GRADE ONE LTD AND OTHERS v. CHOW CHIN YUI, ANGELA AND OTHERS

HCA 494/2021

[2022] HKCFI 2328

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 494 OF 2021

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D E C I S I O N

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A.  INTRODUCTION

1.  By summons of 29^th October 2021 (“the Summons”), the 3^rd and 4^th Defendants seek summary judgment on their counterclaim against the Plaintiffs.

1.1  The 3^rd Defendant has counterclaimed against the Plaintiffs for outstanding principal, interest and default interest under a facility agreement of 29^th November 2019 (“the Facility Agreement”).

1.2  The 4^th Defendant has counterclaimed against the 2^nd and 3^rd Plaintiffs for the outstanding commencement amount, interest and default interest under a supplemental deed of 24^th April 2020 (“the Supplemental Deed”).

2.  There is also before me a summons of 22^nd June 2022, taken out by the Plaintiffs, seeking leave to file and serve further evidence in opposition to the 3^rd and 4^th Defendants’ application (“the New Evidence Summons”). By agreement, I was asked to consider the evidence de bene esse and to rule on both summonses at the same time.

B.  THE BACKGROUND

3.  Unless otherwise indicated, the following matters are common ground, or at least not in dispute having regard to the pleadings and the evidence filed.

B1.  The parties

4.  The 1^st Plaintiff (“GOL”) and 2^nd Plaintiff (“SGGL”) are companies incorporated in the British Virgin Islands (“the BVI”).

5.  At all material times, the 3^rd Plaintiff (“Mr Lau”) was the sole director of both companies. Mr Lau has worked as a solicitor in England at Messrs Clifford Chance, a credit restructurer at ABN Amro Bank NV, the head of fund derivatives in Asia at BNP Paribas, and as the founder of a fund management company Adamas Asset Management (HK) Limited (“Adamas HK”). It has been pleaded on his behalf that he has extensive experience in private finance and private equity in Hong Kong.

6.  The 3^rd Defendant (“CAM”) is a company incorporated in Hong Kong, offering discretionary portfolio and management and wealth planning services.

7.  The 4^th Defendant (“CMS”) is an exempted company incorporated with limited liability and registered as a segregated portfolio company in the Cayman Islands. At all material times, it acted on behalf of, or for the account of, Cachet Deep Value Fund SP.

8.  CAM and CMS are part of the Cachet group of companies (“Cachet”), an asset management business. The parties have used “Cachet” to refer loosely to one or more of the entities in the group, and the term should be understood in the same sense below.

9.  The 1^st Defendant (“Ms Chow”) is the founder and Chief Executive Officer of CAM and a director of CMS.

10.  The 2^nd Defendant (“Mr Chan”) is the Chief Operating Officer of CAM.

11.  The 5^th Defendant (“HPPL”) is a company incorporated in Hong Kong, wholly and beneficially owned by one Tam Jin Rong, who is a director of Henter Finance Limited (“HFL”). HFL is a licensed money lender pursuant to the Money Lenders Ordinance (Cap.163) (“MLO”).

B2.  The Supplemental Deed

12.  There is no dispute that the Supplemental Deed was signed by GOL as buyer, Mr Lau as guarantor, and CMS as the vendor.

13.  Although there is a dispute as to whether Mr Lau was persuaded to enter into the Supplemental Deed (on behalf of himself and GOL) by reason of various representations said to have been made to him, it is not disputed that the Supplemental Deed was preceded by a Total Return Put and Call Option Transaction Agreement of 2^nd August 2019 (“the Option Agreement”), entered into by SGGL as buyer, CMS as vendor, and Mr Lau as guarantor.

14.  Pursuant to the Option Agreement:

14.1  CMS was to purchase 3,300,000 shares in Adamas London, a company listed on the London Stock Exchange (“the Adamas London Shares”), on or before 2^nd August 2019;

14.2  SGGL was to pay CMS a 1% foreign exchange hedge risk charge, based on the total purchase costs of the Adamas London Shares, within ten days of 2^nd August 2019;

14.3  CMS was to have a put option with SGGL, pursuant to which CMS could sell the Adamas London Shares to SGGL, to be exercisable on 3^rd February 2020, at CMS’ purchase cost plus a 20% premium, or at market price, whichever was the higher;

14.4  SGGL was to settle and pay CMS within five business days upon the exercise of the put option. If SGGL failed to pay CMS, SGGL was to pay extra interest on the unpaid sum at the rate of 0.08% per calendar day.

15.  Pursuant to the Option Agreement, CMS purchased the Adamas London Shares on 2^nd August 2019 for £1,188,000.

16.  By a letter of 3^rd February 2020, CMS elected to exercise the put option under the Option Agreement.

17.  SGGL did not purchase the Adamas London Shares from CMS.

18.  The Supplemental Deed was entered into for the purposes of restructuring the parties’ obligations under the Option Agreement.

19.  Pursuant to the Supplemental Deed:

19.1  the parties acknowledged that as at 24^th April 2020, SGGL owed the settlement amount of £1,425,600 and accrued default interest of £83,255.04 pursuant to the Option Agreement (together defined as the “Commencement Amount”) (clause 2.1);

19.2  upon execution of the Supplemental Deed, SGGL or Mr Lau was to pay interest on the Commencement Amount at the rate of 18% per annum (clause 2.2(a));

19.3  if SGGL defaulted in the payment of any sum payable under the Supplemental Deed, SGGL was to pay interest on the overdue sum at the rate of 24% per annum (clause 2.2(b));

19.4  SGGL or Mr Lau was to pay not less than £200,000 on or before 7^th May 2020, as the first repayment of the Commencement Amount and the accrued interest under the Supplemental Deed, and to buy back 436,000 of the Adamas London Shares (clause 2.3);

19.5  SGGL or Mr Lau was to pay not less than £300,000 on or before 7^th July 2020, as the second repayment of the Commencement Amount and the accrued interest under the Supplemental Deed, and to buy back 656,000 of the Adamas London Shares (clause 2.4);

19.6  SGGL or Mr Lau was to pay not less than £500,000 on or before 7^th September 2020, as the third repayment of the Commencement Amount and the accrued interest under the Supplemental Deed, and to buy back 1,092,000 of the Adamas London Shares (clause 2.5);

19.7  SGGL or Mr Lau was to pay the remaining outstanding amount of the Commencement Amount and the accrued interest, and all other amounts accrued or outstanding under the Supplemental Deed, on or before 9^th November 2020, to buy back the remaining 1,116,000 of the Adamas London Shares (clause 2.6).

20.  SGGL did not purchase the Adamas London Shares from CMS pursuant to the Supplemental Deed.

21.  It is the Defendants’ case that between 17^th July 2020 and 13^th January 2021, SGGL made a number of payments to CMS in partial settlement of its outstanding liabilities under the Supplemental Deed. The Plaintiffs say, however, that the payments were made to pay off debts owed by one Percy Archambaud-Chao (“Chao”).

22.  CMS’ counterclaim against SGGL and Mr Lau is for the outstanding Commencement Amount, interest and default interest under the Supplemental Deed.

B3.  The Facility Agreement

23.  There is no dispute that the Facility Agreement was signed by GOL as borrower, SGGL and Mr Lau as guarantors, CAM as agent, and CMS and HPPL as lenders.

24.  Again, although there is a dispute as to whether Mr Lau was persuaded to enter into the Facility Agreement (on behalf of himself, GOL and SGGL) by reason of various representations said to have been made to him, it is not disputed that the background of the Facility Agreement goes back to two loans made to Chao, as set out in (1) a share pledge of 5^th August 2019 (“the Share Pledge”), entered into by Chao as borrower, CMS as lender, and Mr Lau and SGGL as guarantors, and (2) a loan agreement of 29^th August 2019 (“the Henter Loan Agreement”), entered into by Chao as borrower, HFL as lender, and Mr Lau and SGGL as guarantors.

B3.1  Loan of $12m to Chao under the Share Pledge

25.  Mr Lau introduced Chao to Ms Chow, and it was agreed that Cachet could advance a loan of $12,000,000 to Chao. There is a dispute as to whether Mr Lau had any interest in the transaction – Mr Lau says he did not, whereas Ms Chow says that Mr Lau told her that he and Chao were two of the major investors in Affluent Partners Holdings Ltd (“Affluent Partners”), a company listed on the main board of the Hong Kong Stock Exchange, and that he sought a loan to him or Chao to develop the business of Affluent Partners. There is no dispute that 45,000,000 shares in Affluent Partners were to be pledged as security for the loan, and that Ms Chow further asked for Mr Lau and SGGL to provide guarantees for the loan (Mr Lau says that he did so in reliance on representations that they would not be enforced).

26.  Pursuant to the Share Pledge:

26.1  Chao pledged 45,000,000 shares in Affluent Partners, held by a BVI company owned by Chao (“the Pledged Shares”), in favour of CMS, with a pre-executed bought and sold note, and transfer form, in favour of CMS, in exchange for a six-month loan of $12,000,000 at an absolute interest rate of 2% per month on 5^th August 2019 (“the Cachet Loan”);

26.2  CMS was to disburse the loan on receipt of the Pledged Shares;

26.3  Chao was to pay CMS a 1% structuring fee, deducted on the drawdown date of 5^th August 2019;

26.4  Chao was to pay CMS interest of 2% per month, in arrears on the last business day of each thirty days’ period after the drawdown date, in accordance with an agreed schedule;

26.5  if Chao was unable to repay the full amount of $12,000,000 or to pay interest payments according to the agreed schedule, the Pledged Shares would be owned by CMS unconditionally, and CMS could retain or dispose of them;

26.6  if Chao failed to pay any principal, interest or other sum due under the Share Pledge, he was to pay extra interest on the unpaid sum at the rate of 0.08% per calendar day above the interest rate compounding daily;

26.7  if the share price of Affluent Partners fell below $0.60 during the loan period, Chao would first repay $6,000,000 within two business days, and the balance of $6,000,000 on 4^th February 2020, or else the Pledged Shares would be forfeited by CMS;

26.8  in consideration of CMS entering into the Share Pledge with Chao, SGGL and Mr Lau, as primary obligors, undertook and guaranteed, with unlimited liability, the full, prompt, complete and due repayment of the loan by Chao, and also undertook that if Chao defaulted in the repayment of the loan, they would forthwith on demand by CMS pay CMS, and indemnify CMS against loss and liability associated with such default.

27.  On 5^th August 2019, the same date as the Share Pledge, Mr Lau also signed two letters of guarantee, one on behalf of himself and the other on behalf of SGGL, pursuant to which each of Mr Lau and SGGL agreed, as primary obligor and not merely as surety, to guarantee payment of moneys and performance of obligations due from Chao to CMS.

28.  Pursuant to the Share Pledge, CMS advanced $12,000,000 to Chao on 5^th August 2019.

29.  On 11^th September 2019, the share price of Affluent Partners fell below $0.6 per share. Chao failed to make the required payment under the Share Pledge. As a result, Chao, CMS, Mr Lau and SGGL entered into a supplemental agreement (“the Supplemental Agreement”) dated 17^th September 2019 to restructure the loan under the Share Pledge.

30.  Under the Supplemental Agreement:

30.1  a 3% upfront loan restructuring charge in the sum of $360,000 was to be payable by Chao to Cachet Investment Manager Limited, a company nominated by CMS, upon signing;

30.2  the interest rate in clause 3 of the Share Pledge was to be increased from 2% to 2.5%, and payments of interest were to be made in accordance with an amended agreed schedule;

30.3  the default interest rate in clause 6 of the Share Pledge was to be changed from 0.08% per day to 0.1% per day;

30.4  clause 7 of the Share Pledge was replaced by a term that on or before 20^th September 2019, Chao was to pay $3,500,000 in cash or other securities to be approved by CMS as security for the loan. If the share price of Affluent Partners fell below $0.15 any time before 31^st October 2019 or below $0.5 any time on or after 31^st October 2019 during the loan period, Chao was to pay $7,000,000 first to CMS within two business days and the remaining balance on 4^th February 2020, or else the Pledged Shares would be forfeited by Chao.

31.  References below to the Share Pledge which postdate the date of the Supplemental Agreement are to the Share Pledge as amended by the Supplemental Agreement.

32.  On 9^th October 2019, the share price of Affluent Partners fell below $0.15 per share.

33.  In about October 2019, Chow defaulted and failed to pay either interest or capital under the Supplemental Agreement.

34.  It is the Defendants’ case that CMS sold all of the Pledged Shares to partially settle Chao’s indebtedness.

B3.2  Loan of $10m to Chao under the Henter Loan Agreement

35.  There is some dispute as to how a second loan to Chao came to be made, but it not disputed that Ms Chow introduced HFL, a licensed moneylender, to Mr Lau. It was agreed that HFL would lend $10,000,000 to Chao. There is no dispute that Ms Chow again asked Mr Lau and SGGL to provide guarantees for the loan (Mr Lau says that he did so in reliance on representations that they would not be enforced).

36.  Pursuant to the Henter Loan Agreement:

36.1  HFL agreed to grant a loan of $10,000,000 to Chao, at an interest rate of 36.5% per annum, repayable by Chao thirty days after execution of the agreement (“the Henter Loan”);

36.2  security was to be provided for the loan in the form of personal guarantees from Mr Lau and SGGL.

37.  On 28^th August 2019, the same date as the Henter Loan Agreement, Mr Lau also signed two letters of guarantee, one on behalf of himself and the other on behalf of SGGL, pursuant to which each of Mr Lau and SGGL agreed, as primary obligor and not merely as surety, to guarantee payment of moneys and performance of obligations due from Chao to HFL.

38.  It is not disputed that some time thereafter, Chao defaulted in his obligations to make repayment of amounts due under the Henter Loan Agreement.

B3.3  Restructuring pursuant to the Facility Agreement, Participation Agreement and Henter Loan Transfer Deed

39.  It is not disputed that for the purpose of restructuring the Share Pledge and the Henter Loan Agreement, the following agreements were executed on 29^th November 2019:

39.1  a Participation Agreement signed by GOL as participant, CMS as lender, HPPL, and Mr Lau as guarantor (“the Participation Agreement”);

39.2  a Loan Transfer Deed signed by HFL as assignor, GOL as assignee, and Mr Lau and SGGL (“the Henter Loan Transfer Deed”); and

39.3  the Facility Agreement (signed by GOL as borrower, SGGL and Mr Lau as guarantors, CMS and HPPL as lenders, and CAM as trustee on behalf of the lenders).

40.  Pursuant to the Participation Agreement:

40.1  CMS and GOL acknowledged and confirmed that pursuant to the Share Pledge, CMS had remitted and advanced the Cachet Loan of $12,000,000 to Chao (clause 2.1(a));

40.2  GOL agreed to remit and pay to CMS a “Participation Amount” of $8,667,471, being the amount owed by Chao under the Share Pledge as at the date of the Facility Agreement (clause 2.1(b));

40.3  CMS agreed that the Participation Amount payable by GOL to CMS would be satisfied by way of set off against part of the loan facility in the principal amount of $8,667,471 which was to be made available from CMS to GOL under the Facility Agreement (clause 2.2(b));

40.4  CMS was to grant, and GOL was to acquire for its own account and risk and without recourse to CMS, the right to receive repayment of the amounts due under the Share Pledge, subject to the terms thereof (clause 2.3);

40.5  upon receipt or collection by CMS of any amounts representing the repayment of principal or interest made by Chao, such amounts would be applied towards the expenses incurred by CMS and HPPL in connection with the Facility Agreement, default interest, interest and principal under the Facility Agreement (clause 3.1);

40.6  in relation to Chao, CMS had full discretion to take or refrain from taking steps to enforce the rights, and to exercise the authorities or powers conferred under, the Share Pledge and ancillary documents (clause 7.1).

41.  Pursuant to the Henter Loan Transfer Deed:

41.1  HFL irrevocably and unconditionally assigned to GOL all its rights, title, benefit, interest and obligations in respect of the Henter Loan and all moneys owing to HFL by Chao and GOC irrevocably and unconditionally accepted such assignment from HFL. To the extent that such rights, title, benefit, interest and obligations were not effectively assigned, HFL was to hold the same on trust for GOL (clause 1.1);

41.2  GOL irrevocably and unconditionally assumed all of HFL’s obligations and responsibilities in respect of the Henter Loan (clause 1.2);

41.3  in consideration of the assignment and/or trust created by HFL by clause 1.1, GOL was to be bound by the assumption, undertaking and indemnity contained in clause 1.2, and was to pay HFL $10,580,000 on 29^th November 2019 (clause 3.1).

42.  Pursuant to the Facility Agreement:

42.1  CMS and HPPL were to make available to GOL the principal amounts of $8,667,471 and $10,580,000 respectively (clause 2.1). (These were in fact the amounts which were outstanding under the Share Pledge and the Henter Loan Agreement as at the date of the Facility Agreement (clause 1.1 definitions of “Cachet Loan” and “Henter Loan”));

42.2  GOL was to apply all amounts borrowed under the Facility Agreement in the following manner (clause 3.1):

42.2.1  in respect of the $8,667,471 advanced by CMS, towards the satisfaction of the Participation Amount of $8,667,471 payable by GOL to CMS in respect of GOL’s participation in the Cachet Loan on the terms of the Participation Agreement;

42.2.2  in respect of the $10,580,000 advanced by HPPL, towards the satisfaction of the assignment consideration payable by GOL to HFL in respect of the assignment of the Henter Loan from HFL to GOL on the terms of the Henter Loan Transfer Deed;

42.3  GOL was to deliver a set of documents to CAM (as trustee for and on behalf of CMS and HPPL) on or before 13^th December 2019 (the conditions subsequent) (clause 4.3). These consisted of various forms of security;

42.4  the principal of the loan was to be repaid six months from the drawdown date (clause 6.1(a));

42.5  interest on the loan was to be (a) 24% per annum prior to the fulfilment or waiver of all the conditions subsequent under cl.4.3 and (b) 20% per annum after fulfilment or waiver of all the conditions subsequent (clause 8.1);

42.6  interest on the loan was payable by GOL on the last day of each interest period. The first interest period was to be a period of two months and each subsequent interest period was to be a period of one month (clauses 8.2, 9.1);

42.7  if GOL as borrower, or Mr Lau or SGGL as guarantors, failed to pay any amount payable under the Finance Agreement, interest of 5% per annum higher than the loan interest rate of 24% per annum was to accrue on the unpaid sum, and be compounded with the unpaid sum at the end of each interest period applicable to that unpaid sum (clauses 8.3(a), (c));

42.8  CMS would, on a best effort basis, collect from Chao such principal amount and/or interest payable by Chao under the Share Pledge, and distribute such amount pursuant to clause 3 of the Participation Agreement (clause 11.1);

42.9  Mr Lau and SGGL irrevocably and unconditionally jointly guaranteed the punctual performance of the Facility Agreement by GOL, and undertook to pay any amount due thereunder which GOL did not pay (clauses 14(a), (b));

42.10  Mr Lau and SGGL irrevocably and unconditionally agreed that if any obligation guaranteed by them was unenforceable, invalid or illegal, they would, as an independent and primary obligation indemnify CMS and HPPL against any cost, loss or liability incurred as a result of GOL not paying any amount payable but for such unenforceability, invalidity or illegality (clause 14.1(a));

42.11  the guarantee by Mr Lau and SGGL was a continuing guarantee and extended to the ultimate balance of the sums payable by any of GOL, Mr Lau and SGGL (clause 14.2);

42.12  Mr Lau and SGGL waived any right they might have of first requiring CMS and HPL to proceed against or enforce any other rights or security or to claim payment from any person before claiming from them (clause 14.5);

42.13  each of CMS and HPL authorised CAM to exercise the rights, powers, authorities and discretions given to CAM under or in connection with the Facility Agreement together with any other incidental rights, powers, authorities and discretions (clause 21.1(b)).

B3.4  Events subsequent to the signing of the Facility Agreement

43.  Pursuant to the Facility Agreement, CMS advanced $8,667,741 to GOL under the Facility Agreement, and HPL advanced $10,580,000 to GOL.

44.  GOL failed to fulfil the conditions subsequent under clause 4.3 of the Facility Agreement (in other words, to deliver the various documents set out thereunder by 13^th December 2019).

45.  GOL made a number of repayments between February 2020 to December 2020. The Plaintiff says that they were made under the Facility Agreement; in the 2^nd Affidavit of Lau Wang Chi, Barry (“Lau 2^nd”) Mr Lau says that they were made simply to help Cachet with its performance and track record, although in the skeleton argument filed on behalf of the Plaintiffs, it was said, in contradiction, that the payments were made pursuant to the Facility Agreement under the mistaken belief that they were indeed payable under the Facility Agreement, and that it was only subsequently that Mr Lau realised that they were not so payable since the Facility Agreement was tainted by illegality (and the 3^rd Affidavit of Lau Wang Chi, Barry (“Lau 3^rd”), which I was asked to consider de bene esse, was to the same effect).

46.  CAM’s counterclaim against GOL, SGGL and Mr Lau is for the outstanding principal, interest and default interest under the Facility Agreement.

C.  THE APPLICABLE PRINCIPLES

47.  There is no dispute as to the applicable principles. In Menfond Electronic Art & Computer Design Co Ltd v Wong Wang Tat Victor [2013] 2 HKC 259, DHCJ Lisa Wong SC (as she then was) said at [61]:

“The principles governing the grant or refusal of summary judgment under O 14 are well established. It is for the defendant to show that there is an arguable defence or triable issue. In doing so, the defendant must condescend to particulars. The mere assertion in an affidavit of a given situation by the defendant does not, ipso facto, ground leave to defend. The defendant must satisfy the court that his evidence is capable of being believed and that on the basis of such evidence, there is a fair or reasonable probability of the defendant having a real or bona fide defence. In deciding whether there is a fair or reasonable probability of the defendant having a real or bona fide defence, the court does not isolate each factual issue and consider whether it is possible that the defendant’s story on that issue is credible. Rather, the court must look at the whole situation. In assessing the credibility of the defendant’s factual case, while the court will not embark on a mini-trial on affidavit evidence, the court is not obliged to suspend its critical faculties and assume that the defendant’s evidence is accurate. If having regard to inherent plausibility, inconsistency with contemporaneous documents and other compelling evidence, the defence is not credible, the court must say so. If the defendant’s defence is incredible in any material respect, it cannot be said that there is a fair or reasonable probability that the defendant has a real or bona fide defence …”

48.  It was emphasised on behalf of the Plaintiffs that summary judgment is for clear cases, that is, in which there is no serious material factual dispute and, if there is a legal issue, then no more than a crisp legal question as well decided summarily as otherwise; and that unless it was obvious that the defence was frivolous and practically moonshine, summary judgment ought not to be applied, the issue being not whether the defendant’s assertions were to be believed, but whether they were believable. See Polykote Coatings Manufacturing Co Ltd v Grace Rehabilitation Centre Ltd [2016] 2 HKC 29 at [15] to [19], per To J.

49.  Mr Charles Sussex SC, leading counsel for the Plaintiffs, additionally submitted that the Defendants’ argument that the Plaintiffs’ case as advanced in their skeleton argument was very different from the one appearing in their pleadings was one that could only go to the credibility of that case, since a summary judgment application would typically be taken out before any pleadings were filed; there was therefore no legal impediment to departing from the pleadings when opposing an application for summary judgment. I agree, but in any event did not understand Mr Ambrose Ho SC, leading counsel for the Defendants, to be arguing otherwise.

D.  THE DEFENCES TO THE COUNTERCLAIM

50.  The Plaintiffs relied on the following defences to CAM’s and CMS’s counterclaims:

50.1  that they were induced to enter into the Facility Agreement (and perhaps the Supplemental Deed) by reason of representations that (inter alia) the Defendants and Henter would only enforce against Chao and would not enforce the guarantees given by Mr Lau and SGGL;

50.2  that they were induced to enter into the Supplemental Deed and Facility Agreement by reason of the Fund Performance Representation, which was essentially consisted of representations by Ms Chow to Mr Lau on various occasions “that the Cachet Funds were performing well”;[1]

50.3  that the Facility Agreement is unenforceable as part of the loan thereunder (the part relating to the Cachet Loan) was to repay sums due under the Share Pledge, which breached ss.23 and 24 MLO;

50.4  that the Plaintiffs have a counterclaim for the repayments which were made pursuant to the Facility Agreement.

D1.  Representations that the Facility Agreement (and Supplemental Deed) would not be enforced, and other representations originally pleaded

51.  As a defence to the counterclaim regarding the Facility Agreement (but not the Supplemental Deed), the Plaintiffs pleaded that they were induced to enter into the agreement because it was represented to Mr Lau that (1) Ms Chow and Mr Chan would procure investments of between US$10m to US$15m into Adamas London and Ms Chow would find investors for “Fund IV”, said to be a fund which Adamas HK was seeking to set up, (2) the Defendants and Henter would only pursue Chao and would not enforce the guarantees given by Mr Lau and SGGL, and (3) the interest rate used on the loans to Chao would be significantly reduced.

52.  Whilst these featured only in the Plaintiffs’ pleadings, and not their skeleton argument, Mr Sussex indicated at the hearing before me that they had not been abandoned, and continued to be relied upon.

53.  In Lau 2^nd, Mr Lau further claimed that he was induced to enter into the Supplemental Deed (and not just the Facility Agreement) based on Ms Chow’s representations that she would not actually enforce against him or SGGL. However, no specific occasion on which such a representation was made in relation to the Supplemental Deed (as opposed to the earlier Option Agreement) was identified. Again, such representations were not addressed in the Plaintiff’s skeleton argument. No claim to rescind the Supplemental Deed for mispresentation has been made in the Plaintiffs’ pleadings, affidavit evidence or skeleton argument.

D1.1  Representation of non-enforcement

54.  Out of the above representations, the principal one appears[2] to be that the Defendants and Henter would only pursue Chao to recoup loans made to him, and would not enforce the guarantees given by Mr Lau and SGGL.

55.  Mr Sussex submitted that the representation that the Defendants would only pursue Chao and would not enforce the guarantees given by Mr Lau and SGGL was “not wholly unworthy of belief” since:

55.1  Mr Lau had no underlying interest in the transactions in August 2019 (by which Mr Sussex meant the Option Agreement, Share Pledge and the Henter Loan), which exposed him and SGGL to obligations of about $36m aside from interest;

55.2  even if references to the representations did not appear in the voluminous contemporaneous text messages between Mr Lau and Ms Chow, such representations could have been made orally in voice messages, WeChat calls, telephone calls or meetings;

55.3  it was “not inherently unbelievable” that Ms Chow represented that the documents to be signed were merely procedural and not to be enforced, given their friendly relationship; restructuring the parties’ arrangements would enable the net asset value (“NAV”) of Ms Chow’s investment fund to be maintained, instead of having to recognise a defaulting deal.

56.  I agree with Mr Ho that the claimed representation that the Defendants would only pursue Chao, and not enforce against Mr Lau and SGGL, cannot constitute a credible defence.

56.1  There was a great deal of contemporaneous text message exchange (by WeChat and WhatsApp) between Mr Lau and Ms Chow, but no reference was made to such a representation being made, whether at the time of entering into the Facility Agreement (or Supplemental Deed) or afterwards when enforcement action against Mr Lau and SGGL was actually being taken.

56.2  On the contrary, the messages indicate that the Defendants intended Mr Lau’s and SGGL’s guarantees to be binding and valid, in the way that any other such document would be expected to be.

56.2.1  There was a discussion between Mr Lau and Ms Chow on 11^th September 2019 when Ms Chow expressed a concern as to whether the Henter Loan could be repaid, pointing out that “You both PG”,[3] and Mr Lau replied that he was “v worried” (rather than pointing out that the personal guarantee would not be enforced against him). This would have related to the personal guarantee under the Henter Loan Agreement rather than the subsequent Facility Agreement, but it contradicts the suggestion that Mr Lau and Ms Chow had generally been dealing on the basis that personal guarantees sought from Mr Lau (and SGGL) were not intended to be enforced.

52.2.2  In the run up to the signing of the Facility Agreement, starting from mid-October 2019, personnel from Cachet sought information from Mr Lau regarding his assets, to be considered for use as collateral in the restructuring of the Cachet Loan and Henter Loan. As the Defendants have submitted, this would have been a pointless exercise if there was to be no enforcement against Mr Lau or if the documents were for the purpose of “window-dressing” as Mr Lau has claimed.

52.2.3  On 28^th October 2019, as part of the negotiations for the Facility Agreement, Mr Lau proposed various revisions, including the substitution of SGGL for himself as the borrower, and the deletion of certain assets as collateral. In response, Foster Lee (“Mr Lee”), the managing director of CAM, responded “Barry, please don’t do this to me. This is fundamental change to our terms. You be borrower or PG it”. I do not accept that this can credibly be consistent with representations that the personal guarantees were never intended to be enforced.

52.2.4  On 5^th November 2019, Mr Lau also asked whether Cachet could accept a corporate guarantee from SGGL in lieu of security over his London property, but Mr Lee rejected this. He also discussed the proposed changes to the collateral. There were then various rounds of negotiations and comments on the drafts, including the Facility Agreement, from Mr Lau. Again, this is not consistent with representations that the personal guarantees in the Facility Agreement were not to be enforced.

56.3  Mr Lau did not particularise when the representation was allegedly made. In Lau 2^nd, all that Mr Lau said was that “The only reason I ever agreed to do this massive favour for Angela [sign the Facility Agreement, Participation Agreement and Henter Loan Transfer Deed] was because (i) she represented to me that she would not enforce the Facility Agreement against me…”. In the Statement of Claim, it is pleaded the representation (and other representations) were made on “multiple occasions”, and it is also pleaded that the representations were made fraudulently. Yet none of the occasions were identified in the pleadings or evidence. As noted above, Mr Sussex’s submission was that the representations could have been made in voice messages, or WeChat calls, or telephone calls, or face to face meetings – but not one specific occasion on which a representation was actually made has been identified, and this despite the availability of extensive WeChat and WhatsApp records to assist in pinning down any such occasion.

56.4  WeChat and WhatsApp records were produced to show that from about May 2020 to March 2021, Cachet personnel chased Mr Lau for payments under the Facility Agreement. Payments were indeed made on certain occasions during this period. In response to the chasers, Mr Lau never claimed that representations had been made that Cachet would not enforce against him or SGGL.

56.5  As to the representation that Cachet would pursue Chao rather than Mr Lau or SGGL, Mr Lee sent a message on 24^th November 2019 to Mr Lau expressly saying that whilst Cachet was happy to chase Chao for him, “we do not want it a condition to enforce our rights”. This simply contradicts the alleged representation, and is also reflected in clause 11.1 of the Facility Agreement which stated that CMS would use a “best efforts” basis to collect from Chao, and clause 14.5 which provided that the guarantors waived any rights they might have of requiring CMS, HPPL or CAM to proceed against or enforce any other rights or security or claim payment from any person before claiming from the guarantors. (It will also be recalled that clause 7.1 of the Participation Agreement provided that CMS had the full discretion to take or refrain from taking steps to enforce its rights under the Share Pledge.)

56.6  GOL made a number of repayments under the Facility Agreement between February 2020 to December 2020. In Lau 2^nd, Mr Lau said that this was simply to help Cachet with its fund performance, rather than pursuant to any obligation. In the Plaintiffs’ skeleton argument, however, it was argued that GOL made payments under the mistaken belief that the Facility Agreement was legally binding, so that GOL had a counterclaim in unjust enrichment for the return of such payments, and the New Evidence Summons was issued for the purpose of adducing evidence in support of this claim. In other words, the Plaintiffs’ latest stance (that payments were made because Mr Lau thought that the Facility Agreement was legally binding) contradicts Mr Lau’s claim that he thought that the Facility Agreement was not binding by reason of representations made to him that there would not be enforcement against him and that he made repayments only to help Cachet with its fund performance.

56.7  Furthermore, the credibility of the alleged representation should be assessed against the background that Mr Lau has qualified and worked as a lawyer, and also had extensive experience in private finance and private equity in Hong Kong. Given Mr Lau’s knowledge and experience in both the legal and finance fields, it is difficult to see how he can credibly say that he relied on such a representation, even if it was made to him, and why he would not have documented it if he relied on it, or protested when Ms Chow went back on it.

56.8  Even if, as Mr Sussex argued, Ms Chow might have made the representation given her friendly relationship with Mr Lau, the purpose being to enable the NAV of Ms Chow’s investment fund to be maintained, it is inherently unbelievable that Mr Lau would not have recorded somewhere that he was indeed doing what he now calls a “massive favour” for Ms Chow, or that there would not be at least some reference to this in the parties’ extensive text messages. Certainly, after enforcement action started to be taken, it is inconceivable that there would not be some protest by Mr Lau that Ms Chow had gone back on her word, despite Mr Lau doing her such a “massive favour”. Mr Sussex referred to messages to show that Mr Lau and Ms Chow were on friendly terms, both before and after Mr Lau had defaulted on his obligations. He did not, however, identify any messages referring to a representation that there would be no enforcement against Mr Lau, whether before or after Mr Lau had defaulted on his obligations. Rather, there were messages from Mr Lau asking Ms Chow for an extension of time in which to make payment.

56.9  As for the argument that Mr Lau had no underlying interest in the transactions in August 2019, it is Mr Lau’s own evidence that there were commercial reasons for him to enter into the Option Agreement, Share Pledge and Henter Loan Agreement.[4] That evidence is disputed, as it involves further alleged representations said to have been made by the Defendants. But leaving that aside, the point is that Mr Lau having entered into the Share Pledge and Henter Loan Agreement in August 2019, it could not be said that there was no reason for him to enter into the Facility Agreement in November 2019 for the purpose of restructuring his obligations.

56.10  In relation to the Supplemental Deed (of April 2020), the Plaintiffs have not condescended into particulars as to the occasions when representations regarding enforcement of the Supplemental Deed (whether against Chao, Mr Lau or SGGL) were allegedly made. A general reference to representations made in relation to the Option Agreement (of August 2019) does not raise a credible defence that representations were made in relation to the Supplemental Deed such as to enable rescission of the Supplemental Deed.

D1.2  Representation about US$10m Commitment and Fund IV Commitment

57.  In paragraph 34 of the Statement of Claim, it was pleaded that Mr Lau was induced into signing the Facility Agreement (and Participation Agreement and Henter Loan Transfer Deed) because Ms Chow represented that “The Cachet Parties would honour their US$10M Commitment and the Fund IV Commitment”.

58.  Paragraph 21.1 of the Statement of Claim defines the “US$10M Commitment” as a representation by Ms Chow and/or Mr Chan to Mr Lau that “once the CASIL Block Investment [the Adamas London Shares] was done, they would procure investments (be it from Cachet or other clients) of between US$10m to US$15m million into Adamas London”.

59.  Paragraph 26.2 of the Statement of Claim defines the “Fund IV Commitment” as a representation by Ms Chow to Mr Lau that “she would find investors for Fund IV from her Family Offices and her substantial network of resources and contacts to back the launch of Fund IV as an anchor investor”.

60.  As the Defendants have pointed out, Mr Lau has changed his case as to the representations made, because in Lau 2^nd he claimed that he entered into the Facility Agreement because he “continued to have in mind [Ms Chow’s] promises regarding the US$10m Commitment, the Fund IV Investment and the Fund IV Commitment”. The “Fund IV Investment” is different from the Fund IV Commitment. Paragraph 17 of the Statement of Claim defines the “Fund IV Investment” as “Cachet’s interest to come in as the anchor investor … by investing US$150 million” in a new special situations fund to be run by Adamas HK, named “Fund IV”.

61.  I agree with Mr Ho that these representations (insofar as they can be characterised as such, Mr Lau himself putting it only on the basis that he “had in mind” certain “promises”) cannot constitute a credible defence. Dealing first with the (pleaded) Fund IV Commitment and the (unpleaded) Fund IV Investment:

61.1  The Fund IV Investment (by Cachet in a specified amount) was not mentioned in the pleadings as one of the representations or reasons for Mr Lau or SGGL signing the Facility Agreement (as opposed to the Fund IV Commitment which related to seeking investment by third party investors of unspecified amounts);

61.2  the Plaintiffs cannot point to any contemporaneous document which suggests that Ms Chow made a promise that Cachet would invest US$150m in Fund IV. As Mr Ho points out, and as is not disputed, for a commitment of that value, there would have had to have been paperwork in the form of due diligence, emails, draft agreements, text messages, or internal documents within Adamas HK. Nor is there any explanation why there are no such documents;

61.3  Fund IV was supposed to be launched in July 2019. The Facility Agreement was signed in November 2019, by which time it would have been clear that Cachet had not found any third party investors for Fund IV (pursuant to the Fund IV Commitment) and had not honoured any commitment to be the “anchor” investor (pursuant to the Fund IV Investment). Yet no complaint about either failure was made, even when enforcement action under the Facility Agreement was taken.

62.  As for the US$10M Commitment, the Plaintiffs’ case again is not capable of belief:

62.1  again, one would expect there to be a paper trail regarding such a commitment, but there are no contemporaneous documents which refer to it, and no explanation for their absence;

62.2  on the Plaintiffs’ case, Cachet should have honoured the US$10M Commitment once CMS purchased the Adamas London Shares on 2^nd August 2019. However, no complaint was made about the failure to do so. On the contrary, Mr Lau went on to sign the Facility Agreement;

62.3  The Plaintiffs’ case, as set out in Lau 2^nd, was that the purpose of the US$10m investment by Cachet in Adamas London was “in order for Cachet to pursue its ambition for global expansion”. Indeed, the background to the purchase of the Adamas London Shares, as pleaded in the Statement of Claim, was Mr Lau telling Mr Chow and Mr Chan that there was an opportunity for Cachet to invest in Adamas London, thereby providing investment opportunities for its clients who were “keen to expand into the UK and Europe”. However, Adamas London’s principal place of business was Hong Kong and according to materials exhibited in Lau 2^nd, it “exclusively focused on investing across Asia”, “provide[d] investors with access to Asia”, and was “The only investment company listed in London exclusively financing businesses across Asia in the SME Sector.”

D1.3  Representation that interest rate on the loans to Chao would be significantly reduced

63.  As pointed out in the Defendants’ evidence, it would have been illogical for Ms Chow to have made a representation to Mr Lau that the interest rate on the loans to Chao would be reduced. In the case of the Cachet Loan, a reduction in the interest rate of the loan would have reduced the amount of repayment which GOL would be entitled to receive from Chao pursuant to the Participation Agreement. In the case of the Henter Loan, the terms of the Henter Loan Transfer Deed allowed GOL to reduce the interest rate itself if it should so wish (but which would have been contrary to GOL’s interest).

64.  In Lau 2^nd, Mr Lau no longer claimed that he was induced into entering the Facility Agreement by reason of any such representation.

65.  The lack of credibility of this alleged representation only serves to further undermine the credibility of the representations which were pleaded together as having induced Mr Lau to enter into the Facility Agreement, namely, the representation that the guarantees against Mr Lau and SGGL would not be enforced, and the representation regarding the US$10m Commitment and the Fund IV Commitment.

D2.  Representation that the Cachet Funds were performing well

66.  At the forefront of the Plaintiffs’ misrepresentation defence now is the argument that the Plaintiffs were induced into entering into the Supplemental Deed and Facility Agreement by a representation that the investment funds of Cachet were performing well (“the Fund Performance Representation”). This is the only defence put forward that relates to both the Supplemental Deed and the Facility Agreement.

67.  This representation was not raised in the Plaintiff’s Statement of Claim of 30^th April 2021, but only in Lau 2^nd of 11^th February 2022. I was referred to the following parts of the evidence.

67.1  Paragraph 36 (in relation to the Fund IV Investment): “Therefore, purely on account of our good relationship, in light of her representations that she [Ms Chow] was committed to proceed with the Fund IV Investment and that her funds were performing well, I referred her to a number of what I recognized as good investment opportunities for Cachet, and did everything I could to assist her in ensuring the deals could be smoothly executed.”

67.2  Paragraph 60 and 60.3 (in relation to the Supplemental Deed): “I was very surprised that Cachet has taken this step [of exercising the put option under the Option Agreement] and immediately reminded Angela of her earlier representations that:- [CMS was inter alia to honour the US$10M Commitment and the Option Agreement was only a formality.] However, given the Fund IV Investment that I was expecting from Cachet, I was willing to overlook all this, and to do what I could to assist her to maintain her fund performance, which I was constantly told was doing well.”

67.3  Paragraph 104 (in relation to the Restructuring Agreements[5]): “Still bearing in mind that the Cachet Funds were performing well, and relying on Cachet’s promise of the Fund IV Investment, the Fund IV Commitment and our intended long-term partnership, I eventually signed the Restructuring Agreements on 29 November 2019…”

67.4  Paragraph 170 (in relation to Cachet’s investment failures): “Unfortunately, I have since come to know that Angela’s representations, in particular that Cachet was doing really well and could therefore support further investments such as the Fund IV Investment and the US$10m Commitment, were false. I certainly did not know this at the times which I have discussed above.”

68.  Mr Sussex submitted that the absence of reference to the Fund Performance Representation in the Statement of Claim was because Mr Lau was not aware of its falsity at the time. Mr Lau said that unbeknown to him, prior to his dealings with the Defendants, Cachet had already been in a precarious position, so that Ms Chow only sought to recover its losses and never intended, or had the ability, to make the US$10M Commitment, the Fund IV Investment, or to honour the Fund IV Commitment. The matter relied on in Lau 2^nd as being unknown prior to Ms Chow’s affirmation of 27^th October 2021 was that on 1^st April 2019, CMS had lent $150 million to one Uni-Pro Ltd (“the Uni-Pro Loan”); Uni-Pro Ltd had held 50.05% shares in Sun Cheong Creative Development Holdings Limited (a listed company with stock code 1781) (“1781.HK”); Uni-Pro Ltd and one Ivan Chan (a shareholder of 1781.HK and a guarantor of the loan) had deposited their shares into a designated brokerage account pursuant to the loan agreement, to effect a share pledge in substance; winding-up petitions were presented against 1781.HK in June and July 2019, which would have triggered an event of default under the loan agreement; 1781.HK was “in deep financial trouble” and the Uni-Pro Loan was “a terrible investment for Cachet”; Ms Chow was intent on protecting her fund performance and inducing Mr Lau into signing the (unspecified) agreements to achieve this purpose to “cover up the blackhole from the HK$150 million bad debt”.

69.  The explanation as to why the Fund Performance Representation was not raised in the Statement of Claim, but only in Lau 2^nd, is not credible.

69.1  There were WeChat exchanges between Ms Chow and Mr Lau in February and March 2020 in which the parties discussed a possible collaboration which involved Ms Chow injecting a “main board shell” as her initial contribution and Mr Lau injecting his yacht as his initial contribution. Mr Lau says that he did not know at that point what the “shell” would be. Then, on 8^th March 2020, he asked Ms Chow “Is ur listco in ur control already?”, to which she answered “Yes, we owned it plus control the board and management already”. Mr Lau asked for the number of the company, and Ms Chow answered “1781” (which Lau 2^nd acknowledges was a reference to 1781.HK). Mr Lau then asked “The Uni-pro n Invan Ho stakes pledged to u? Have you enforced or We work with management?” Ms Chow answered “Enforced already…”.

69.2  On 5^th April 2020, Mr Lau wrote in his WeChat:

“1781

Existing loan from Cachet 150m notional collateralised with 75% of shares held by largest shareholder

Various banks loans in aggregate [ m] extended to the Co now in default

… [Mr Lau then sets out a restructuring proposal]”

69.3  These messages would appear to indicate that Mr Lau was aware at the time that 1781.HK was in default and enforcement action had been taken against it. In Lau 2^nd, Mr Lau does not deny this, but says[6] “Still unaware of the extent of financial problems that 1781.HK was in, thinking that 1781.HK could be rescued … on 24 March 2000 I suggested that we should make it a “White Knight Fund” … aiming to rescue the financially troubled 1781.HK and generate returns from the increase in the share price of 1781.HK on the Hong Kong Stock Exchange.” “It only later became clear to me that 1781.HK was beyond saving and that its shares would soon become delisted from the Hong Kong Stock Exchange. This clearly must have been known to Angela, who already had “control” of the Board. I began to understand more clearly what Angela’s intentions were. She wasn’t actually trying to “rescue” 1781.HK, but was only seeking to use our “collaboration” to turn around her disastrous investment in the Uni-Pro Loan, and save her fund performance…”

69.4  On Mr Lau’s own evidence, he was aware at least to some extent that 1781.HK was in financial trouble by March 2000. He could have hardly said otherwise, given the WeChat records.

69.5  The financial woes of 1781.HK are the only matter relied on in support of the alleged falsity of the representation that Cachet was performing well (in Lau 2^nd paragraphs 109 to 132).

69.6  The thrust of the Statement of Claim of April 2021 is a complaint that Ms Chow and the other Defendants fraudulently deceived Mr Lau into entering a series of transactions, including the Supplemental Deed and Facility Agreement, by means of dishonest misrepresentations that they would honour the US$10M Commitment and the Fund IV Commitment.

69.7  If Mr Lau had been induced into entering into the Supplemental Deed and Facility Agreement because of misrepresentations that the Cachet Fund was performing well, it is not credible that Mr Lau, with his avowed experience in the financial industry, would not have known to make a complaint about the same by the time of the Statement of Claim.

69.8  The lack of credibility of Mr Lau’s claim is highlighted by the absence, in Lau 2^nd, of any particularity as to when and how he says he came to know enough about 1781.HK so as to realise that Cachet was in a precarious position. In Lau 2^nd paragraph 109, he says “I have since come to know…”; in paragraph 131 he says “It only later became clear to me…”.

70.  I do not find the Fund Performance Representation to be a credible defence.

70.1  As just explained, the reason given for its absence from the Statement of Claim is not credible. If the misrepresentation had truly been made, it is not credible that it would not have been included in the list of misrepresentations complained of.

70.2  Leaving this aside, again there is no contemporaneous evidence in the extensive WeChat and WhatsApp exchanges of the representation, which Mr Lau says were “constantly” made. The only reference which the Plaintiffs could identify, which they described as “circumstantial evidence”, was an exchange on 12^th July 2019 when Mr Lau commented “It’s not easy to get on PB [private bank] list”, to which Ms Chow said “Yeah so we are very careful not to burn anything”. It was said that the understanding to be derived from this was that “Cachet had not been “burnt” by any bad investments”. Mr Ho points out that the context of the discussion was compliance, so that the reference to not getting “burnt” was to ensuring strict compliance with private banking requirements. It is of course not for me to determine which is correct. But in any event, even Mr Sussex’s interpretation is not that Cachet was performing well (so as to be able to afford the various investments and commitments claimed by Mr Lau) but simply that Cachet had not been “burnt”. If there had been “constant” representations that Cachet was performing well, and that Mr Lau had entered into various transactions in reliance on such representations, it is hardly credible that this is the only reference to them that could be found.

70.3  Again, there is a lack of particularity as to the occasions on which the representations were made, and what was supposedly said, so as to constitute an actionable misrepresentation. It is for a defendant to an application for summary judgment to condescend to particulars. The Fund Performance Representation was not pleaded in the Statement of Claim, and was only raised in Lau 2^nd. I have set out the relevant paragraphs above, which only make a general reference to the making of the representation. If it had been made “constantly”, surely at least a few of the occasions on which it was made could have been identified. Mr Sussex submits that Ms Chow did not deny that she made the representations, but merely says that she did not overstate Cachet’s performance. In my view, it is for a defendant to properly particularise its defence before it can be said that the plaintiff has failed to deny it.

70.4  The same paragraphs of Lau 2^nd show that on Mr Lau’s case, the Fund Performance Representation is inextricably linked up with the US$10m Commitment, Fund IV Investment and Fund IV Commitment, since Mr Lau says that it was on the strength of this representation that he believed that Cachet had the financial ability to undertake further substantial financial commitments, and he acted on this belief in entering into the Supplemental Deed and Facility Agreement. Given my observations above that the representations about the US$10m Commitment and Fund IV Commitment are not capable of belief, this also renders the Fund Performance Representation not capable of belief.

70.5  As Mr Ho submitted, the claimed reliance on the Fund Performance Representation is illogical. In deciding whether or not to enter into the Supplemental Deed and the Facility Agreement, which were to restructure Mr Lau’s obligations, the financial performance of Cachet was commercially irrelevant. Under the Supplemental Deed, CMS was to receive payment; under the Facility Agreement, the Cachet parties were to lend. It is not suggested that the performance of Cachet’s funds had any impact on (or any other relevance to) the performance of the Cachet parties under the Supplemental Deed and Facility Agreement. All that Mr Lau says is that he acted on the representation when entering into the agreements, but he does not say how there could logically have been any reliance.

70.6  In fact, when Mr Lau came to explain why he entered into the Supplemental Deed and Facility Agreement in Lau 2^nd paragraph 99, it is telling that he did not refer to the Fund Performance Representation as one of the reasons. The defence is therefore also incapable of belief not only as regards whether it was made, but also as regards whether there could have been reliance.

D3.  Enforceability of Facility Agreement – ss.23, 24 MLO

71.  In Lau 2^nd, it is no longer said that the Facility Agreement itself is in breach of the MLO,[7] contrary to the original pleaded case. Instead, it is said that the Facility Agreement is unenforceable as it is tainted by reason of the breaches of the MLO relating to the Share Pledge (and Supplemental Agreement). The argument is that:

71.1  the loan under the Share Pledge is unenforceable by virtue of s.23 MLO as CMS was not a licensed moneylender;

71.2  by reason of the Supplemental Agreement, the loan under the Share Pledge has an effective interest rate exceeding 60% per annum, in breach of s.24 MLO;

71.3  the Participation Agreement required GOL to pay CMS the entire amount due under the Share Pledge;

71.4  the Participation Amount was to be satisfied by sums drawn under the Facility Agreement;

71.5  accordingly, the Facility Agreement is tainted by the illegality of the Share Pledge and is unenforceable.

D3.1  CMS not a licensed moneylender

72.  There is no dispute that CMS did not have a license to carry on business as a money lender. As to whether it was a money lender within the meaning of the MLO, in that it was in the business of making loans, or advertised, announced or held itself out as carrying on such a business, there is some dispute of fact. The Defendants say that CMS was not, and identified the only four loans which they say were made by CMS in the past three years. The Plaintiffs say that apart from these instances, CMS was willing to consider the making of loans, citing an instance when Mr Lau asked and Ms Chow agreed at least in principle to the grant of another loan to Chao.

73.  Mr Ho relied on Link Excellent Limited v Ruijin Technology Limited, unreported, HCA 1993/2016, 6^th November 2017, at [20] to [21] to make the point that the carrying on of a business requires a degree of repetition, system and continuity, and that several isolated loans would generally be insufficient to cause a lender to be treated as a money lender within s.2(1) MLO.

74.  Mr Sussex cited Chan Miu Chu Zoe v Choi Chiu Yuk, unreported, HCA 698/2021, 21^st February 2014 at [21b] and Re Florescent Holdings Ltd [2022] 2 HKLRD 203 for the proposition that even one transaction may be sufficient if there is evidence to show that the lender was a money lender at the time of the transaction.

75.  In my view, whether or not CMS was a money lender within the meaning of s.2(1) MLO when making the loan under the Share Pledge is fact-sensitive, and cannot be said at this stage to be an assertion that is not capable of belief, given the evidence outlined above.

D3.2  Interest rate

76.  Mr Sussex’s argument was that if one were to take into account the amendments made by the Supplemental Agreement to the interest rate under the Share Pledge, including default interest, this would take the total interest charged to over 60%.

77.  At the hearing, Mr Sussex acknowledged that I am bound by Easy Fortune Property Ltd v Yung Chun Him [2020] 4 HKC 1, where Chu JA at [53] held that an analysis of whether s.24 MLO has been breached should not be conducted on a scenario of default. Instead, he sought to reserve the point for argument should the matter go further.

D3.3  Whether Facility Agreement tainted

78.  The next step of the argument that I therefore need to consider is whether it could be said that if the loan made under the Share Pledge is unenforceable under s.23 MLO, this taints the Facility Agreement.

79.  Mr Sussex submitted that collateral transactions may be infected with the illegality of a principal contract if they help a person to perform an illegal contract, or if they would, if valid, make possible the indirect enforcement of an illegal contract: Trietel, The Law of Contract, 15^th ed., paragraph 11-107. He cited Spector v Ageda [1973] 1 Ch 30 for the proposition that a loan knowingly made to discharge an illegal loan is tainted with illegality and unenforceable. In that case, Megarry J considered that the original loan was illegal in two respects: first, that it was made by an unlicensed lender, and second, that it provided for compound interest.

80.  Mr Sussex argued that the sum of $8,667,471 borrowed by GOL from CMS under the Facility Agreement was for the purpose of paying the Participation Amount of $8,667,471 by GOL to CMS in respect of GOL’s participation in the Cachet Loan under the Participation Agreement. The Participation Agreement required GOL to pay the Participation Amount, defined as the amount understanding under the Share Pledge (and Supplemental Agreement), to CMS, in return for GOL’s acquisition of the right to receive the Participation Amount and interest from repayment by Chao under the Share Pledge. Applying Spector v Ageda, the loan under the Facility Agreement was tainted by the illegality under the Share Pledge.

81.  Mr Ho did not dispute the legal propositions relied on by Mr Sussex, but argued that there was no discharge of the Cachet Loan under the Share Pledge, which remained live and under which Chao continued to owe obligations; there had simply been a purchase by GOL of the lender’s rights under the Share Pledge, and a transfer of the commercial risks under those agreements to GOL.

82.  Without going into any detailed analysis or expressing any firm view on the matter, it seems to me that it is at least arguable that the arrangement under the Participation Agreement and that part of the Facility Agreement relating to the Cachet Loan was to enable GOL to borrow money to discharge the Cachet Loan. I note, for example, that under cl.3.1 of the Facility Agreement, GOL was to apply the $8,667,471 advanced by CMS towards the satisfaction of the Participation Amount under the Participation Agreement; and that under the Participation Agreement, “Participation Amount” was effectively defined as all debts owed by Chao to CMS under the Cachet Loan, and GOL was to pay the Participation Amount to CMS in return for effectively stepping into CMS’ shoes under the Share Pledge.

83.  Whilst Mr Ho characterised the arrangement as being an acquisition of rights and risks by GOL rather than a discharge of the Cachet Loan, it is at least arguable that this (acquisition) was simply another, rather than the only, feature of the arrangement.

84.  Mr Ho also submitted that even if the Cachet Loan under the Share Pledge was illegal, there was no evidence that Ms Chow had the necessary knowledge of the illegality, as all that Lau 2^nd said in support of the allegation that Ms Chow knew of the illegality of the Share Pledge is that the Participation Agreement was deliberately not described as a loan transfer, whereas the Henter Loan Transfer Deed was. I agree with Mr Sussex’s submissions that the reasons why the Cachet Loan was not the subject of an outright transfer, unlike the Henter Loan, remain to be explained. I further note that Ms Chow has said that the reason why she referred Mr Lau to HFL for the Henter Loan was precisely because CAM, CMS and HPPL never held themselves out as licensed money lenders, which indicates that she was aware that there might be circumstances in which they could not make loans. I therefore consider that whether or not Ms Chow had the necessary knowledge of illegality is a matter which needs to be determined at trial.

85.  For completeness, I note that Mr Sussex has referred only to s.23 MLO which provides for the unenforceability (rather than illegality) of a loan made by an unlicensed money lender. Unenforceability does not necessarily equate to illegality, as indeed Megarry J observed in Spector (supra) at 42H. However, Megarry J was of the view that the loan in that case was nevertheless illegal because of the provision (corresponding to s.29(1) MLO) making it an offence for an unlicensed person to carry on business as a moneylender without a licence, the plaintiff’s sister in that case being the unlicensed lender (although, ultimately, Megarry J did not hold against the plaintiff on this aspect as he was not satisfied that the plaintiff had the requisite degree of knowledge of the illegality). Mr Ho did not seek to argue that Specter did not apply by reason of any distinction between unenforceability and illegality in the present case.

86.  Mr Ho submitted that in any event, the defence only applied to that part of the Facility Agreement which concerned the Cachet Loan, and could not affect that part which concerned the Henter Loan, given the terms of the Facility Agreement. Under clause 2.1 of the Facility Agreement, the loans relating to the Cachet Loan and the Henter Loan were set out separately. Clause 2.2 of the Facility Agreement provided for the rights and obligations of the parties to be several, separate and independent. I agree; no particular reason has been put forward to explain why any illegality relating to the Cachet Loan could taint the arrangement under the Facility Agreement relating to the Henter Loan.

D4.  Plaintiffs’ counterclaim to Defendants’ counterclaim

87.  The Plaintiffs sought leave to file and serve Lau 3^rd, dated 22^nd June 2022. As explained in the Plaintiffs’ skeleton argument, this was to support a potential counterclaim for the return of money paid under the Facility Agreement, on the grounds that the money was paid under a mistake of law, Mr Lau acting under the belief that the Share Pledge (and Supplemental Agreement) were not in breach of the MLO and that the Facility Agreement was not tainted with such illegality.

88.  I refuse leave to file the further evidence. Master D To had ordered on 16^th November 2021 that after the evidence to be filed pursuant to that order, no further evidence was to be filed without leave. No explanation has been given for the lateness of the application or as to why the matters in the affirmation could not have been included in Lau 2^nd. No exceptional circumstances were put forward to justify the admission of the evidence: Jose Miranda Da Costa Junior v Lorenzo Yih, unreported, HCA 156/2010, 28^th April 2014 at [11].] Merely to say that the Defendants have had notice of the Plaintiffs’ allegations under the MLO since the pleadings (which in any event were different to those advanced at the hearing) and that the Plaintiffs would suffer prejudice if the evidence were not filed cannot begin to form the basis of an exercise of discretion in the Plaintiffs’ favour.

89.  As to the counterclaim, this does not provide any additional defence to the Defendants’ counterclaim for summary judgment regarding the Facility Agreement, but stands or falls with the defence based on illegality, which I have addressed above.

E.  DISPOSITION

90.  I dismiss the New Evidence Summons and make an order nisi that the costs of and occasioned by the same are to be paid by the Plaintiffs to CAM and CMS, to be taxed if not agreed.

91.  I give judgment in favour of CMS on its counterclaim against SGGL and Mr Lau relating to the Supplemental Deed.

92.  I give judgment in favour of CAM on its counterclaim against GOL, SGGL and Mr Lau relating to the Facility Agreement insofar as it relates to the Henter Loan.

93.  I give unconditional leave to GOL, SGGL and Mr Lau to defend CAM’s counterclaim relating to the Facility Agreement insofar as it relates to the Cachet Loan.

94.  I further make an order nisi that the Plaintiffs pay CAM’s and CMS’s costs of the counterclaim and of the Summons, save that one-third of the costs of the hearing before me should be in the cause of the counterclaim relating to the Facility Agreement insofar as it relates to the Cachet Loan. The argument as to illegality considered in section D3.3 above, on which I have given the Plaintiffs leave to defend part of CAM’s counterclaim, was raised only in the skeleton argument filed for the hearing, and took up a relatively small proportion of the argument before me.

95.  The parties are to draw up an agreed draft order for approval within fourteen days. In the absence of agreement, the parties should set out their differences, with reasons, within fourteen days.