WANG JUN v. SIN YUK HUNG AND ANOTHER

HCA 2917/2018

[2020] HKCFI 1490

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2917 OF 2018

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REASONS FOR JUDGMENT

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1.  This is an appeal against the order made by Master Anthony Chan on 25 July 2019 granting summary judgment in favour of the Plaintiff against both Defendants. In the hearing on 26 June 2020, I dismissed the appeal and affirmed the judgment granted by the Master. I now give my reasons.

2.  The 2^nd Defendant did not appear in the hearing to prosecute the appeal.

BACKGROUND

3.  The Plaintiff’s claim is a straightforward one against the 1^st Defendant (as borrower) and the 2^nd Defendant (as guarantor) for non-repayment of a loan in the amount of $30,000,000 (the “Loan”) plus interest under three one-page agreements (collectively, the “Agreements”).

4.  In or around September 2017, pursuant to the Agreements, the Plaintiff advanced the Loan to the 1^st Defendant as borrower upon the 2^nd Defendant’s guarantee of the 1^st Defendant’s repayment obligations. The Plaintiff’s understanding is that the Loan was advanced in order to enable the 2^nd Defendant to make an investment in the shares of a Hong Kong listed company known as Elegance Optical International Holdings Limited (“Elegance Optical”).

5.  There is no dispute that the Agreements comprise the following three agreements, each being a one-page document dated 11 September 2017:

(i)  a written loan agreement (the “Loan Agreement”) whereby the Plaintiff (as lender) agreed to advance the 1^st Defendant (as borrower) the Loan upon the 2^nd Defendant’s guarantee of the 1^st Defendant’s liability thereunder;

(ii)  a further written agreement (the “Conversion Agreement”) whereby the Plaintiff and 1^st Defendant agreed, upon the 2^nd Defendant’s guarantee of the 1^st Defendant’s liability thereunder, that in discharge of the 1^st Defendant’s debt to the Plaintiff under the Loan Agreement, the 1^st Defendant would, and the 2^nd Defendant guaranteed that the 1^st Defendant would, procure the transfer of approximately 17.1 million shares (the “Relevant Shares”) in Elegance Optical from the 1^st Defendant’s corporate vehicle, Wealth China Worldwide Limited (“Wealth China”), to a trading account designated by the Plaintiff within one month (i.e. 11 October 2017); and

(iii)  a further written agreement (the “Repurchase Agreement”) whereby the Plaintiff and the Defendants agreed that the Plaintiff would continue to hold the Relevant Shares until at least 10 September 2018 (the “Deadline”), at which point, if the market value of the Relevant Shares was less than $30,000,000 (i.e. the Loan amount), the Defendants would repurchase the same at the consideration of $30,000,000 (i.e. the Loan amount) plus interest at 15% per annum.

6.  The cumulative effect of the Agreements, which again does not appear to be in serious dispute, is analogous to a loan arrangement secured by a share charge.  In other words:

(i)  in consideration for the advancement of the Loan by the Plaintiff to the Defendants, the Plaintiff was to be transferred the Relevant Shares as security until at least the Deadline;

(ii)  if by the Deadline, the market value of the Relevant Shares was less than the Loan amount, the Defendants were to repay the Plaintiff the Loan amount plus interest at 15% per annum.

7.  It is common ground that both Defendants signed the Agreements.  The 1^st Defendant also acknowledges that on 11 and 12 September 2017, she received the full Loan amount in the sum of $30,000,000 in 12 tranches.

8.  As at the Deadline, the closing price of the listed shares of Elegance Optical was $ 1.33 per share.  Thus, the market value of the Relevant Shares was $22,786,977.78, which was less than the Loan amount of $30,000,000, thereby triggering the repurchase obligation on the part of the Defendants.  However, the 1^st Defendant failed to, by 11 October 2017 or otherwise, procure a transfer of the Relevant Shares to the Plaintiff as per the Conversion Agreement.  The 2^nd Defendant also failed to secure the 1^st Defendant’s performance of obligations under the Conversion Agreement.  Up to now, the Defendants have failed to make repayment of, and the Plaintiff has not recovered the Loan amount or the interest thereon.

9.  Under such circumstances, it is indisputable that the Plaintiff has advanced the Loan amount to the Defendants, and has received nothing in return, be it the Relevant Shares under the Conversion and Repurchase Agreements or the repayment of the Loan amount under the Loan Agreement.  The Plaintiff therefore brought the present action against the Defendants to claim for the repayment of the Loan.

ANALYSIS

(i)   Claim against the 1^st Defendant

10.  The 1^st Defendant’s defence is premised on two interrelated grounds: (i) that the Agreements are shams and therefore unenforceable against the 1^st Defendant; and (ii) that prior to the signing of the Agreements, the 1^st Defendant was informed by one Mr Chen Youchun (“Mr Chen”), being the Plaintiff’s Mainland lawyer, that the 1^st Defendant’s role in respect of the Agreements was merely tokenistic and that only the 2^nd Defendant would be liable to repay the Loan.

11.  According to the 1^st Defendant, due to the restrictions arising from his high position within the Mainland Government, the 2^nd Defendant was not allowed to take out a substantial loan in his own name.  As such, the parties engineered the purported Agreements by which the Plaintiff would advance $30,000,000 to the 1^st Defendant as part of the consideration from the 2^nd Defendant for the latter’s purchase of half of the 1^st Defendant’s interest in Elegance Optical.  In the premises, the Plaintiff, the 1^st and 2^nd Defendants arrived at the common understanding that: (i) only the 2^nd Defendant would be the borrower under the purported Agreements, and only the 2^nd Defendant (and not the 1^st Defendant) would be obligated to repay the Loan; and (ii) the intended effect of the purported Agreements was to deceive, or assist the 2^nd Defendant to deceive, the Mainland Government or conceal the true status of the 2^nd Defendant as the borrower.

12.  The legal principles for summary judgment application are trite I do not want to repeat the same here.

13.  The burden on the part of a defendant to establish an arguable defence is a low one.  Despite the low threshold, I am of the view that the 1^st Defendant has failed to discharge such burden.

14.  The crux of the 1^st Defendant’s case is that the Agreements are shams.

15.  A sham exists where: (i) the parties intended that the documents or acts they have done would not create the legal rights or obligations they appear to create; and (ii) it was intended that the documents or acts would mislead a third party into believing the parties had created those rights and obligations.[1]

16.  It is simple logic that businessmen, or indeed any persons, would not sign or execute documents, which on the face have serious legal consequences, for no particular purpose.  In sham transactions, the parties sign or execute certain written documents with a view to deceive others to believe that the parties have entered into the arrangement as stated in the written documents where in fact they have not.

17.  If what the 1^st Defendant tells the court were the truth, why the parties needed to execute the Agreements in the first place?  According to the 1^st Defendant, the 2^nd Defendant was holding high position in the Mainland Government and so he could not raise loan to finance the acquisition of the shares of Elegance Optical.  The Agreements were therefore executed to conceal the fact that the 2^nd Defendant was the true borrower.  However, it remains unanswered as to why the parties needed to execute the Agreements, in particular the Loan Agreement itself.

18.  According to the 1^st Defendant, it was the common understanding between the Plaintiff and the 2^nd Defendant that the latter was the true borrower.  The Loan Agreement was a sham, and so the Plaintiff knew that he could not enforce the Loan against the 1^st Defendant.  If that was the case, why would the Plaintiff have asked the 1^st Defendant to execute the Loan Agreement?  The fact that the parties were prepared to execute such agreement actually shows that they intended the Agreements to have their legal effects as recorded therein.

19.  The evidence of this case shows that there was simply no need to commit the Loan Agreement in writing.  Even if the parties wanted to record the shares conversion and repurchase arrangements (which is actually not the case alleged by the 1^st Defendant as she claims that all the Agreements are shams), it was not necessary for the parties to tell others about any “loan”.  In fact, it would be against the interest of the 2^nd Defendant to have any written agreement about the Loan itself.  For the Plaintiff, why would it be necessary for him to execute the Loan Agreement if it was indeed a sham?

20.  There is a bare allegation that the Agreements were executed with the intention of deceiving the Mainland Government, and yet it remains unexplained as to how the Agreements could be used for such purpose.  Under such circumstances, there is simply no particulars to substantiate the sham allegation advanced by the 1^st Defendants.

21.  As the 1^st Defendant cannot demonstrate that there was other purpose for the making of the written Loan Agreement, whether it was used for the purpose of deceiving any particular person or institution or otherwise, the court can safely come to the conclusion that the written Loan Agreement was executed by the parties to confirm their true legal relationship as stated in such document.

22.  The allegation that the Loan was used to finance the 2^nd Defendant’s acquisition of shares of Elegance Optical is neither here or there.  It does not change the fact that the 1^st Defendant took out the Loan as the borrower under the Agreements.

23.  Furthermore, it has been pointed by Coleman J in Poon Ka Man Jason v Cheng Wai Tao[2] that, when a written agreement is executed, there is a strong presumption that the parties intend to be bound by the provisions of the agreement into which they enter, and intend the agreement to take effect.  The burden is on the person who alleges sham to establish the same by “cogent evidence”.

24.  Apart from the absence of logical explanation about the purpose of the execution of the Agreements including the Loan Agreement, there is also no evidence, apart from the 1^st Defendant’s bare assertions, to substantiate the “sham” arrangement between the parties. As rightly observed by the Master:[3]

“Mr Alan Kwong, for D1, raised one defence, i.e. the agreements were a sham and, hence, not binding. In particular, he submitted that the agreements were, in truth, a 30 million-loan to D2, which D2 used to pay Dl as part payment for a 50 percent stake in D1's company. Mr Kwong said D1 did not need the loan and referred me to evidence that he says supports that contention. However, apart from D1’s own assertion, there is no evidence to support D1’s defence that she received the money as part payment from D2, leaving D2 to repay the loan to P. D1 did not produce the sale and purchase agreement of the sale of her company shares to D2’s nominee. There is no signed receipt from D1 to D2 acknowledging receipt of part payment. Nor is there evidence of D1 protesting to P as far as she was concerned, that she did not obtain a loan, but received a 30 million as part payment from D2. There is also no evidence that D1 has demanded D2 to pay the supposed balance of HK$9 million.

It is incapable of being believed that there is not a single shred of documentary record of sale and purchase of what, on D1's own case, was a valuable stake worth HK$39 million in her own company.”

(with the abbreviations P, D1 and D2, as the Plaintiff, the 1^st Defendant and the 2^nd Defendant respectively)

25.  I agree with such observations made by the Master.  The irony with the 1^st Defendant’s case is that she cannot produce any other documents to substantiate her version of the story apart from the Agreements which she says are shams.

26.  In summary judgment application, the defendant bears the burden of establishing a credible defence capable of being believed. However, all the particulars about the sham transactions are missing in the present case.  In my judgment, the absence of a logical explanation as to why the parties had to execute the Agreements is fatal to the 1^st Defendant’s defence.

27.  The same reasoning can be applied to analyse the 1^st Defendant’s allegation about the alleged representation made by Mr Chen at the meeting in Shenzhen on 11 September 2017 when the Agreements were signed.  According to the 1st Defendant, she had not met the Plaintiff to discuss the loan arrangement.  If she understood from Mr Chen that her role was only tokenistic, why did she have to sign the Agreements in the first place?  What was her role?  What was the purpose of the alleged deception?  All these questions have remained unanswered.

28.  In her affirmations, the 1^st Defendant has raised a cloud of factual issues which are devoid of any substance.  Further, the allegation that she never had any use of the Loan does not change the legal rights between the parties and does not give rise to any “sham”.  I agree with the submission of Mr Ho, counsel for the Plaintiff, that the 1^st Defendant’s introduction of voluminous evidence on who the actual user of the Loan was or how the Loan was applied is nothing but a futile attempt to create irrelevant factual disputes which have no bearing on the determination of the O14 summons.

29.  As the 1^st Defendant has failed to discharge the burden of establishing an arguable defence capable of being believed, the Master was right in granting summary judgment against the 1^st Defendant.

(ii)   Claim against the 2^nd Defendant

30.  As the 2^nd Defendant has failed to appear in the hearing to prosecute the appeal, his appeal can be dismissed for want of prosecution.  In any event, his defence has no substance at all.

31.  The 2^nd Defendant’s purported defence, based on his affirmations, is premised on four grounds, namely that: (i) he did not know the legal consequences of the Agreements when he signed them; (ii)the parties never intended that he would be the guarantor under the Agreements; (iii)the guarantees under the Agreements are unenforceable because they only contain the mere description “guarantor” (保證人) without stipulating the guarantor’s obligation or liability; and (iv)there is “no stipulation as to the consideration” for the guarantees under the Agreements.

32.  There is no merit in these defences or allegations.

33.  The 2^nd Defendant signed the Agreements.  It is trite that a person is bound by the terms of the document on which he signed unless he can show one of the vitiating factors.  None has been shown in the present case.  As the 2^nd Defendant was a senior executive of a significant commercial enterprise, it would be absurd to suggest that, when he signed the Agreements, he did not understand the legal obligation of a guarantor.  Further, the WeChat messages amongst the Plaintiff, one Mr Yu and the 2^nd Defendants clearly show that the 2^nd Defendant had all along been aware of his obligation as guarantor.  From the contents of the Agreements, there can also be no uncertainty as to what the 2^nd Defendant as the guarantor is guaranteeing.  Finally, the defence about the lack of consideration is simply hopeless as the Plaintiff had advanced to Loan to the 1^st Defendant pursuant to the Agreements.

34.  For the above reasons, I dismissed the appeal and affirmed the summary judgment granted by the Master.  There is no dispute that costs should follow the event and so I ordered the Defendants to bear the costs of the appeal with certificate for one counsel only.