong.

18. The loan notes instrument provided that:

(1)  the loan notes were to mature in the period up to 21 July 2013 with interest in the sum of HK$100,000,000.00 to be paid by three instalments of HK$33,334,000.00 and HK$33,333,000.00 and HK$33,333,000.00 payable on 21 January 2013, 21 April 2013 and 21 July 2013 respectively;

(2)  if the 1^st defendant failed to pay any interest or redemption monies, default interest would be paid at the rate of 31.67% per annum on the unpaid sum until full payment (including interest thereon);

(3)  if the 1^st defendant failed to pay any redemption monies, it would also pay an administrative fee equivalent to 10% of the outstanding principal amount;

(4)  once the loan notes had become redeemable, the plaintiff, as the Noteholder, had, at its absolute discretion, the right to convert all of the loan notes held by it into fully paid shares of the 1^st defendant which if fully converted would convert into 49,900 shares, representing 99.8% of the 1^st defendant’s issued capital on a fully diluted basis.

19. As guarantor under clause 8 of the loan notes purchase agreement, Mr Chen guaranteed the due performance of the “Guaranteed Obligations”, defined to mean all present and future obligations, commitments, undertakings,warranties, indemnities, covenants and liabilities of or given by the 1^st defendant to the plaintiff under the loan notes purchase agreement and, inter alia, the loan notes instrument.

20. By 17 January 2013, all money due to be paid by the plaintiff to the 1^st defendant under the loan notes purchase agreement had been paid.

21. The 1^st defendant duly paid the first instalment of interest of HK$33,333,334 but it defaulted on paying the second and third instalments of interest and following demand notices served on behalf of the plaintiff the principal amount of the loan notes (HK$500,000,000.00) became due and owing on 21 July 2013, together with the interest that had been accruing since 21 July 2013 pursuant to the terms of the loan notes instrument.

22. In his Amended Defence, endorsed with a statement of truth he signed on 24 August 2015, Mr Chen admits that the transactions described above were concluded by the 1^st defendant with himself as guarantor of the 1^st defendant’s liabilities thereunder but he alleges that the plaintiff did not advance the full HK$500,000,000.00 but only HK$494,555,736.33.  He also alleges that the signature on the draw down notice dated 9 January 2013 by which the 1^st defendant acknowledged receipt of US$62,475,031 out of the purchase price of HK$500,000,000.00 is not his signature but a forgery, notwithstanding that his own lawyer, Mr Raymond Kwong, confirmed to Mr Tang of DLA Piper that the signature was Mr Chen’s true signature.

23. Mr Chen’s pleaded defence is that an overriding oral joint venture agreement was concluded between the plaintiff, acting by Mr Mok and Mr Chen in early October 2012, of which the plaintiff is in breach, thereby rendering the agreements relied on by the plaintiff unenforceable against the 1^st defendant and Mr Chen.

24. The terms of the alleged overriding collateral joint venture agreement (“the collateral joint venture agreement”) averred by Chen are:

(i) the plaintiff would lend HK$500 million to the 1^st defendant through issuing loan notes convertible into shares in the 1^st defendant;

(ii) the plaintiff would invest jointly in a project with the 1^st defendant to acquire SCL’s interest in JV Co, the amount of the plaintiff’s investment to be HK$2,000,000,000.00 which was to be used to acquire 95% of the shares in the 1^st defendant from the 1^st defendant and/or Mr Chen; and

(iii) the HK$500 million loan together with any interest accruing thereon would be set‑off against the HK$2,000,000,000.00 payable by the plaintiff to the 1^st defendant and/or Mr Chen.

25. Mr Chen further pleads that:

(i) Ms Chen expressly confirmed the said alleged collateral joint venture agreement at a meeting on 12 October 2012 held at the offices of DLA Piper in Hong Kong when she further confirmed that Mr Mok was authorised by her and the plaintiff to conclude the collateral joint venture agreement;

(ii) it was in reliance of the collateral joint venture agreement and only in reliance of that agreement that:

(a) the 1^st defendant and/or Mr Chen executed the loan notes purchase agreement;

(b) the 1^st defendant issued the loan notes instrument and the five loan notes certificates and executed the share pledge and the share charge;

(iii) the plaintiff breached the alleged joint venture agreement by:

(a) failing to acquire any share in the 1^st defendant;

(b) failing to pay any part of the HK$2,000,000,000.00 to the 1^st defendant or Mr Chen to acquire the shares in the 1^st defendant; and

(c) purporting to redeem the loan notes by issuing a demand letter through DLA Piper dated 4 June 2013 and commencing the present action.

26. The alleged collateral joint venture agreement is denied by the plaintiff in its Re‑Amended Reply.  Mr Chen’s evidence as to the alleged collateral joint venture agreement is also refuted and denied in the witness statements of each of the witnesses called by the plaintiff.

27. Given:

(1) the evidence of Ms Chen that the full amount to be paid under the loan notes purchase agreement was indeed paid and her incontrovertible evidence that the 1^st defendant did not pay the second and third instalments of interest due under the loan notes instrument;

(2) the denial in the witness statements of the witnesses called by the plaintiff of the alleged collateral joint venture agreement; and

(3) Mr Chen’s admissions as to:

(i) the execution by the 1^st defendant and himself of the loan notes purchase agreement;

(ii) the execution by the 1^st defendant of the loan notes instrument and the share pledge;

(iii) the execution by himself of the share charge;

(iv) the issuance of the five loan notes certificates by the 1^st defendant,

the evidential burden was on Mr Chen to prove the alleged collateral agreement on the balance of probabilities.  Pre‑trial, he proposed to do this by giving evidence himself in accordance with his two witness statements and by calling Mr Lo Ka Wo.

28. In the event, the plaintiff’s witnesses were not cross‑examined on behalf of Mr Chen and no witnesses gave evidence on behalf of Mr Chen.  Further, there was nothing in the evidence given by the plaintiff’s witnesses that suggested that they were not telling the truth.  The inevitable conclusionof the court was therefore that Mr Chen had failed to discharge the evidential burden on him to prove the alleged collateral joint venture agreement with the result that the plaintiff has established its claim against him and is entitled to the sums set out in the prayer of its Statement of Claim.

29. Even if Mr Chen had called evidence and/or challenged the evidence called by the plaintiff, I am bound to say he would have had an uphill, although not an impossible, task in proving his case.  In saying this I adopt the submissions made in Ms Cheng’s Opening Submissions.  Thus, the allegedoverriding joint venture agreement not only finds no support at all in any of thecontemporaneous documents, it is in fact positively refuted by some of them.  In particular, its terms go directly against the loan notes purchase agreement, the loan notes instrument and the loan notes certificates, which give an option to, rather than impose an obligation on, the plaintiff to purchase up to 95% of the issued share capital of United Best Developments; provide that the plaintiff shall at its absolute discretion have a right to convert the loan notes into shares; contain extensive provisions for full redemption of the loan notes by the plaintiff upon their maturity or following an event of default or a material breach by the 1^st defendant or Mr Chen.  Further, at all material times, the 1^st defendantand Mr Chen were legally represented with their lawyer, Mr Raymond Kwong, taking instructions and commenting on the documents as they were being negotiated and drafted.  Yet at no point before the dispute arose was any allusion made to the existence of the alleged overriding collateral joint venture agreement.  On the contrary, the 1^st defendant performed its obligation to pay the first instalment of interest which would be inexplicable were there an agreement between the parties to set‑off the loan and accrued interest against the HK$2,000,000,000 which Mr Chen alleges the plaintiff was obliged to pay for acquiring the shares in the 1^st defendant.  There is also nothing in the documents or the undisputed background of the case to support the contention that Jason Mok was or was ever held out to be the authorised representative of the plaintiff or Ms Chen.

30. In any event, in my view, Mr Chen’s defence is legally unsustainable in the face of the entire agreement clause (clause 13) contained in the loan notes purchase agreement.  That clause provides in full as follows:

“13.1 In this clause 13, ‘Pre‑Contractual Statement’ means any representation, statement, assurance, covenant, undertaking, warranty,indemnity, guarantee or commitment (whether contractual or otherwise) made or given before the date of this agreement.

13.2 The Loan Documents[1] supersede and extinguish all previous agreements, arrangements and understandings between, or Pre‑Contractual Statements given by, the parties relating to the subject matter of the Loan Documents (or any of them).

13.3 The Loan Documents (as varied in accordance with their terms) constitute the entire agreement and understanding between the parties in respect of the subject matter of the Loan Documents (or any of them).

13.4 This clause 13 shall not exclude or limit any liability arising as a result of any fraud, wilful misstatement, wilful misconduct or wilful concealment.”

31. The effect of an entire agreement clause such as clause 13 was considered in Inntrepreneur Pub Co v East CrownLtd[2000] 2 Lloyd’s Rep 611 Ch D where Lightman J said (at para 7):

“The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim such as the present to the existence of a collateral warranty. The entire agreement clause obviates the occasionfor any such search and the peril to the contracting parties posed by the need which may arise in its absence to conduct such a search. For such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that accordingly any promises or assurances made in the course of the negotiations (which in the absence of such a clause might have effect as a collateral warranty) shall have no contractual force, save insofar as they are reflected and given effect in that document. The operation of the clause is not to render evidence of the collateral warranty inadmissible in evidence as is suggested in Chitty on Contract 28^th ed. Vol 1 para 12‒102: it is to denude what would otherwise constitute a collateral warranty of legal effect.”

32. Inntrepreneur was applied by the Hong Kong Court of Appeal in Glory Gold Ltd v Star Play Development Ltd [2008] 2 HKLRD 416, where Cheung JA stated (at para 16):

“16. The clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clauses and not elsewhere and that any promises or assurances made in the course of negotiation (which in the absence of such a clause may have effect as a collateral warranty) shall have no contractual force, save, insofar as they are reflected and given effect in that document. The clause is not merely to render evidenceof the collateral warranty inadmissible in evidence but to deny whatwould, otherwise, constitute a collateral warranty of legal effect, see: Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] 2 Lloyd’s Rep 611. ”

Concluding remarks

33. It is a universal principle shared by all but the most primitive legal systems that a party who makes factual assertions in a contested case has the burden of proving those assertions.  As stated above, Mr Chen’s defence to the plaintiff’s claim depended on him proving on the balance of probabilities that the plaintiff and the 1^st defendant had entered into the allegedcollateral joint venture agreement.  In the event, Mr Chen called no evidenceand failed to challenge the evidence relied on by the plaintiff, with the inevitable result that he failed to prove the existence of the alleged agreement and the plaintiff succeeded in its claim against him.

34. In my judgment, Mr Chen’s non‑appearance at the trial was entirely of his own doing.  It was always in his power to ensure that he had permission to enter Hong Kong to attend the trial and I am satisfied that he deliberately brought about a situation that made it impossible for him to do so.  I also strongly suspect that, knowing the court was virtually certain to refuse an adjournment, he instructed his counsel to apply for an adjournment and upon that application being refused, not to challenge the plaintiff’s case evidentially or legally in an endeavour to render the inevitable judgment in the plaintiff’s favour unenforceable outside Hong Kong in a jurisdiction where Mr Chen has assets susceptible to execution.  If this indeed was Mr Chen’s plan, it ought to fail because in the circumstances of this case the plaintiff’s claim was indeed tried on the merits albeit in the self‑induced absence of Mr Chen and the judgment against him in the plaintiff’s favour is as deserving to be enforced outside Hong Kong as it would be if Mr Choy had fully participated in the trial.