EVER CHANCE DEVELOPMENT LTD v. CHING KAI CHIU t/a WING HUNG HARDWARE & MACHINERY CO AND OTHERS

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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JUDGMENT

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1. This is an application by the plaintiff (Ever Chance) for final judgment against the second and third defendants (Madam Lee and Many Fund) for specific performance of what is referred to as "the July Memorandum". This document is the basis for Ever Chance's claim against Madam Lee and Many Fund.

2. The July memorandum is important. I set it out in full. This is the English language translation provided by Madam Lee and Many Fund. Mr Fung is content to rely on this version -

3. Whatever the circumstances in which they did so, Madam Lee admits she and the first defendant (Mr Ching) signed this agreement. She does say that the two additional clauses "did not exist at the time I signed it", and they were added "without my knowledge or consent". This evidence, contained in Madam Lee's second affirmation dated 3 November 1997, is not consistent with evidence in Madam Lee's first affirmation dated 31 July 1997. In that, she said "In order to play safe, Mr He suggested to put down on the document that the 1^st Defendant would pay RMB 15,000,000.00 before end of July 1994 and RMB5,000,000.00 in 1 month thereafter". This detail appears only in the two additional clauses.

4. The loan mentioned in this memorandum is, according to the statement of claim by Ever Chance, a loan by Ever Chance to Mr Ching in 1992. The loan amount was RMB$20 million, and the agreement provided for repayment of RMB$28 million by 13 November 1993. The sum of RMB$2 million was repaid, leaving a balance of RMB$26 million, which is the sum mentioned in the July memorandum.

5. It is certainly arguable, at least, that the liability of Madam Lee and Many Fund under the July memorandum is dependent on the liability of Mr Ching under the loan agreement. In other words, if Mr Ching is not liable under that loan agreement, Madam Lee and Many Fund cannot be liable under the July memorandum. There is no independent basis for their liability.

6. It is also arguable, putting it at its lowest, that the loan agreement is not enforceable and, therefore, Mr Ching has no liability under it. I will explain why I say this.

7. It appears that the loan agreement is governed by the law of mainland China. Indeed, in his judgment on 29 January 1996, Sears, J. said "The Agreement was made in Macau, and in my judgment it is governed by Chinese law and I do not think anyone dissents from that."

8. The People's Government of Dai Ling Town, Shun Tak City (Dai Ling Town) took proceedings against Ever Chance in the People's Intermediate Court, Guangdong. Wing Hung Hardware & Machinery Company (Wing Hung) and Mr Ching were joined as third parties in these proceedings. On 22 August 1995, the court gave its judgment. The judgment recited that Dai Ling Town alleged that it had lent RMB20 million to Ever Chance for one year at interest at the rate of 18% per annum, but Ever Chance did not pay, that Ever Chance admitted that it had borrowed the money, but considered that Wing Hung and Mr Ching were the "real" borrowers, that Mr Ching denied this and said that Dai Ling Town had invested the money in the business of Kiangmen City Xing Sheng Real Estate Company Limited, which should be the defendant. The court found that a subsidiary of Dai Ling Town lent the money to Mr Ching, that Dai Ling Town entered into the loan agreement with Ever Chance and, on the same day, Ever Chance entered into an agreement with "the same basic content" with Wing Hung and Mr Ching, but the interest increased from RMB 3.6 million to RMB8 million, that Mr Ching repaid RMB2 million and that Mr Ching admitted the debt and pledged "two properties in Hong Kong and one property in San Hui City". The court also found that the agreement between Dai Ling Town and Ever Chance and that between Ever Chance and Mr Ching "were contrary to statutory regulations ... and should be regarded as invalid and the loan should be restituted according to law.". The court ordered Ever Chance to repay Dai Ling Town RMB20 million deducting RMB2 million repaid, with modest interest, and that Wing Hung and Mr Ching repay Ever Chance similarly.

9. Wing Hung and Mr Ching appealed to the People's High Court in Guangdong, with Dai Ling Town and Ever Chance as respondents. This court upheld the findings that the two loan agreements were "invalid agreements according to law", upheld the original judgment and dismissed the appeal.

10. Ever Chance sued Mr Ching in this court on the basis of these judgments and obtained summary judgment. Mr Ching appealed against this. Mr Tong, who appeared in that case for Mr Ching, argued the appeal only on the ground that the judgments in Guangdong were procured by fraud. The appeal failed.

11. It is on that basis that I say that it is, at least, arguable that the loan agreement is not enforceable and, therefore, Mr Ching has no liability under it. The basis on which Mr Ching was found liable to pay in the Guangdong courts was not on the loan agreement, which was found to be "invalid", but on the basis, as we might put it, of the equitable ground of liability to make restitutio in integrum. Equally, the issue before our Court of Appeal was not whether or not Mr Ching was liable under the loan agreement, but whether or not the judgments of the Guangdong courts were obtained by fraud.

12. Mr Fung argues that the question of whether or not Mr Ching "truly owed the debt was res judicata". The issue before me is whether or not there is an arguable defence that Madam Lee and Many Fund are not liable under the July memorandum because Mr Ching is not liable under the loan agreement. The issue that may res judicata, assuming Madam Lee and Many Fund are bound by the decision of the Court of Appeal, is whether or not although the loan agreement was found to be "invalid", Mr Ching is liable to repay under some equitable principle of restitution found applicable by the Guangdong courts. As I see the matter, these issues are fundamentally different. I cannot, at this stage, see any basis for saying that Madam Lee and Many Fund are liable under the July memorandum because, although that agreement firmly anchored their obligations to Mr Ching's obligations under the loan agreement, they are to be taken to have assumed liability based on some obligation by Mr Ching to make restitution.

13. That in my judgment, is the end of the matter. Once I have found that Madam Lee and Many Fund have raised a good defence, they are entitled to a trial. This is not a matter of discretion so there is no need to examine the merits of the other points raised by Mr Tong on their behalf. Indeed, the least said about these points, the better. They may have to be considered at the trial.

14. In the result, I find that Madam Lee and Many Fund have raised a defence that should be tried. They are entitled to unconditional leave to defend.

15. I have heard no argument on costs, but, on the face of it, there seems no reason why the costs should not follow the event. I make an order nisi that Madam Lee and Many Fund have their costs of the application.