TRANSASIA PRIVATE CAPITAL LTD v. CHENG YU

HCA 598/2021

[2022] HKCFI 1295

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 598 OF 2021

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DECISION

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1.  This is the appeal of Cheng Yu (“the Defendant”) from the Decision of Master KW Wong dated 13 January 2022 dismissing the Defendant’s summons dated 27 August 2021 to stay these proceedings on the ground of lis alibi pendens and to set aside the Final Judgment dated 20 July 2021 obtained by TransAsia Private Capital Limited (“the Plaintiff”) in default of acknowledgement of service. At the conclusion of the hearing, the decision was reserved which I now give.

Background

2.  On 22 June 2018, the Plaintiff (as the lender) and Gene Capital (China) Limited (“Gene Capital”) (as the principal borrower) entered into a facility agreement (“Facility Agreement”) pursuant to which Gene Capital had made 8 drawdowns from June 2018 and January 2020.

3.  The Defendant is the sole director and shareholder of Gene Capital.

4.  Various security documents were executed in favour of TA Private Capital Security Agent Limited (“Security Agent”) to provide collateral for the debts granted under the Facility Agreement including the Defendant’s personal guarantee dated 22 June 2018 (“the Guarantee”) in respect of Gene Capital’s obligations to repay monies lent by the Plaintiff under the Facility Agreement.

5.  Recital (D) of the Security Trust Deed dated 22 June 2018 made between the Security Agent, the Plaintiff, Gene Capital and the Defendant provided that the Security Agent would hold the security documents as trustee in favour of, inter alia, the Plaintiff.

6.  As at 1 December 2020, the outstanding indebtedness under the drawdowns amounted to USD13,717,091.84.

7.  The Plaintiff commenced an action against Gene Capital on 2 December 2020 under HCA 2026/2020 (“HCA 2026”) for repayment of that amount.

8.  An order 14 application made on 23 June 2021 in that action was heard by Master KW Wong on 15 December 2021 who granted summary judgment in favour of the Plaintiff. In the absence of any appeal, the summary judgment became a full and final judgment.

9.  Separately, pursuant to clauses 12.1 and 12.3 of the Guarantee, the Security Agent executed a Deed of Assignment dated 24 December 2020 and transferred all its rights under the Guarantee to the Plaintiff who acquired the necessary locus standi to sue the Defendant under the Guarantee in the present action. A notice of assignment was given to the Defendant on the same day.

10.  On 13 April 2021, Plaintiff sent a demand letter to the Defendant requesting payment under the Guarantee by 15 April 2021.

11.  When no repayment was received, the present action was commenced on 21 April 2021 seeking payment of USD14,512,934.22 which sum included interest accrued since the commencement of HCA 2026 on 2 December 2020.

12.  On 20 July 2021 judgment in default of acknowledgement of service was entered against the Defendant.

13.  The Defendant’s summons for a stay and the setting aside of the default judgment was dismissed by Master KW Wong on 13 January 2022 culminating in the present appeal.

14.  Meanwhile, on 21 January 2021, the Plaintiff had commenced proceedings against the Defendant on the Guarantee in the Lianyungang Intermediate People’s Court (“the LYG court”) (“the PRC proceedings”).

15.  Subsequent to the commencement of HCA 2026, on 15 June 2021 the LYG court dismissed the Plaintiff’s claim for want of jurisdiction.

16.  The Plaintiff filed its notice of appeal which was accepted by the Jiangsu High People’s Court. At the hearing, the court was informed that the Plaintiff received a notice that morning that the appeal is scheduled to be heard on 24 June 2022. 

The issues

17.  At the hearing,oral submissions focused on 3 issues, namely: lis alibi pendens, service of the writ and meritorious defence. These will be considered in turn.

(1) Stay under lis alibi pendens

18.  Mr Thomas Lee, counsel for the Defendant, submitted that the present proceedings ought to be stayed as identical proceedings were commenced in the PRC between the same parties and in relation to the same subject matter in January 2021, several months before the present proceedings. That is a ‘weighty factor’ to consider and the court will be ‘astute’ to avoid a multiplicity of proceedings, citing Hong Kong Civil Procedure 2022 (“HKCP 2022”) §11/1/134 and China Construction Bank (Asia) Corp Ltd v Shanghai Pudong Development Bank Co Ltd, CACV 14/2016, 3 February 2017, [2017] HKCA 51.

19.  The Defendant readily acknowledged that the Guarantee contains an asymmetric jurisdiction clause (“AJC”) commonly found in financial documents.

20.  The nature of an AJC is was considered by Au-Yeung J in Industrial and Commercial Bank of China (Asia) Ltd v Wisdom Top International Limited, HCA 278/2019, 4 March 2020, [2020] HKCFI 322 (“the ICBC case”) at §§16-17 which I gratefully adopt:

“16. Its nature has been summarized in the case of Commerzbank Aktiengesellschaft v Liquimar Tankers Management Inc [2017] 1 WLR 3497 §§40-41:

‘40 ... As we have seen, such clauses contain different provision as to jurisdiction depending on whether proceedings are initiated by X on the one hand or by Y on the other. In an asymmetric jurisdiction clause Y is limited to jurisdiction A but X may proceed in that jurisdiction or in other courts which have competent jurisdiction: Mauritius Commercial Bank Ltd v Hestia Holdings Ltd [2013] 2 All ER (Comm) 899, para 37, per Popplewell J. X can sue anywhere under such a clause but only if and to the extent that a court other than in A has jurisdiction. Moreover if Y sues in A, X is not able to challenge the court’s jurisdiction since it has agreed to it. In this situation X may not be able to sue elsewhere: Lornamead Acquisitions Ltd v Kaupthing Bank HF [2013] 1 BCLC 73, para 112.

41 Asymmetric jurisdiction agreements are a long-established and practical feature of international financial documentation …’

17. In essence, an AJC ensures that a creditor can always litigate in a debtor’s home court whilst preserving its right to bring proceedings where the debtor’s assets may be located at the time a dispute arises.  This increases the prospect of a creditor successfully recovering a debt owed to it, which in turn contributes to the readiness of the creditor to provide finance and reduces the costs of borrowing, by minimizing the risk that a debtor’s obligations will be unenforceable: Etihad Airways PJSC v Prof. Dr. Lucas Flöther [2019] EWHC 3107 (Comm) §162, Jacobs J.”  

21.  In the present case, whilst the Defendant can only commence proceedings against the Plaintiff in Hong Kong, the Plaintiff is not so constrained. It had every right under the Guarantee to commence proceedings against the Defendant in his home court (the PRC) as well as in Hong Kong.

22.  Ms Shirley Leung, counsel for the Plaintiff, submitted that if a stay were granted, the Plaintiff would be prejudiced because the AJC is not an “exclusive jurisdiction clause in favour of Hong Kong with respect to both parties to the agreement” under section 3 (1) of the Mainland Judgments (Reciprocal Enforcement) Ordinance, Cap 597: see the ICBC case at §§10 and 58.

23.  As a result, even if the Plaintiff obtains a judgment against the Defendant in the present action, it could not be enforced in the PRC due to the presence of the AJC. Thus, PRC proceedings against the Defendant are necessary in order that the Plaintiff could pursue debts not recoverable in Hong Kong.

24.  In my view, having regard to the Plaintiff’s clear contractual right to commence proceedings in Hong Kong and the PRC and a potential need to pursue the Defendant in the PRC, a stay of these proceedings would not serve the ends of justice and I decline to grant such a stay.

(2) Service of the writ

25.  The Guarantee contains the following provisions:

“1.2 ... Security Period” means the period from the date of the Facility Agreement until the full and final discharge of the security created by the Security Documents by final and irrevocable repayment or payment in full of the Outstanding Indebtedness.

...

18.3  The Guarantor hereby irrevocably agrees:

18.3.1  that, for the purpose of Proceedings in Hong Kong, any summons, writ or other legal process may be served upon the Borrower’s agent in Hong Kong with its address at:

Gene Capital (China) Co., Limited

Room 1705, 17^th Floor, Harcourt House

39 Gloucester Road, Wanchai,

Hong Kong

Attn: Cheng Yu

The Process Agent is hereby authorised to accept service on behalf of the Guarantor, which shall be deemed to be good service on Guarantor; and

18.3.2  that throughout the Security Period the Guarantor will maintain a duly appointed process agent in Hong Kong, duly notified to the Security Agent, and that failure by any such process agent to give notice thereof to the Guarantor shall not impair the validity of such service of a judgment or order based thereon.”

26.  The issue that arises is whether the writ was duly served according to RHC O 10, r 3 which provides as follows:

“3. Service of writ in pursuance of contract (O. 10, r. 3)

(1) Where –

(a) a contract contains a term to the effect that the Court of First Instance shall have jurisdiction to hear and determine any action in respect of a contract or, apart from any such term, the Court of First Instance has jurisdiction to hear and determine any such action, and

(b) the contract provides that, in the event of any action in respect of the contract being begun, the process by which it is begun may be served on the defendant, or on such other person on his behalf as may be specified in the contract, in such manner, or at such place (whether within or out of the jurisdiction), as may be so specified,

then, if an action in respect of the contract is begun in the Court and the writ by which it is begun is served in accordance with the contract, the writ shall, subject to paragraph (2), be deemed to have been duly served on the defendant.”

27.  Mr Lee relied on the Defendant’s affirmation dated 26 August 2021 (“Defendant 1^st) to show that when the writ was served the contractual address was no longer valid. The Defendant stated (Defendant 1^st at §19) that the Harcourt House address was the old address of Gene Capital’s Hong Kong office back when it had a physical presence in Hong Kong but that it was closed at “the end of 2018” and the registered address was changed to the Easy Commercial Building address which is the address of Gene Capital’s company secretary. A notice of change of registered address was exhibited: however, it is dated 6 December 2018 rather than at “the end of 2018” as one would expect.

28.  On those facts, it was said that the contractual address designated in §18.3.1 of the Guarantee was not Gene Capital’s address at the time the writ was served and service could not have been in strict compliance with the contractual provision.

29.  As regards the Defendant’s assertion that Gene Capital, (the Defendant’s Process Agent) had closed its Hong Kong office at the contractual address in late December 2018, the Plaintiff invited attention to the fact that the Defendant had executed various legal documents in and/or after December 2018, either on behalf of Gene Capital or himself, representing that the contractual address was Gene Capital’s address:

(i)  when Gene Capital executed the 2^nd Amendment Deed on 20 December 2018, the contractual address was given as its address;

(ii)  the contractual address was used as Gene Capital’s address when it executed the Account Charge dated 13 May 2019 in favour of the Plaintiff; and

(iii)  the Renewal of Uncommitted Trade Finance Facility dated 18 December 2019 was sent to the Process Agent at the contractual address and signed by the Defendant as Guarantor.

30.  Those matters necessarily undermine the reliability of the Defendant’s evidence that as a matter of fact the contractual address was not Gene Capital’s address when the writ was served in April 2021. The date the Defendant had put forward as the date when the contractual address ceased to be Gene Capital’s address, namely, “the end of 2018” is shown not to be the case.

31.  There being no other date (preceding the date on which the writ was served) put forward, on the evidence before the court, the Defendant has not discharged the onus of showing by credible evidence that factually the contractual address was not Gene Capital’s address on the date the writ was served.

32.  The Plaintiff also placed reliance on §18.3.2 of the Guarantee as its fall-back position. The Plaintiff invited attention to the Guarantor’s obligation under that provision to maintain a duly appointed Process Agent in Hong Kong throughout the Security Period, duly notified to the Security Agent. The Plaintiff submitted that it was incumbent on the Defendant to notify the Security Agent of any change of address.

33.  The Defendant referred to §17.2[1] (concerning “Notices” which makes express provision for a change in address for communication). It was said that §18.3 could have but did not expressly cater for the change of address contingency and as the security documents were all drafted by the Plaintiff, it only had itself to blame.

34.  As a matter of construction, it is not entirely clear that the obligation to “maintain” a Process Agent in Hong Kong and to duly notify the Security Agent includes an obligation to notify a change of address of the duly appointed Process Agent within Hong Kong. Arguably, it may not and may be directed at replacements of the Process Agent only.

35.  The concluding words of §18.3.2[2] not to impair the validity et cetera relate to “a judgment or order” do not assist when the issue is service of the writ rather than any judgment or order obtained thereafter.

36.  In the present case, even proceeding on the basis that there was no obligation to notify the Security Agent of a change of address, I am not satisfied that the Defendant has shown that as a matter of fact when the writ was served on Gene Capital the contractual address was no longer its address.

37.  In my view, the Plaintiff had strictly complied with §18.3.1 of the Guarantee such that the writ was deemed duly served pursuant to O. 10, r. 3 (1).

(3) Meritorious defence

38.  It is common ground that the burden is on the Defendant to show a defence with a real prospect of success with evidence in support: HKCP 2022 at §13/9/14.

39.  The Defendant’s account of the relevant background may be summarized as follows:

(a)  Prior to 2017, Gene Capital was primarily engaged in the import and trading of metal raw materials.

(b)  Thereafter, Gene Capital’s primary trade became the import of luxury vehicles into the Mainland.

(c)  In 2017, it traded on a credit line of USD15 million from Malayan Bank Berhad but the credit had to be repaid in strict accordance with contractual obligations whether or not luxury vehicles procured by such credit had been paid for by Gene Capital’s customers which included China Grand Automotive Services Group Co Limited (“China Grand”) and Huayang Zhongyuan (Tianjin) Industrial Group Co Limited (“Huayang”).

(d)  In 2018, the Defendant was introduced to the Plaintiff and in May 2018, they entered into a Cooperation Agreement, a key element of which was that the Plaintiff would share in profits earned from the sale of luxury vehicles procured using funds originating from the Plaintiff.

(e)  As the Defendant understood it, the legal rights and obligations were different from the legal rights and obligations expressed in the Facility Agreement and related agreements.

40.  Before the Master, the Defendant ran defences based on the Cooperation Agreement and that the Facility Agreement was a sham. Those defences were dismissed by Master KW Wong in HCA 2026 and in these proceedings.

41.  Mr Lee (who did not appear below) submitted that based on the same evidence which is before the court, there is nevertheless an alternative defence based on estoppel by convention.

42.  The defence raised is based on a different characterization of the evidence. It was said that the evidence discloses a common understanding between the Plaintiff and Gene Capital that the Plaintiff would not enforce any rights it had to repayment until Gene Capital had itself been paid by its customers.

43.  The Court of Final Appeal explained the 3 elements of an estoppel by convention[3] in Unruh v Seeberger (2007) 10 HKCFAR 31 at §§133 and 150.

44.  Various provisions of the Facility Agreement were highlighted which show that the Facility Agreement was designed for the Defendant’s business including approved buyers and repayments through a specified collection account:

Purpose(s) of Facility	To finance credit insured receivables of Borrower from Approved Buyer for the trading of parallel imported vehicles
Tenor	Up to a maximum of 180 days from the date of each drawing
…
Repayment	Repayment shall be made upon collection of sales proceeds paid by the Approved Buyer directly to the Collection Account within the Tenor
Collection Account	A bank account approved by the Lender and/or the Security Agent and opened in the name of the Borrower with the Security Agent as the joint-authorised signatory and having view-access rights, details of which are as follows: Account name Account number/ Time deposit reference number/ Structured deposit or Structured Investment transaction reference number Account Bank Account Bank Address SWIFT Code GENE CAPITAL (CHINA) CO. LIMITED 735-111912000 (HKD) 735-111912001 (USD) 735-111912018 (CNY) China CITIC Bank International Limited Lippo Centre, 89 Queensway, HK KWHKHKHH
…
Approved Buyer(s)	a. Huayang Zhongyuan (Tianjin) Co.; and   b. any other buyers on Approved Sales Terms  acceptable and pre-approved by the Lender

45.  Mr Lee drew attention to the Schedule attached to his submissions which shows that altogether there were 4 tranches of working capital advanced by the Plaintiff between 28 June 2018 and 8 January 2020. The funds advanced were said to be tailored to bespoke ‘supply contracts’ entered into with Gene Capital’s customers who were large, reputable organizations including China Grand, a public company and Huayang which was named in the Facility Agreement as an approved buyer.

46.  All substantive repayments by Gene Capital to the Plaintiff were made upon receipt of payments by Gene Capital from customers until 6 January 2020 at about the time the pandemic intervened, causing disruptions.

47.  The estoppel by convention advocated involves restraining the lender (the Plaintiff) from exercising its rights to enforce and recover payments advanced under the Facility Agreement until Gene Capital itself had received payments from its customers.

48.  It was submitted that “pay when paid” arrangements are not unusual in arrangements for financing and supply and commonly arise in the construction industry. Firma C-Trade SA v Newcastle Protection and Indemnity Association [1991] 2 AC 1 was cited as an example but in that case there were express ‘pay when paid’ provisions which is not the present case.

49.  It was submitted that the present transaction is nonetheless a commercial transaction with collateral given over the subject matter of the financing i.e. the cars themselves and it is not a situation where the contract ‘has gone south’ in the sense that a 3^rd party buyer had entered into insolvency as the case in the Firma C-Trade case. The Defendant emphasized that the buyers are large state-owned enterprises or public companies listed on the Shanghai stock exchange. They are not insolvent; rather, it is a case of their not having ‘completed’ their part of the arrangement.

50.  In response to the court’s query as to “when the curtains will come down” or whether it was entirely open-ended under the arrangement now put forward, Mr Lee accepted that there is no evidence on the issue. However, he opined that he did not consider that the estoppel would survive an insolvency or a debt restructuring.

51.  Reference was then made to email exchanges between the parties which it was said to show the common assumption. Having perused the emails identified, I am unable to agree that they show any common assumption. Rather, they show admissions of liability with Gene Capital putting forward various proposals for repayment.

52.  In my view, the Defendant has not been able to adduce any clear and credible evidence to support an estoppel by convention. The fact that the Facility Agreement was ‘bespoke” does not of itself establish any common assumption: it is equally consistent with a regular facility agreement whose terms are binding on the parties.

53.  Although the Defendant distanced itself from the arguments previously deployed to run the Cooperation Agreement and sham transaction defences (which it accepts cannot be reopened), in substance, the defence of estoppel by convention is no different from the Facility Agreement being a sham transaction when its clear provisions are not to take effect as drawn or are varied by some common assumption.

54.  In any event, given the lack of credible evidence in support, in my view, the defence of estoppel by convention is a nonstarter.

Conclusion

55.  For the reasons stated above, I would dismiss this appeal.

56.  The parties’ written submissions also addressed a minor point as to whether the omission of any mention of the PRC proceedings or of HCA 2026 in the affirmations of the process server is a ground for setting aside the judgment. I do not consider it necessary to go into this question given my conclusions on the 3 main issues. 

Order

57.  Accordingly, it is ordered that the Defendant’s summons be dismissed.

58.  There is to be an order nisi of costs in favour of the Plaintiff with certificate for counsel, such costs to be summarily assessed and payable forthwith, such assessment to be dealt with in Chambers.

59.  The Plaintiff is directed to lodge its statement of costs within 7 days hereof, the Defendant to lodge his objections within 14 days thereafter and the Plaintiff its reply (if any) within 7 days thereafter.