XCHRX NISSHO IWAI HONG KONG CORPORATION LTD. v. SAINT JOY INTERNATIONAL CO. LTD. AND ANOTHER

HCA1747/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1747 OF 2000

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J U D G M E N T

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1. This is the plaintiff's application for summary judgment against both the defendants. The plaintiff runs a business as a money lender in Hong Kong under the Money Lender's Ordinance, Cap.163. Under the terms of an Agreement relating to a Bridging Loan of US$10 million dated 23 March 1998 between the plaintiff and the 1st defendant ("the Agreement"), the plaintiff agreed, inter alia, to make available to the 1st defendant, a Bridging Loan up to an aggregate principal amount of US$10 million ("the Bridging Loan") to finance part of the acquisition cost of an equity interest in Beijing Hua Nan Building Centre Company Limited. The loan was stipulated to be repayable by five installments over a period of two years. The 1st defendant further agreed to pay to the plaintiff the fees set out in the Fees Letter dated 23 March 1998. On the same day, the 2nd defendant entered into a personal guarantee with the plaintiff whereunder he guaranteed, "as principal debtor and not merely as surety", the due and prompt payment by the 1st defendant of all amounts due by it under the loan agreement.

2. There is no dispute that the plaintiff duly advanced the full amount of the loan to the 1st defendant on 3 April 1998, and that the 1st defendant did repay the installments of interest and principal which were due up to January 2000, and has been in default thereafter. On 14 January 2000 the plaintiff, through its solicitors, served a written notice on the 1st defendant in terms of clause 18.02 of the Agreement declaring that the total amount of principal plus interest outstanding were immediately due and payable, in the sum of US$4,174,915.52. By letter dated 27 January 2000 the plaintiff, through its solicitors, demanded repayment by the 2nd defendant in terms of the personal guarantee undertaken by him, of the full amount owing by the 1st defendant under the loan agreement.

3. The 1st defendant's solicitors responded to the plaintiff's demand by a letter dated 21 January 2000, inter alia, in the following terms :

" We do not consider that your letter constitutes a valid declaration by your client pursuant to section 18.02 of the Agreement dated 23rd March 1998 or that your client's claim to a bonus fee under the letter of 23rd March 1998 is a valid one.

We are instructed that our client is, and has at all times been, perfectly capable financially of continuing to make payments due under the loan agreement's terms. However, as your client knows, the Asia-Pac considers that, before any further payment is made by Saint Joy, your client must address satisfactorily its involvement in the unlawful conduct of Mr Alexander Ing, a former director and senior employee of the Asia-Pac Group."

4. This early response accurately foreshadowed the bases upon which the defendants deny liability for the plaintiff's claims, as embodied in a draft Defence and Counterclaim which was exhibited to the 3rd affirmation of the 2nd defendant. Mr Scott has made it clear that if the defendants are given leave to defend in these proceedings, their Defence will be essentially in the same terms as set out in the draft Defence and Counterclaim.

5. Thus it is pleaded in paragraph 1 of the draft Defence and Counterclaim that the defendants' primary contention is that "the Statement of Claim ought to be struck out on the basis that no valid demand has been served on the 1st defendant pursuant to clause 18.02 of the Saint Joy Loan Agreement dated 23rd March 1998."

6. Paragraph 18.02 of the loan agreement provides as follows :

"18.02 Declaration by Nissho Iwai.

Nissho Iwai may at any time after the happening of an Event of Default, whether or not notice shall have been given to Borrower of the occurrence of such Event of Default, by written notice to Borrower declare that the whole of the Total Indebtedness for the time being outstanding and unpaid has become immediately due and payable, and that the obligations of Nissho Iwai hereunder and under the Bridging Loan have been cancelled ..."

7. There is no dispute that the general principle applicable is correctly stated in Bowstead and Reynolds on Agency, 16th Edition at paragraph 2-018 :

"Contract.

In general a person may make any contract through an agent. He can also perform a contract through an agent unless it is a contract that involves his own personal attributes or otherwise expressly or impliedly excludes vicarious performance."

8. Mr Scott submits - I think it would be fair to say that he did so without any enthusiasm - that on a proper construction, the relevant provisions of paragraph 18.02 of the Agreement expressly or impliedly exclude vicarious performance, and requires "Nissho Iwai" itself to give written notice to the Borrower. Since the notice in this case was given by the plaintiff's solicitors on its behalf, it is defective.

9. This point can in my view be disposed of without any further ado. The plaintiff is referred to throughout the loan agreement by the abbreviation "Nissho Iwai". Clause 18.02 of the Agreement was no different in this respect. It simply provides for Nissho Iwai to give written notice to the Borrower. There is nothing in the terms of the clause which evinces an intention to preclude Nissho Iwai from giving such notice through its solicitors, in the normal way. It is to be expected, and is completely in accordance with normal business practice and experience for such notice to be given by a party's solicitors, particularly so when the party is a corporate entity like the plaintiff. In my view, there is no merit whatever in this point taken by the defendants, and it does not raise any triable issue.

Draft Defence and Counterclaim

10. The draft Defence and Counterclaim is a lengthy document, running to 22 pages. It contains considerable repetition, overlap and circumlocution. The essence of it is to the effect that the relationship between the parties was not simply one of lender, borrower and guarantor. Rather, the plaintiff had developed a relationship with the Asia-Pac Group, of which the 1st defendant was a member, which imposed upon the plaintiff fiduciary duties towards the Asia-Pac Group, including specifically the 1st and 2nd defendants. The plaintiff has by its conduct breached such fiduciary duties, which entitles the defendants to rescind the loan agreement, set aside the guarantee and claim damages and/or equitable compensation against the plaintiff.

11. Thus it is pleaded in paragraph 6 :

"From in or about 1996 to the date hereof Nissho Iwai has acted as one of the primary financiers and financial advisers of, and in particular has provided loan facilities to the Asia-Pac Group .... the relationship between the defendants and Nissho Iwai was one of mutual investment and benefit :

(1) In relation to the Asia-Pac Group (through the Asia-Pac Group, Mr Ho) in the provision of loan facilities and financial advice and investment by Nissho Iwai;

(2) In relation to Nissho Iwai not simply from the return upon such loan facilities as loan provider but also in particular by reason of the grant to Nissho Iwai of options within the loan facility for Nissho Iwai to participate in and benefit from the investment concerned by the mechanism of a transfer of shares in favour of Nissho Iwai."

12. Under the sub heading "The Co-operation Agreement", it is further pleaded in paragraph 8 :

"On or about 28 November 1996, and during the course of a meeting between Mr Ho and Mr Takizawa (the Deputy General Manager of Nissho Iwai).... Mr Ho (acting on his own behalf and on behalf of the Asia-Pac Group) and Mr Takizawa (acting on behalf of Nissho Iwai) entered into a long term oral co-operation agreement and memorandum of understanding ('the Co-operation Agreement') whereby it was agreed that during the term of Nissho Iwai providing finance facilities to Mr Ho's Asia-Pac Group, and in consideration thereof, Mr Ho would provide to Nissho Iwai confidential information in relation to actual and potential business opportunities and proposals of the Asia-Pac Group and would provide Nissho Iwai with opportunities for Nissho Iwai to participate in Asia-Pac projects as preferred loan provider and investor."

13. Pursuant to the Co-operation Agreement and/or the relationship between the parties, the Asia-Pac Group and Mr Ho had provided Nissho Iwai with confidential information in relation to actual and potential business opportunities, proposals and projects of the Asia-Pac Group on numerous occasions; Nissho Iwai has provided loan facilities to the Asia-Pac Group; and Nissho Iwai has participated in investments of the Asia-Pac Group through the provision of loan facilities containing options in Nissho Iwai's favour.

"11. In the premises, at all material times Nissho Iwai has owed the Asia-Pac Group (and Saint Joy and Asia-Pac Infrastructure Development Company Limited in particular) and/or Mr Ho fiduciary duties and/or duties at common law or in equity :

(1) To act in good faith in its dealings with the defendants and Asia-Pac;

(2) To keep all information provided to it in confidence and not use that information for the actual or potential benefit of itself or any other individual or entity;

(3) In the event that Nissho Iwai was approached by a person seeking finance from Nissho Iwai to establish a business in circumstances in which Nissho Iwai knew or should have known that person would be establishing the business in breach of fiduciary duties owed to either of the defendants :

(a) not to provide finance or any assistance to that person ... without the prior consent of Mr Ho and/or the relevant entity in the Asia-Pac; and

(b) to inform the relevant entity in the Asia-Pac Group and/or Mr Ho of what the person was proposing to do."

14. It is further pleaded that at all material times Nissho Iwai has known that the principal activities and businesses of the Asia-Pac Group and Mr Ho have included, inter alia, the development of projects in Asia, and in particular the PRC, involving, inter alia, gas and utilities, telecommunications and hi-fi, expressways and transportation. (Particulars are provided of various meetings at which Mr Ho gave detailed explanations to Nissho Iwai, and in particular Mr Takizawa, of the major activities of the Asia-Pac Group, both generally and in the course of specific loan applications for specific projects by different companies of the Asia-Pac Group.)

15. Nissho Iwai had on a number of occasions met and had dealings with one Mr Alexander Ing in his capacity as a Director, Senior Vice-President and full time employee of Asia-Pac Infrastructure and Development Company Limited ("the Company"). The plaintiff therefore knew, or should have known, that Mr Ing owed fiduciary duties to the Company, including a duty to act in the best interests of the Company; not to place himself in a position where his personal interests conflicted with those of the Company, without making a full disclosure to the Company; not to compete with the Company or the Group; and not to profit from his position as a senior employee and director.

16. Unknown to the defendants and/or the Asia-Pac Group, in or around September 1997, Mr Ing was seeking to procure finance for Tri-Tel Limited, a company owned and/or controlled by Mr Ing, in order to carry out projects similar to projects which the defendants and the Asia-Pac Group were interested in; and Mr Ing approached the plaintiff to provide finance for such projects. Thereafter the plaintiff and Mr Ing, without either of them making any disclosure to the Asia-Pac Group or Mr Ho, exchanged financial proposals in respect of the projects involving Tri-Tel Limited.

17. The plaintiff knew that Mr Ing, in seeking to involve his own company, Tri-Tel Limited, in doing business of the same kind as and in competition with that of the Company, was acting wrongfully in breach of his fiduciary and/or contractual duties towards the Company. Furthermore, by exchanging financial proposals with Mr Ing, the plaintiff knowingly assisted him in his breach of his fiduciary and/or contractual duties towards the Company. Further and alternatively the plaintiff by exchanging financial proposals with Mr Ing, without informing the defendants of the matter, was in breach of the "Co-operation Agreement" and thereby in breach of its fiduciary duties to Saint Joy and Mr Ho. Had these matters been disclosed to the defendants, the 1st defendant would not have entered into the loan agreement and the 2nd defendant would not have entered into the guarantee. The 1st defendant is thereby entitled to rescind the loan agreement and/or to claim damages, and the 2nd defendant is entitled to rescind the guarantee and/or to claim damages.

18. The Counterclaim repeats the Defence and alleges that the 1st defendant has suffered damages, being payments made to the plaintiff under the loan agreement which would not have been made but for the plaintiff's breaches; and the 2nd defendant has suffered damages consisting largely of a loss of profits caused by his inability to obtain the project which Mr Ing was seeking to be involved in through his company Tri-Tel Limited; legal costs and managerial time spent in investigating the matter; and in addition the various management fees and commissions paid to the plaintiff in relation to the four loans which were advanced by the plaintiff to different companies in the Asia-Pac Group, since if the plaintiff had disclosed its involvement with Mr Ing as aforesaid, the aforesaid companies would not have entered into the loan agreements in question.

The relationship between the parties

19. At the foundation of the Defence and Counterclaim is the allegation that the relationship between the parties was not simply that of lender, borrower and guarantor, that the plaintiff did not simply provide finance upon application by specific companies within the Asia-Pac Group for specific projects : rather, the plaintiff was not only one of the primary financial advisers to the Group, but in addition the parties had developed a relationship of mutual investment and benefit which, particularly having regard to the so-called "Co-operation Agreement", gave rise to the fiduciary duties which the plaintiff allegedly owed the defendants.

20. It is not disputed that the plaintiff has been at all material times a registered money lender, and has never been a registered bank under the Banking Ordinance, or investment adviser under the Money Lenders Ordinance. The plaintiff denies that it was a financial adviser to the defendants or the Asia-Pac Group, or a co-investor or business partner. The defendants' allegations to the effect that the plaintiff was a financial adviser to the Asia-Pac Group - no doubt as a peg upon which to attach fiduciary duties to the plaintiff - are bare assertions, not substantiated by any evidence or particularity as to the type of advice which the plaintiff allegedly gave, or the dates or occasions upon which it did so.

21. The defendants place particular reliance, in support of their allegation that the plaintiff was not just a lender but a business partner, upon the grant of the options in the loan agreements, which they allege elevated the parties' relationship beyond that of merely lender and borrower.

22. There is no dispute that the plaintiff has advanced four loans altogether to companies of the Asia-Pac Group, each advanced to a specific company, and not in any sense to the Asia-Pac Group as a whole :

(1) a US$5 million facility to Noble Emperor Limited, a subsidiary of the Asia-Pac Group, for the purchase of shares in PRC Expressways Funds Limited, entered into on or about 19 December 1996 (fully repaid on 13 March 1998);

(2) a US$10 million loan facility to King Growth Limited, another subsidiary of the Asia-Pac Group, for the purchase of an interest in the Greater Beijing Region Expressways Limited ("GBRE") entered into on or about 11 March 1997 (fully repaid on 31 March 1998);

(3) the US$10 million loan to the 1st defendant dated 23 March 1998, the subject of these proceedings; and

(4) a US$10 million loan to Channery Limited, another subsidiary of the Asia-Pac Group, for a development project in the PRC, entered into in or about 11 May 1998.

23. It seems clear that these were all normal arm's length commercial transactions. Nothing has been adduced by the defendants to support their allegation that the inclusion of the share option provisions in the loan agreements changed the nature of the parties' relationship from that of lender and borrower to one of co-investors, or gave rise to fiduciary duties on the part of the plaintiff towards the defendants, or the Asia-Pac Group. On the face of them, the options are no more than a device adopted in order to maximize the plaintiff's profits on each of the transactions. This is further evidenced by the fact that each of the agreements contains a buy-back option for the borrower, entitling the borrower at its option to buy back the shares by paying to Nissho Iwai the market price of the shares, instead of transferring them. (I note that in the event, none of the share options were exercised.)

24. As far as the alleged "oral Co-operation Agreement" is concerned, Mr Takizawa emphatically rejects the suggestion that any such agreement was ever concluded.

25. As evidence of such an agreement, the defendants rely upon :

(1) a handwritten note of Mr Takizawa's headed "MOU", which is undated, unsigned and contains nothing more than a few scribbled notes, which make no reference to any "Co-operation Agreement"; and

(2) a letter from the 2nd defendant to the plaintiff addressed to Mr Takizawa dated 6 December 1996 which reads, inter alia, as follows :

" I refer to our recent discussions concerning the proposed loan facility from Nissho Iwai to the Asia-Pac Group.

As requested I enclose a summary of the principal activities and businesses of the Asia-Pac Group. As you would appreciate, the summary contains very sensitive and confidential information and is provided to you on a strict confidential basis. Please therefore do not disclose any of the information to any other person or entity without my prior written consent and do not use the information for any purpose other than for considering the proposed loan facility to the Asia-Pac Group. ...

I confirm our mutual understanding that during the term of your providing financing to the Asia-Pac Group, we will endeavour to provide opportunities for Nissho Iwai to participate in Asia-Pac projects as a preferred loan provider, investor etc."

26. It was perfectly normal for the plaintiff to require information about the activities and businesses of the various companies of the Asia-Pac Group, as a background to its considering applications for loans from the various companies in the Group; nor does the general statement at the conclusion of the letter that "... we will endeavour to provide opportunities for Nissho Iwai to participate in Asia-Pac projects as a preferred loan provider, investor etc.", provide any basis to seriously argue that the parties had entered into a long-term oral "Co-operation Agreement and Memorandum of Understanding".

27. The defendants' allegations as to the existence of the so-called "Co-operation Agreement" and generally of a relationship between the parties which gave rise to alleged fiduciary duties on the part of the plaintiff, amount to no more than bare assertions, unsupported by any credible particularity or evidence, and they do not, in my view, give rise to any triable issues.

(See Murjani & Others v. Bank of India [1990] 1 HKLR 586)

Plaintiff's alleged breaches

28. That is far from being the end of the defendants' difficulties. At the very heart of the defendants' case is the allegation that the plaintiff, by its involvement with Ing, whom plaintiff knew was a Director and Senior Vice-President of the Company, was in breach of its (the plaintiff's) fiduciary duties to the Company and/or Mr Ho and/or the Asia-Pac Group, which entitles the defendants to have the loan and guarantee agreements rescinded, and to claim damages.

29. Mr Scott referred me to the judgment in Asia-Pac Infrastructure Development Limited v. Ing Yim Leung, Alexander and Others, HCA 16778/1999, which he prayed in aid as at least prima facie supporting the defendants' allegations as to Mr Ing's breaches of his fiduciary duties to the Company. I accept for the purposes of this application that the defendants do have a prima facie case in that respect. I also note that the Company has instituted proceedings against Ing and other former employees and Tri-Tel Limited for their alleged breaches of fiduciary duties.

30. The plaintiff's alleged breach of its fiduciary duties consisted in its having entered into negotiations with and exchanged financial proposals with Ing in connection with his financing proposals for Tri-Tel Limited in relation to the Beijing Guotong project, which the plaintiff failed to disclose to either of the defendants.

31. It is however important to note that it is common ground that the plaintiff, after conducting its normal due diligence investigations, declined Ing's financing proposals, and that no loan was in the event advanced to Ing or Tri-Tel Limited, and no transaction of any sort concluded with the Company.

32. On these facts, even if it is accepted for present purposes that the plaintiff did indeed owe fiduciary duties to the defendants, it is simply not arguable, in my view, that the plaintiff's actions caused any identifiable loss or damages to either of the defendants, or entitles either of them to rescind the loan or guarantee agreements, or to claim damages against the plaintiff.

33. Mr Scott referred me to the recent decision of the Court of Appeal in England in Spice Girls Ltd v. Aprilia World Service BV (Unreported) delivered on 24 February 2000. The decision turned, inevitably, upon its own facts, and I can find no assistance for the defendants in applying the ratio to the facts of the present case.

34. Mr Scott also cited the decision in Royal Brunei Airlines Sdn Bhd v. Philip Tan Kok Ming [1995] 2 AC 378, in which it was held that :

"Where a third party dishonestly assisted a trustee to commit a breach of trust or procured him to do so, the third party would be liable to the beneficiary for the loss occasioned by the breach of trust, even though the third party had received no trust property and irrespective of whether the trustee had been dishonest or fraudulent; that in the context of such accessory liability honesty was to be judged objectively ....". (at 379B)

35. I note (at p.389B-E) that the dishonesty required is a "conscious impropriety", and it is based upon what the third party actually knew at the time in question, not on what he should have known.

36. There is no suggestion in the draft Defence and Counterclaim, or in the affidavits which have been filed on behalf of the defendants, that Mr Ho or any of the companies in the Asia-Pac Group were interested in participating in the Guotong project for which Ing was allegedly seeking finance, let alone that they had ever communicated any such interest to the plaintiff. No basis has been laid upon which it could be found that the plaintiff's actions in entertaining Ing's financial proposals or exchanging financial proposals in relation to that project were dishonest or a conscious impropriety towards either of the defendants.

37. More fundamentally, once again bearing in mind that there is no dispute that the plaintiff declined to offer any financial assistance to Ing, there is no triable issue raised to the effect that the plaintiff's actions caused any actual prejudice or loss to either of the defendants. In these circumstances the principles extracted from the Royal Brunei Airlines case have no application to the facts of this case.

The agreements

38. The loan and guarantee agreements which were entered into between the plaintiff and the 1st and 2nd defendants are both very precisely and comprehensively drafted documents, respectively running to 105 pages and 11 pages.

39. I note that clause 13 of the loan agreement provides as follows :

"13 No set-off or withholdings

13.01 Neither set-off nor withholding All sums payable by Borrower to Nissho Iwai pursuant to this Agreement, whether of principal, interest or otherwise, shall be paid in full, free of any restriction or condition, without set-off or counter-claim and without any deduction or withholding for or on account of any taxes. ...."

Paragraph 15 of the guarantee agreement is in almost identical terms; in any event, the 2nd defendant guaranteed "as principal debtor and not merely as surety, until final payment has been made, due and prompt payment by the Borrower of the guaranteed indebtedness in the manner and at the times fixed or calculated under the Loan Agreement. ...".

40. These contractual provisions were intended to avoid precisely the sort of situation which the defendants have created by seeking to raise collateral considerations as reasons for avoiding their liabilities clearly undertaken in terms of the loan and guarantee agreements. (This is not to overlook the fact that if the defendants were, contrary to my view, entitled to rescind the agreements, then of course the aforesaid provisions of the agreements would have no application.)

41. The defendants have failed to discharge the threshold onus put upon them to satisfy me that, looking at the whole situation as presented by the pleadings, affirmations and the documents exhibited thereto, there is a fair or reasonable possibility of their having a real or bona fide defence to the plaintiff's claims in this matter.

(RSC Order 14, rule 3;
Tandy Rank Video & Ano v. Yee Hing Cassette Factory Ltd [1991] HKC 136).

42. As Godfrey JA (as he then was) observed in Man Earn Ltd v. Wing Ting Fong [1996] 1 HKC 225 at 227C, the procedures of the courts are designed for the resolution of genuine disputes. The defendants have failed to demonstrate that they have any real defence or counterclaim or that there are any triable issues in the case. In my view the defences and counterclaims raised are indeed "practically moonshine", and should not be allowed to delay any longer the plaintiff's clear entitlement to repayment of the loan with interest and costs in accordance with the loan agreement and the guarantee.

43. I grant summary judgment to the plaintiff against both defendants, against the 1st defendant in terms of prayer A(a), (b) and (c) and against the 2nd defendant in terms of prayer B(a) and (b).

44. I make an order nisi that the defendants are to pay the plaintiff's costs of these proceedings.