SZE KUNG YEE v. LAM KEUNG AND ANOTHER

HCA 1620/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1620 OF 2008

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D E C I S I O N

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1.  There is a serious question to be tried on whether the defendants are indeed the legal and beneficial owners of the 8,800 shares of Hua Ning Industries Limited (“Hua Ning”) which are registered in their names.  The plaintiff says that the shares were transferred to the 2nd defendant only as security for lending.  He is supported by the terms of the third loan repayment extension agreement dated 28 December 2007.  Hence, the right and power of the 1st and 2nd defendants to resolve on behalf of Hua Ning to sell its barges and office unit are also a serious question to be tried.

2.  The next serious question to be tried is on whether the loan has become due.  The second loan extension agreement extended the loan period to the end of May 2008.  The third extension agreement provided the lender with another 4,800 shares of Hua Ning as security.  The parties however disputed on the loan period as extended by the third extension agreement. 

3.  Clause 2(1) of the third extension agreement provided that the loan period was extended to June 2008 but would not be beyond December 2008 (which was the completion date of the reclamation project of Best Leader Engineering Limited, a company related to Hua Ning).  The defendants thus argue that even if the loan period was not to expire at the end of June 2008, it would have expired at the completion of the project, which they allege, was prior to 15 July 2008.  However, the parties also dispute on the project completion date.  The plaintiff however accepts that the barges are now moored and not in operation as their insurance policies have all expired and not renewed.

4.  Having considered Clause 2(1) of the third loan extension agreement, I think there is indeed a serious question to be tried on whether the loan period would expire only at the end of December 2008 and not before.  That means I cannot tell if the loan period has already expired or whether there should be or should have been full repayment of the loan and interests to the 2nd defendant.  At one time I thought that despite this dispute of whether the loan period has ended, there must be default of the monthly repayment of interests on the part of Hua Ning to the 2nd defendant.  With that default, the 2nd defendant would be entitled under Clause 4 of the third loan extension agreement to sell the barges and the office unit by public auction.

5.  However, having looked at Clause 4 again, I think there is also a serious question to be tried on whether the obligation to repay interests has also been extended/suspended until the end of the loan period.  Therefore, I cannot even say that the 2nd defendant or the defendants now have the right to sell the security by public auction.  That is also a matter to be tried.  

6.  I now consider whether damages are adequate to the plaintiff if I do not continue the injunction.  My view is that damages are inadequate as without the injunction, the defendants will sell all the barges and the office unit and Hua Ning would be left with nothing.  It will go out of business altogether.  However, damages will be an adequate remedy for the defendants as what is owed to the 2nd defendant is a loan plus interests.  I think the fact that Hua Ning at present has no business and no money to run its business are all irrelevant factors.

7.  In the light of the several serious questions to be tried, the fact that Hua Ning is in the cash flow difficulty is not a sufficient justification for the defendants to liquidate Hua Ning’s assets and tools of business.  Therefore, having concluded that damages will not be an adequate remedy to the plaintiff but an adequate remedy to the defendants, I do not have to proceed to consider the balance of convenience.  

8.  On the defendants’ request for the plaintiff’s fortification of undertaking in damages, I do not think fortification is necessary.  The reason being that the barges and office unit together still worth at least  $10-odd millions.  They are under the control of the 2nd defendant or both defendants.  The plaintiff in fact puts the value of the assets at a much higher value of $28 million.  The 2nd defendant says that market value of the barges will go down and some of them may become scrap as they are lying idle.  I think this is too pessimistic a view.  In any case, the loan period will expire by the end of December 2008, and the 2nd defendant will then be able to sell Hua Ning’s assets by public auction pursuant to Clause 4 of the third loan extension agreement. 

9.  I therefore continue paragraphs 1 and 2 of the order of Deputy High Court Judge To made on 29 August 2008 until trial or until further order.

(Discussion re costs)

10.  The costs order as reserved by Sakhrani J and the costs order for the application, including today’s costs, will be the plaintiff’s costs in the cause.