張嘉謙及另一人 v. 龐克訓及另二人

HCA 2145/2018

[2019] HKCFI 2523

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2145 OF 2018

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DECISION

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1.  At the hearing of this matter, there were two summonses before me.

2.  The first was a summary judgment application. By a summons filed on 12 April 2019, the plaintiffs apply for summary judgment against all three defendants in these proceedings for repayment of sums loaned,in the sum of RMB 57,000,000, plus liquidated damages in the sum of RMB 11,400,000, contractual interest in the sum of RMB 3,335,865, as well as ongoing contractual interest.  Costs were sought, on an indemnity basis.

3.  The second was a summons from the defendants dated 27 September 2019, by which leave is ought to make amendments to the Defence, as filed on 4 March 2019. 

4.  I said that I would determine both summonses in my decision.

5.  The disputes in these proceedings arise principally from a series of four loan agreements which I shall summarise below.

Loan agreement no. 1 dated 24 February 2014 (“LA‑1”)

6.  This is an agreement between Vincci Investment (Shenzhen) Co Ltd and Cheung Ka Him (the plaintiffs) as lenders and Zhuhai Xincheng Import & Export Co Ltd and Pang Kexun (the 1^st and 2^nd defendants) as borrowers.  By this agreement, the lenders were to lend RMB 20,000,000. The loan was for a term of two months and was to carry interest at 3% per month (ie 36% per annum).  Any disputes between the parties were to be settled by way of negotiation failing which disputes were to be brought before the court at the place of execution of the agreement.  Since LA-1 was signed in Shenzhen, the dispute resolution clause was the PRC courts, rather than Hong Kong.

7.  Clause 4 of LA‑1 provided that in the event of payment default, the borrowers were liable for the loan principal, overdue interest as well as damages for breach of the agreement and expenses arising from the lenders’ exercise of their creditors’ rights, including but not limited to attorney’s fees, travelling, transportation, board and lodging, expenses etc.  Clause 5 went on to provide that in the event of payment default, the loan principal and interest would be payable in a lump sum within seven days.  The borrowers were also to pay damages for breach of the agreement being 20% of the loan principal. 

Loan agreement no. 2 dated 3 March 2014 (“LA‑2”)

8.  This agreement is between the same parties as LA-1. The amount loaned was stated to be RMB 30,000,000.  The term of the loan was 12 months and the interest rate was expressed to be 3.5% per month (ie an annualized interest rate of 42%).  The dispute resolution provisions of LA‑2 were the same as LA‑1, thus disputes under LA-2 fell to be determined before the PRC courts.  LA-2 (again like LA‑1) contained a provision that in the event of payment default, the loan principal and interest were payable, as well as expenses (such as attorney’s fees, travelling, transportation, board and lodging expenses).  Damages being 20% of the loan principal were also payable.

Loan agreement no. 3 dated 7 September 2015 (“LA‑3”)

9.  LA‑3 is between the same parties and refers to the two prior loan agreements.  Recital 4 to LA-3 records that the prior loans were to have been repaid in full in September 2015 (which appears to be incorrect). Recital 4 also records that “due to various reasons, the borrowers request to extend the terms of loan for one year”. 

10.  By LA‑3, the combined sums loaned under LA‑1 and LA‑2 were extended for one year from 1 October 2015 to 30 September 2016 (clause 1).  Clause 2 provided that as the principal sum of RMB 50,000,000“is still outstanding” the loan principal remained at that sum.  A new interest rate was set at 2.5% and clause 3 provided that RMB 1,250,000 would be paid monthly before the 15^th of each month.

11.  Despite recording that the monthly repayment sum was a flat sum of RMB 1,250,000 the table of calculation of principal and interest as appended to LA‑3 appears to have provided for compounding of interest.  To this extent,there seems to be an inconsistency between clause 3 of LA‑3 and the table appended thereto. 

12.  In the event of default, LA‑3 again provided for damages to be assessed at 20% of the loan principal.  These damages were in addition to any loan principal and interest that may remain payable, as well as being additional to general damages.

13.  There then follow some important departures from the terms of LA‑1 and LA 2, as follows:

  (a)  Whereas previously, LA‑1 and LA‑2 were silent on the question of joint versus several liability as between the borrowers, clause 7 of LA‑3 provided that the borrowers were henceforth “severally and jointly” liable for the entire sum.

  (b)  The place of signing of LA-3 was Hong Kong and in the event of disputes arising that could not be settled by negotiation, the parties were to bring proceedings in Hong Kong (rather than the PRC courts as was the case for LA-1 and LA-2). Importantly,a new clause 8 provided that the property of the borrowers whether located in Hong Kong or on the Mainland was said to be subject to recovery on the basis that Mr Cheung and Mr Pang are Hong Kong residents.  Thus, what began as two separate PRC loans in China had essentially changed, pursuant to LA‑3,into a single agreement where disputes fell to be heard in the courts of Hong Kong.

Loan agreement no. 4 dated 11 November 2016 (“LA‑4”)

14.  This agreement is between the same parties as its predecessors except that a new party, Mr Du Guowei (the 3^rd defendant), is added as a guarantor. 

15.  Clause 6 of LA‑4 records that the sums due to be repaid under the terms of LA‑1 to LA‑3, had not been repaid and that as such, the borrowers requested an extension of the loan for one further year.  LA‑4 then cites the terms of LA‑3 and then goes on to provide as follows (clause 8):

“ According to the agreement, [borrowers] should originally on everymonth repay the interest and principal (the principal of 50,000,000 dollars and 12 months’ interest of 17,244,411.21 dollars totalling 67,244,441.21 dollars), and the arrears were due on 30 September 2016. [Borrowers] had repaid nothing so far.”

16.  As pointed out to me by Mr Mok (appearing for the defendants), this clause, at a stroke, changed the currency of sums repayable from Chinese RMB to Hong Kong dollars.  But in making this change, there is no adjustment to reflect the material difference between the two currencies. 

17.  Clause 9 provides in effect that if the lenders agree to reduce the interest, Mr Du would join as a guarantor.  The new and final set of terms between the parties are then set out at clauses 1 to 11 of LA‑4. These provisions provide (inter alia) as follows:

  (a)  The terms of LA-3 were extended from 1 October 2015 to 30 September 2016.  As the principal sum of 50,000,000 dollars was said to be “still outstanding” the loan principal would remain at 50,000,000 dollars.  (Clause 1)

  (b)  Interest amounting to a total of 17,244,441.21 dollars was the interest owed but since Mr Du was willing to be a guarantor,this interest sum was reduced to 7,000,000 dollars ie waiving 10,244,441.21 dollars.  On this basis, the arrears of the original principal plus the interest remaining outstanding (allowing for interest waived) was said to be 57,000,000 dollars. (Clause 2)

  (c)  Mr Du became liable as guarantor for the sum of 57,000,000 dollars (clause 3).

  (d)  For the new principal sum of 57,000,000 dollars the new term was 1 October 2016 to 30 September 2017 and the interest rate for this period would be 1.5% per month (ie 18% per annum). Thus, the total due would be 57,000,000 dollars as accrued principal and interest plus a further 10,260,000 dollars for the period 1 October 2016 to 30 September 2017.

  (e)  The borrowers and guarantor were able to repay the loan in whole or in part at any time and in that event, interest would be adjusted pro rata (clause 6). 

  (f)  It was provided that LA‑4 was the final agreement signed by the parties and that all previous written and verbal agreements (in effect including LA‑1 to LA‑3) were declared null and void (clause 8).

  (g)  LA‑4 was to be governed by the laws of Hong Kong (clause 9).

Changes to relief sought

18.  Following the filing of written submissions, Mr Joseph Wong, who appeared for the plaintiffs, made two changes to the relief sought by the plaintiffs, namely:

  (a)  The claim for liquidated damages in the sum of RMB 11,400,000 was abandoned altogether. 

  (b)  Indemnity costs are no longer sought.

Plaintiffs’ case

19.  As to the relevant Order 14 principles, Mr Wong referred me to the decision of DHCJ Lisa Wong SC (as she then was) in Menfond Electronic Art & Computer Design Co Ltd v Wong Wang Tat Victor(unreported, HCA 293/2011), §61:

“ The principles governing the grant or refusal of summary judgmentunder Order 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 anaffidavit 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 contemporaneousdocuments and other compelling evidence, the defence is not credible,the court must say so.”

20.  Mr Wong also submitted that the court should not take the defence in this case on its face value but test it against the evidence disclosed in the defendants’ affidavits, including matters such as contemporaneous documents, whether the alleged defence was consistent with the defence previously put forward, and whether the defence is only recently raised despite the opportunity being given to the defendant to respond to it earlier. For these propositions, Mr Wong relied on the decisions of Time Rich 08 Ltd v DBE (HK) Ltd & others (unreported, CACV 282/2017) and Paul Y Management Ltd v Eternal Unity Development Ltd (unreported,CACV 16/2008). 

21.  Having cited these authorities, Mr Wong makes much of the way that the defendants’ defence has undergone a “metamorphosis” since the proceedings began.  In the defence filed on 4 March 2019, the defendants admitted that they had borrowed RMB 50,000,000 but it is asserted that this sum was advanced pursuant to oral agreements rather than the written agreements relied upon by the plaintiffs.  Importantly, the defendants assert that large repayments were made by the defendants totalling RMB 54,143,000.  While the defendants admit signing LA‑1 to LA‑4 inclusive, the defendants plead that they were forced by the 1^st plaintiff to drink alcohol after which they were forced to sign the different versioned loan agreements. The particulars of being forced to drink alcohol and sign loan agreements are similar if not identical in respect of all four loan agreements.

22.  Mr Wong explained that faced with these pleadings, the plaintiff sought further and better particulars of the defence, which request was evidently ignored by the defendants.

23.  On the plaintiffs’ case, events have now moved on.  The defendants, having reviewed the affirmation of Mr Cheung dated 11 April 2019 (and in particular paragraphs 33 to 37 thereof) have now “completely abandoned” the oral agreements pleaded in the defence.  The pleadings as to intoxication and threats have also changed and there are now different defences coming into play.  These are the matters addressed in the plaintiff’s summons dated 27 September 2019 seeking leave to amend the defence.  In brief, they are defences centred on the details of the loans having been repaid and on arguments that the loan agreements are invalid, unenforceable and/or tainted by foreign illegality.    

24.  While the “repayment” defence is still relied upon by the defendants, Mr Wong says that this defence is simply not credible because it flies in the face of numerous assertions in LA‑1 to LA‑4 that monies had not been repaid by the defendants.  In fact, the reverse is true, ie the agreements specifically recorded that sums advanced to the defendants remain outstanding.  Mr Wong’s submission is that the plaintiffs have given credit for all sums repaid by the defendants. 

25.  Mr Wong urged great caution in examining the defendants’claims that large amounts of money were repaid by the defendants in cash. He referred me in this regard to three authorities namely, Venetian Macau Ltd v Chen Mei Huan (unreported, HCA 1440/2012), Ju Yan Di Emperory Genesisy v Yau Wai Han (unreported, DCCJ 2996/2012) and Overseas Advisory Inc v General Ultrasound Technology Ltd (unreported, DCCJ 370/2008).

26.  In Mr Wong’s submission, merely asserting cash repayments, is not sufficient.  Among other things, there was no attempt to trace these alleged cash payments to their origins. 

27.  Mr Wong is also critical of the new legal defences raised by the defendants in the proposed amendments to the Defence.  He says that these defences are an afterthought.  They are said to be completely inconsistent with the provisions of LA‑4 (which contains an entire agreement clause).  Further, Mr Wong submits that the assumptions upon which the legal opinion relied upon by the defendants are based are completely without foundation.

Defendants’ case

28.  For his part, Mr Mok referred me to §14/4/9 of Hong Kong CivilProcedure 2019 (Vol 1) for the proposition that “the issue is not whether the defendant’s assertions are to be believed; it is whether those assertions are believable …. The defence set up need only show that there is a triable issue or question or that for some other reason there ought to be a trial”. 

29.  Mr Mok also relied upon the decision of the Court of Appeal in Man Earn Ltd v Wing Ting Fong [1996] 1 HKC 225 where, in the words of Godfrey JA, “Unless it is obvious that the defence put forward by the defendant is ‘frivolous and practically moonshine, O 14 ought not to be applied’”. 

30.  Mr Mok also asserted that where there are doubts and suspicion in the plaintiff’s case, such doubts detract from the plaintiff’s rights to summary judgment.  For this proposition, Mr Mok relied upon the Court of Appeal decision in Billion Silver Development Ltd v All Wide Investments Ltd [2000] 2 HKC 262.  (This case applied the decision of Extraktionstechnik Gesellschaft Für Anlagenbau MbH v Oskar (1984) 128 SJ 417).  I shall return to the decision in Billion Silver below.

31.  The essence of Mr Mok’s submissions are that on the facts,there is no remaining sum to be paid to the plaintiffs at all.  That is to say,all sums payable by the defendants have been repaid and that the defendants’ indebtedness to the plaintiffs is nil. The second limb of Mr Mok’s written submissions is that the loan agreements are (to summarise the argument), invalid, unenforceable and/or tainted by foreign illegality.  In his submission, the migration of the loans from China (denominated in RMB) to Hong Kong (denominated in Hong Kong dollars) was done to circumvent China’s foreign exchange laws and to give the plaintiffs some Hong Kong assets to enforce against.  For these propositions,  Mr Mok relies upon a PRC Legal Opinion dated 29 July 2019.  This Opinion asserts that LA‑1 and LA‑2 are invalid or void and that LA‑3 and LA‑4 are not “saved from this illegality” by virtue of the fact that they are expressed to be governed by Hong Kong law.

32.  As to the repayment question, a significant portion of the time available at the hearing was spent examining a detailed list of alleged loan repayments (with contemporaneous supporting documents).  Mr Wong said that one must exclude the following from the list of payments tendered by the defendants:

  (a)  All payments made prior to 11 November 2016 (being the date of LA-4).

  (b)  All payments made by parties other than the defendants.

  (c)  All payments made to parties other than the plaintiffs.

  (d)  All cash payments.

33.  Mr Mok disagreed, saying that numerous large payments were made and they cannot simply be ignored.  In effect, Mr Mok’s submission was that there are contemporaneous documents to show that that loan repayments were made – albeit that LA-1 to LA-4 say otherwise.   He submits that these payments must be studied and tallied and that this alone is a triable issue.

Discussion

34.  On the face of things, the plaintiffs’ case for summary judgment has merit.  The loan agreements say what they say and there are clear words to the effect that the sums loaned remained unpaid as late is November 2016. 

35.  But when applying the test in Menfond (supra), I am reminded that the court does not isolate each factual issue and consider whether it is possible that the defendants’ story on that issue is credible.  Rather, the court must look at the whole situation.

36.  When I look at the facts of this case in the round, there are two matters relied upon by Mr Mok which, in my view, cannot properly be ignored.  These are:

  (a)  There are clear – and at least partially documented – allegations that the loans were largely if not fully repaid.  This includes allegations of moneys being paid to a relation of the 2^nd defendant (at the request of the latter) in discharge of the loans.  

  (b)  There are equally clear assertions that the loan transactions (and in particular LA-4) were entered into so as to  circumvent China’s foreign exchange laws.  Defences that the loan agreements are invalid, unenforceable and/or tainted by illegality are matters that the defendants have the right to pursue.  Mr Wong made the point, fairly in my view, that the Legal Opinion tendered by the defendants is based on facts that are merely asserted in the underlying affidavit evidence.  I would caution the defendants against pursuing these sorts of allegations, if there is no basis to support what has been contended.  But this is the case advanced by the defendants and it seems to me that they are entitled to pursue this line of defence as well, if they wish to do so.   

37.  Taking these matters together, I am satisfied that the defendants have raised arguable defences and triable issues and indeed it would be hard to say otherwise.  Both parties have pointed me to contemporaneous documents which they say, support their respective cases.  And while the defendants have challenges to surmount, I am not of the view that their case is not credible.  There are too many “live” issues in this case for it to be suitable for determination under Order 14.     

38.  In reaching this view, I have taken account of Mr Wong’s submission that the “metamorphosis” in the pleaded defences shows the hopelessness of the defendants’ case.  But I do not go that far.  Importantly, the so-called repayment defence was pleaded from the outset and is still relied upon as a primary defence.  The proposed “legal defences” set out in the draft Amended Defence are new but as I see it, it is not unusual for legal defences of this type to be added to the pleadings as proceedings progress towards trial.  

39.  I have also considered Mr Wong’s legal submission that the case law suggests that the court should be very cautious in accepting unsubstantiated assertions that loan repayments were made in cash.   However, that goes too far in the present case, in that there are documents to support payments having been made – and as such, the question is more one of whether the evidence of alleged repayments is adequate.

40.  Applying the test in Man Earn Ltd v Wing Ting Fong (supra), I reach the same conclusion.  From the outset of these proceedings, the defendants have maintained that the loans have been substantially, if not fully, repaid.  There are at least some documents that show payments to have been made and it seems to me that the defendants should be entitled to pursue their repayment defence (and in doing so, they will need to explain why LA-1 to LA-4 are couched in the language of the loans remaining due).

41.  Equally, there are some serious allegations as to the validity, enforceability and legality of the underlying loan transactions.  The defendants will need to make good on the facts that underpin this part of their defence but again, it seems to me that these are defences which the defendants should be entitled to pursue.    

42.  Thus, it is not obvious to me that the repayment and “legal” defences put forward by the defendants are “frivolous and practically moonshine”.  So on this test too, Order 14 ought not to be applied.  

43.  Finally, I would respectfully return to the Billion Silver case (supra).  In the language of that case, where there is suspicion as to the plaintiffs’ case, the correct course is to give unconditional leave so that all relevant matters can be properly ventilated at trial. 

44.  Applying Billion Silver, I believe that the facts of this case exhibit some unusual and in my assessment, suspicious pointers, as follows;

  (a)  Annualised loan interest was as high as 42% (LA‑2). This, of itself, would not be enough.  However, there is more.

  (b)  There were late payment damages payable in the sum of 20% of the amount loaned, which Mr Mok described as a penalty clause.  In the case of LA‑1, LA‑2 and LA‑3, it appears that these damages were payable in addition to general damages.  These penalty damages were rightly dropped by Mr Wong as the hearing progressed but the facts remains that there was a troubling “double claim” to both general damages and penalties in these agreements.    

  (c)  LA‑3 recorded that LA‑1 and LA‑2 were to have been repaid in September 2015, which appears to be far from correct, ie,     LA-1 was to be repaid in April 2014 and LA-2 in March 2015.  Thus, there were evidently arrangements in place at this time that were not reflected in the written loan agreements.  This provides credence to the defendants’ case that there were oral agreements which sat alongside the written agreements.   

  (d)  In LA‑3, clause 3 of the agreement did not “tally” with the table of calculations appended to the agreement.  The former envisaged simple interest whereas the latter calculated compound interest (a difference of around RMB 2,200,000).

  (e)  The unexplained migration from RMB to Hong Kong dollars in LA‑4,with no exchange rate adjustment is a further concern.

45.  I put it no higher than suspicion but from the above, I have formed the view that there is enough that may be “amiss” in the facts of this case so as to make Order 14 relief inappropriate.  That is to say, perhaps there is more to the bargain between the parties than was recorded in the written loan agreements.  I form no view as to these issues, save to say that these are among the matters that should properly be explored (by both parties) at trial.

46.  For these reasons, I grant unconditional leave to the defendants to defend these proceedings.     

47.  It appears that the next step in the proceedings is discovery, which should be undertaken without delay.   Presumably the plaintiffs will also make good on the clear indication given by Mr Wong during the hearing that the penalty damages claim will be formally withdrawn.

Amendments to Defence

48.  The defendants’ summons to amend the Defence centres upon two principal matters, namely:

  (a)  Pleading the sums allegedly repaid (RMB 43,920,000 and HK$12,160,000).

  (b)   A series of defences based on the loan agreements being invalid, unenforceable and/or tainted by foreign illegality.

49.  In light of my decision herein, and noting that the parties did not undertake an examination at the hearing of whether some but not all of the amendments should be allowed, I have formed the view the amendments should be allowed, as drafted. 

50.  The scope of the parties’ discovery will need to encompass the defendants’ newest pleading.

Costs

51.  For the Order 14 summons, I order that the costs of the application be costs in the cause of the action.

52.  As I have granted the defendants leave to amend their Defence in the terms of their summons, costs shall be as set out in paragraph 3 of the defendants’ summons.