CITIBANK NA v. HUI PO YUEN MAKIE

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REASONS FOR JUDGMENT

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1. This is an application by the Plaintiff Bank ("the Bank") for summary judgment against the Defendant. At the conclusion of the hearing, I entered summary judgment against the Defendant and said I would hand down my reasons later. I now hand down the Reasons for my Judgment.

2. The Plaintiff and Zeppelin as lenders, advanced to the Defendant by a loan agreement dated 1st June 1995, the sum of $31.9 million to enable the Defendant to purchase some 22 million shares of Yeebo International Holdings Ltd. ("Yeebo"). Those 22 million shares plus another 50 million Yeebo shares were put up by the Defendant as security for the said loan. The Plaintiff's share of the loan was $20 million and the Plaintiff has a pro rata share of the 72 million Yeebo shares as its security of the Plaintiff's loan of $20 million. Subsequent to the drawdown of the loan, a number of repayments were made to the Plaintiff, so that as of August 1996 just $8 million was still outstanding to the Plaintiff. There was a demand for repayment made by the Plaintiff and it is common ground that demand was not met by the Defendant and no repayment was made.

3. To resist the Order 14 Summons, the Defendant attempted to rely on 4 defences, namely:-

At the hearing before me, Mr. Chua for the Defendant quite rightly and properly abandoned the aforesaid first, second and third defences. The issue between the parties therefore on the Order 14 hearing was limited to the alleged defence based on illegal loan.

4. The illegal loan defence, was not raised by the Defendant in his original Affidavit in opposition to the Summary Judgment application. The purported defence came about this way. The Order 14 Summons was issued on 23rd August 1996 returnable on 18th November 1996. The Summons was supported by the Affidavit of Mary Choo for the Plaintiff dated 16th October 1996. At the hearing of the Summons in the morning of 18th November 1996, Master Jennings made an Order directing the time-table of the filing of Affidavits for the hearing of the Summons, namely:-

In the afternoon of the 18th November 1996, the Defendant filed its Affidavit in answer, namely the Affirmation of Makie Hui Po Yuen ("Hui 1st Affirmation"). The Plaintiff by consent was given an extension to file its Affidavit in reply namely the Final Affidavits and the Plaintiff filed on 17th December 1996 the following Affidavits in reply:-

5. On the 10th December 1996, there was in fact an Order made by Mr. Justice Woo transferring the Action to the Commercial List and for a refixing of the date of hearing before the Commercial Judge. This Order also provided that the directions given by Master Jennnigs on 18th November 1996 for the conduct of the Order 14 application do stand. In other words. Woo, J. on 10th December 1996 confirmed the Order of Master Jennings that no further Affidavit is to be filed by the parties without leave of the Court. On the 11th of December 1996, the Order 14 Summons was fixed to be heard by a Judge on 14th April 1997. On the 8th of April, less than one week before the fixed hearing of the Order 14 Summons, the Court had before it an application brought by the Defendant for the vacating of the 14th April 1997 hearing date and for new date to be fixed, for the cross-examination of deponents of the Plaintiff's Affidavits, for consolidation and for various other orders. I will hereinafter refer to the Summons of that application of the Defendant as the "Cross-Examination Summons". At the Cross-Examination Summons hearing, there was placed before Mr. Justice Sears, a 2nd Affirmation of Makie Hui ("Hui's 2nd Affirmation") which described itself as in support of the Cross-Examination Summons and in support of the leave to defend. Mr. Justice Sears refused to vacate the 14th April hearing date but he adjourned the matter of the other reliefs sought in the Cross-Examination Summons. Otherwise Sears, J. made no other alteration to the directions previously given by Master Jennings and the Defendant did not seek leave from Sears, J. to file and rely on the Hui 2nd Affirmation for the purpose of resisting the Order 14 Summons.

6. In the Hui 1st Affirmation there was nothing said about illegal loan defence. The first appearance of the illegal loan defence was in the Hui 2nd Affirmation. The first question which therefore calls for determination is whether I should receive the Hui 2nd Affirmation having regard to the directions made by Master Jennings. As a matter of case management, there is no good reason why the Court having made direction of no further Affidavit without leave should on the day of the proper hearing many weeks and months later, make an order granting leave to put in an Affirmation out of time. This is specially when there was no Affidavit evidence put before the court explaining the reasons why the affidavit evidence now sought to be raised could not be or was not put in earlier or why there was no earlier application for leave to put in the proposed Affirmation. In the circumstances, I find no good reason why I should exercise my discretion in favour of the Defendant to permit this Hui 2nd Affirmation to be filed out of time. I appreciate that Mr. Chua had very forcefully argued that no prejudice could be said to have been suffered by the Plaintiff with this late Hui 2nd Affirmation but in my view, even if this is accepted to be the case (which it is not), it would not be a sufficiently powerful reason (against the aforesaid background of the case), for the Court to exercise its discretion in favour of the Defendant. The matter however is not as contended that there is no prejudice to the Plaintiff. Prejudice takes many forms. The extra costs to a party and the lack of adequate time to deal last minute with unexpected and unauthorised evidence can and do amount to prejudice. The time table set down by order of the Court ought to be adhered to and as a matter of case management, this is not a case where the Court ought to sanction and authorise the late application for the reception of evidence. Accordingly, I do not grant leave for the filing of the Hui 2nd Affirmation.

7. In the absence of the Hui 2nd Affirmation, there is no proper evidence of illegal loan and no basis therefore for the proper raising of the illegal loan defence issue. It follows that summary judgment must be entered against the Defendant.

8. Strictly speaking it is not necessary for me to go further but as I have received de bene esse the Hui 2nd Affirmation and the Affirmation of Lam Kam Cheung, I will briefly state what would be my conclusions on the illegal loan defence, in the event it might be held that the Hui 2nd Affirmation ought to have been received by the Court on the day of the hearing.

9. The case of the Defendant on the illegal loan was somewhat difficult to understand but in essence it seemed to be an assertion by the Defendant that the arrangement between Hui and Frankie Li was to ram up the market and that therefore the loan was illegal as being in breach of section 135 of the Securities Ordinance which provides as follows:-

10. Mr. Huggins in his able and very fair submissions, pointed to the following four considerations which show that there is no substance in the illegal loan defence:-

11. It seems to me that the starting point of any analysis of the merits of this alleged illegal loan defence is to bear in mind that it is the loan agreement the Plaintiff Bank is suing on which is alleged to be illegal. What is then the loan agreement. It is simply to finance the buying of 22 million shares of Yeebo which would then be kept by the Bank together with another 50 million shares as security for the loan. The bare question of this whole issue of illegal loan defence is whether the Bank knew that the Defendant buying of 22 million shares is illegal. To put up an arguable case of illegal loan defence, the Defendant has to satisfy the Court two essential requirements:-

12. The unchallenged written documentation shows clearly that the 22 million shares in question was the subject of the buy-back option agreement between the Defendant and MUI China Limited dated 28th June 1994 whereby the Defendant agreed to buy back from MUI on 1st June 1995 at $1.45 the 22.5 million shares which the Defendant sold to MUI. The option to buy back was exercised by MUI and therefore the Defendant was forced to buy back from MUI the 22 million shares of Yeebo as evidenced by a letter dated 5th June 1995 to the Stock Exchange. There was therefore nothing illegal in the purchase of the Defendant of the 22 million shares as shown by the Defendant's own acknowledgement to the Stock Exchange. In my judgment, the Defendant does not even cross the threshold of satisfying the first condition of the illegal loan defence, namely that the purchase of the 22 million shares was illegal.

13. The second requirement of showing an illegal loan is even less satisfied. The evidence does not show that the Bank knew that the Defendant's purchase of 22 million shares was illegal and that the Bank knew it was financing an illegal purchase. Therefore there is simply no proper case made out by the Defendant of an illegal loan.

14. However the case of the Defendant is far weaker and on analysis must be shown to be totally devoid of merit. Apart from the well deserved criticism by Mr. Huggins that the crucial factual assertions were not sworn to or verified on Affirmation by Hui and that the facts pleaded by the Defendant do not begin to establish illegal loan, what is not said by the Defendant, but central to his case on illegality under section 135 of the Securities Ordinance is the unpleaded, unverified but assumed assertion that the Bank knew that:-

There was no evidence of either (1) or (2) above but what is crucial is the essential necessary assertion that the Bank would finance shares purchased at $1.45 knowing in fact it was worth far less. This is simply an absurd contention neither supported by evidence nor basic commercial common sense. Even if such facts had been clearly deposed to on Affidavit (which they are not), they would be incredible and not capable of belief.

15. What has to be borne in mind is that this is a case where the Bank and its co-lender put up a sum specifically to finance the purchase of 22 million shares and then not only did the lenders keep these 22 million shares but on top of that the lenders were also given another 50 million shares as additional security and none of these 72 million shares could be used to create a false movement in the market as to result in a false market. This is therefore not a situation where the lenders are lending a large sum to enable the borrower to speculate and push up or down the market price of a share or to enable such borrower to use the shares purchased with the loan to generate false market activities. The combination of the finance of specific number of shares to be purchased and the taking out of market circulation for loan security those shares and 50 million additional shares, render in my view any contention of illegal loan wholly untenable.

16. What is apparent to me is that the Defendant was desperate to find a defence and one after the other its alleged defences, failed including the last manoeuvre of seeking cross-examination which like the other defences was also abandoned. The illegal loan was a last minute desperate measure created for the Defendant, to give a final run to stave off summary judgment. There is no merit in this illegal loan defence. There must be summary judgment to the Plaintiff with interests and costs.