PACIFIC HARBOR ADVISORS PTE LTD AND ANOTHER v. WINSON FEDERAL LTD AND OTHERS

HCA 1257/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1257 OF 2013

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D E C I S I O N

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INTRODUCTION

1.  This is the plaintiffs’ second summary judgment application in this action (“the 2^nd Summary Judgment Summons”).

2.  The plaintiffs (“Ps”), by this action, seek to make recovery in respect of two loans made in 2008, whether by way of repayment from the borrower (D1), or pursuant to security provided by D2 to D7.

3.  As to the parties, at the material times:

(1) Ps are a Singapore company and BVI company respectively, each carrying on business as an investment fund.  P1 made the relevant loans to D1 in 2008, and P2 agreed to sub‑participate in part of the 2^nd loan in about 2011.

(2) D1 is a Hong Kong company to which P1 made the loans.  At the time of the loans being made, the shareholders of D1 were Carlos Cho (“Carlos”) and D5.  Carlos was a director of D1 until his death on 14 November 2008.

(3) Probate in respect of Carlos’ estate has been granted to D2, who is sued in his capacity as executor of Carlos’ estate.

(4) D3, Vincent Cho (“Vincent”), is the son of Carlos.  Vincent was director of D1 until 19 June 2013.

(5) D4 (“IHAL”) is a Hong Kong company whose registered shareholders were Carlos as to 95% and Vincent as to 5%.  IHAL has a 79% stake in D7 (“FSCL”), which indirectly owns the Shenyang Property.

(6) D5 is a BVI company 100% owned by Carlos.  It was a shareholder in D1 and D6.

(7) D6 (“RIL”) is a Hong Kong investment holding company of which Carlos and D5 were equal shareholders.  RIL owns 90% of a PRC company, Shanghai Bund Park Lane Shoppers’ Plaza Co Ltd (“Shanghai Bund”).

(8) D7 (FSCL) is a BVI investment holding company of which Carlos and IHAL were shareholders as to 21% and 79% respectively.  FSCL owns 100% of a PRC company which holds the Shenyang Property.

4.  The first summary judgment application was for monetary judgment and was heard and decided in Ps’ favour by DHCJ B. Chu (as she then was) on 10 June 2014 (“the 1^st Summary Judgment”).  The substance of the order made at that time was for D1 and D2 to pay US$38 million plus interest.  No order was sought against Vincent at the 1^st Summary Judgment application, but he was served with the summons, he filed evidence on his own behalf and he participated in the hearing with legal representation.

5.  On 26 May 2015, Vincent took out a summons for leave to appeal the 1^st Summary Judgment out of time.  Extension of time was sought on the basis of fresh evidence in the form of a taped telephone conversation on 4 May 2015.  The application was dismissed by the Court of Appeal by its judgment dated 21 August 2015 (the “Leave Judgment”).

6.  This 2^nd Summary Judgment Summons was taken out by Ps on 9 February 2015 against Vincent, D4 (IHAL) and D6 (RIL).

(1) The 2^nd Summary Judgment Summons seeks final judgment for the relief claimed in the Amended Statement of Claim and costs, save for the relief already granted in the 1^st Summary Judgment.

(2) However, on this application I was informed that the only relief being presently pursued were the following orders for specific performance:

(i) against Vincent, of the two letters of undertaking dated 2 June 2008 (“LOUs”), and the two IHAL share pledge agreements dated 2 June 2008;

(ii) against D4, of the FSCL share pledge agreements dated 2 June 2008; and

(iii) against D6, of the two Shanghai Bund share pledge agreements.  (These agreements will be considered further below.)

RELEVANT BACKGROUND AND DOCUMENTS

7.  The background to this matter, and the defences raised in the 1^st Summary Judgment Application, are thoroughly addressed in the 1^st Summary Judgment.  However, I will briefly address the relevant background facts and documents for the purposes of this application below.

8.  On 2 June 2008, Ps and/or one or more of the Ds executed documentation relating to loan facilities totalling US$40 million, including.

(1) Loan Agreement for a loan facility of US$10 million by P1 to D1, with a repayment date of 2 June 2009 (“1^st Loan Agreement”).

(2) Loan Agreement for a loan facility f US$30 million by P1 to D1, with a repayment date of 2 June 2009 (“2^nd Loan Agreement”).

(3) Two letters of undertaking (“LOUs”) (in respect of each of the 1^st and 2^nd Loan Agreements).  Each LOU was given by both Carlos and Vincent, and promised (in certain circumstances) to sell a property they owned (“the Guangzhou Property”) and apply the net proceeds of sale to satisfy the loans.

(4) Eight share pledge agreements, including:

(i) Two agreements by Carlos and Vincent to pledge the shares of D4 (IHAL) as security for the 1^st and 2^nd Loan Agreements (“the IHAL Share Pledge Agreements”);

(ii) Two agreements by D4 (IHAL) to pledge the shares of D7 (“FSCL”) as security for the 1^st and 2^nd Loan Agreements (“the FSCL Share Pledge Agreements”); and

(iii) Two agreements by D6 (RIL) to pledge the shares of Shanghai Bund as security for the 1^st and 2^nd Loan Agreements (“the Shanghai Bund Share Pledge Agreements”).

(5) Two personal guarantees by Carlos.

(6) Two corporate guarantees by D7.

9.  Carlos died on 14 November 2008.

10.  D1 was unable to make repayment of the outstanding loan debt of US$38 million pursuant to the 1^st and 2^nd Loan Agreements. By two agreements dated 2 June 2009 (albeit signed thereafter), P1 and D1 agreed to amend the terms of the 1^st and 2^nd Loan Agreements to (1) extend the repayment date (2) vary the interest terms (“the 1^st and 2^nd Amendment Agreements” respectively).  D1 entered the 1^st and 2^nd Amendment Agreements by its director, Vincent.

11.  By solicitors’ letter dated 31 May 2013, Ps stated that an event of default under Clause 7.1 of the Loan Agreements had occurred, demanding immediate repayment of the loans, interest and other amounts apparently accrued under the Loan Agreements.  I am not aware of any earlier notice of event of default under Clause 7.2 of the Loan Agreements (in particular, any Clause 7.2 notice prior to the Amendment Agreements).

SUMMARY JUDGMENT — RELEVANT PRINCIPLES

12.  There was no dispute as to the applicable legal principles.

(1) Leave to defend should be given where the defendant raises any substantial question of fact which ought to be tried, or there is a fair dispute to be tried as to the meaning of the document on which the claim is based: Hong Kong Civil Procedure 2016, para 14/4/11, pp 272.

(2) Leave to defend should be given where a difficult question of law is raised: Hong Kong Civil Procedure 2016, para 14/4/12, pp 272.

(3) “House of Lords points” should be left to mature consideration at trial: Citic Ka Wah Bank Ltd v Lau Kam Luen [2008] 2 HKLRD 167.

D4 AND D6

13.  I can dispose of the applications against D4 and D6 briefly.  Each of D4 and D6 have by letters dated 27 August 2015 addressed to the court stated, by reference to the 2^nd Summary Judgment Summons, that they do not object to summary judgment and the relief sought against them in the ASOC (which is the relief claimed today).  Accordingly, those orders for specific performance will be granted.

D3/VINCENT

14.  The plaintiffs made an application to amend the prayer of their Amended Statement of Claim, in order to claim specific performance of the IHAL Share Pledge Agreements against Vincent.  Although the plaintiffs had pleaded the facts they claimed to be necessary to make a claim against Vincent for specific performance of the IHAL Share Pledges, such a claim was omitted from the prayer.  I agree with Mr Edward Chan SC for the plaintiffs, leading Hugh Kam, that this is a technical matter.  Counsel for Vincent, Mr Earl Deng leading Au Lut Chi, did not object to the amendment.  I accordingly allow an amendment to the prayer as proposed by Mr Chan SC in oral submissions (without a draft amendment being produced) to add the following words to the prayer “AGAINST CARLOS AND/OR VINCENT” before “(2) Specific performance of the IHAL Share Pledge Agreements”.  The plaintiffs’ solicitors are directed to effect such amendment.  The costs of and incidental to the amendment are to Vincent, to be taxed if not agreed.

15.  The evidence filed in support of the 2^nd Summary Judgment Summons is the 7^th affidavit of Warren Allderige on behalf of the plaintiffs, the 5^th affidavit of Vincent in opposition, and the 12^th affidavit of Warren Allderige in reply.  The evidence suggests that Vincent would be disputing the indebtedness of D1 as primary debtor in order to defend the claims made against him.  Such evidence was filed before the Leave Judgment.  By the time of the service of the skeleton arguments, it was clear that (in my view, sensibly), Vincent was not disputing the indebtedness of D1 for present purposes.

16.  I am satisfied, by virtue of the 1^st Summary Judgment, that D1 is indebted to Ps.

17.  I am satisfied that Carlos and Vincent provided the LOUs to P1:

(1) The LOU in respect of the 1^st Loan Agreement (“the 1^st LOU”) provides:

“We, [Carlos] and [Vincent], refer to:

(a) [the 1^st Loan Agreement].

(b) All related agreements, undertakings, and understandings to the [1^st] Loan Agreement.

…

By virtue of this Letter and in consideration of Lender’s [P1’s] entry of the [1^st] Loan Agreement with Borrower [D1], the undersigned hereby:

(1) confirm that we are the owners of … (“the Guangzhou Property”)…

(2) undertake with you that should you exercise your right under Clause 7.2 of the above [1^st] Loan Agreement and that the Borrower fails to repay all monies outstanding under the terms of the above [1^st] Loan Agreement within 15 days of the receipt of the notice mentioned in the said Clause 7.2, we shall sell the Guangzhou Property in accordance with the terms of the above [1^st] Loan Agreement and pay the net proceeds of sale to you to satisfy the monies outstanding by the Borrower [D1] as aforesaid.”

(2) The 2^nd LOU is in identical terms save that it refers to the 2^nd Loan Agreement.

18.  I am also satisfied that the IHAL Share Pledge Agreements were provided to P1 by Carlos and Vincent as pledgors:

(1) The 1^st IHAL Share Pledge Agreement (in respect of the 1^st Loan Agreement) provides:

(i) Carlos owns 95% and Vincent owes 5% of the issued shares of IHAL.

(ii) Carlos and Vincent pledge the IHAL shares in favour of P1 as security for all moneys from time to time owing to P1 under the 1^st Loan Agreement.

(iii) Carlos and Vincent shall, immediately upon demand by P1, do all acts necessary or desirable to ensure the perfection of the pledge.

(iv) In the Event of Default (including any default under the 1^st Loan Agreement) and at the request of P1, the IHAL shares shall be sold by Carlos and Vincent in the open market at the then current market value or higher to settle D1’s obligations and duties under the 1^st Loan Agreement.

(2) The 2^nd IHAL Share Pledge Agreement is in identical terms save that it refers to the 2^nd Loan Agreement.

19.  Ps, having established the outstanding primary indebtedness of D1, and the obligations of Vincent under the LOUs and the IHAL Share Pledge Agreements (there being no dispute that the relevant demands have been made and notices given), are prima facie entitled to the relief they seek against Vincent.  The burden shifts to Vincent to establish an arguable defence.

20.  Vincent argues that there should be no specific performance of the LOUs on the following grounds:

(1) Vincent’s liability as a guarantor under the LOUs has been discharged.

(2) In any event, specific performance is not an appropriate remedy.

21.  Vincent argues that there should be no specific performance of the IHAL Share Pledge Agreements on the basis that specific performance is not an appropriate remedy in the circumstances.

DISCHARGE OF VINCENT AS GUARANTOR

(a) Arguments

22.  It is argued on behalf of Vincent that:

(1) The 1^st and 2^nd Loan Agreements were amended by the Amendment Agreements after Carlos died, and without the consent of, or on behalf of, Carlos.

(2) Carlos was therefore discharged from his guarantee liability under the LOUs.

(3) Vincent, as co‑surety with Carlos under the LOUs, is discharged from his liability thereunder by virtue of Carlos’discharge.

23.  It is argued on behalf of Ps:

(1) It is for Vincent to establish a defence.  Although Vincent pleaded the discharge of the LOUs’ liabilities by reason of variation to the 1^st and 2^nd Loan Agreements, D2 simply denied liability without raising the express defence.  (I am at a loss to understand why D2’s pleaded position should impact on Vincent’s case and I say no more about this.)

(2) Clause 4 of the Amendment Agreements (as construed by Ps) provides for the continuation of the security agreements provided by D1 in respect of the 1^st and 2^nd Loan Agreements, so that there is consent to variation of the 1^st and 2^nd Loan Agreements and/or a reservation of rights under the security agreements.

(3) In the absence of evidence as to ownership of the Guangzhou Property:

(i) If the Guangzhou Property was jointly owned, if one owner dies, then the whole property will be vested in the other.  Whether or not Carlos’ liability under the LOUs was discharged, that will not prejudice Vincent because Carlos had nothing to sell.[1]

(ii) If the Guangzhou Property was severally owned, as tenants in common, and if Ps are right in their construction of Clause 4 of the Amendment Agreement, then neither co‑surety is discharged, so the co‑surety point does not arise.[2]

(4) If Ps are wrong on the construction of Clause 4 of the Amendment Agreement, then Vincent is also estopped from claiming that he is discharged as guarantor because of his loss of rights against the principal debtor or co‑sureties.  That is (it is said) on the basis that Vincent engineered the change of position of the principal debtor, he knew Carlos was dead and no one represented Carlos’ interest, so he cannot claim the benefit of what he has engineered.

(b) Relevant legal principles

24.  Mr Chan SC and Mr Deng were largely agreed as to the applicable legal principles.

25.  If obligations under a contract are guaranteed, any variation to the contract must be agreed by the guarantor, or the creditor must reserve his rights against the surety when making the variation agreement, otherwise the guarantor will be discharged: Holme v Brunskill (1878) 3 QBD 495 at 505.

26.  The rationale for the general rule as to discharge of the surety is that a variation of the principal contract, for example by way of extension of time or release, interferes with the surety’s right to pay off the debt and sue the principal debtor: Holme v Brunskill at 505.

27.  The rationale for the exceptions is as follows:

(1) If a guarantor agrees to the variation, he has of course agreed to the variation of his own rights.

(2) If the creditor (in agreeing a variation with the principal debtor) reserves his rights against the surety, then the principal debtor impliedly consents to the surety’s rights against him remaining on foot notwithstanding the variation.  The surety’s rights to pay off the debt and sue the principal debtor remain intact.  Mahant Singh v U Ba Yi [1939] AC 601 at 609; Greene King plc v Stanley [2001] EWCA Civ 1966 at para 80.

28.  The burden of proof is on the creditor seeking to enforce the guarantee that the guarantor has given consent: O’Donovan & Phillips “The Modern Contract of Guarantee” (English edn) at paras 7‑56.

29.  Consent to the variations need not be express; it may be implied eg where the guarantor requests or instigates the variation and/or where the guarantor is a director of the principal debtor company and negotiates with the creditor for the variation: O’Donovan & Phillips at paras 7‑59‑7‑60.

30.  Mere knowledge of the variation is an insufficient basis from which to infer consent: O’Donovan & Phillips at para 7‑58.

31.  Polak v Everett (1876) 1 QBD 669 at 673 makes clear that if a surety is aware of a proposed variation of the principal contract which might discharge his liability as guarantor, there is no authority for the proposition that he is under a duty to warn the creditor. Mere knowledge of the variation by the surety does not amount to consent to the variation.

32.  Where the guarantor is the director of the debtor company negotiating for the variations, it would be unrealistic to make an artificial distinction in terms of his knowledge and consent between the two capacities of guarantor and director of the debtor: Beck Interiors Ltd v Russo [2009] EWHC 3861 (QB) at para 34; Winstone Ltd v Bourne [1978] 1 NZLR 94 at 96 lines 23‑43; German Trade House International Ltd v Lau Wai Ki [1996] 3 HKC 406 at 411H‑412E.

33.  As to the impact on a guarantor of the release of a co‑guarantor, Andrews & Millett “The Law of Guarantees” (7^th edn), para 9‑040 states that:

(1) The rationale underlying the discharge of the surety where the principal is no longer liable is that the creditor cannot do anything to put the rights of the surety in danger.  Accordingly, where the creditor releases a co‑surety who is jointly or jointly and severally liable, the surety’s rights of contribution and marshalling of securities are prejudiced, and the release will discharge the surety in toto, unless remedies have been reserved against him.

(2) Where one of a number of jointly liable co‑sureties is released, the remaining co‑sureties are wholly discharged.  The analysis is that since they are jointly liable, release of one is release of all.  However, the rule that this applies to jointly and severally liable sureties has been doubted by the Court of Appeal and must be treated with caution (referring to Commercial Bank of Australia v Wilson & Co’s Estate(Official Assignee) [1893] AC 181).

34.  I was not referred to Commercial Bank of Australia, nor did I hear argument on this area of apparent uncertainty in the law.  I do not begin to consider whether the discharge rule does apply in the joint and several liability situation.  For present purposes, I assume that there may be discharge in the context of joint and several liabilities and that is not a matter for summary judgment.

(c) Discussion

35.  It seems to me that the Amendment Agreements would serve to discharge the LOUs unless either of the exceptions are established ie:

(1) consent of the guarantor, or

(2) reservation of the creditor’s rights against the guarantor.

36.  Vincent, as director of D1 who procured the Amendment Agreements, must be taken to have consented to the variations.  Mr Deng sensibly did not dispute this.

37.  I have no doubt that if the LOU contained a surety obligation of Vincent alone, then Vincent’s liability as surety would remain intact notwithstanding the Amendment Agreements.

38.  Ps rely on Clause 4 of the Amendment Agreements to argue that the LOUs, and the liability of Carlos and Vincent thereunder, remain intact.

39.  Clause 4 of the 1^st Amendment Agreement provides:

“The Borrower [D1] hereby confirms that any security agreements it has entered into pursuant to the [1^st] Loan Agreement will continue to secure its obligations under the [1^st] Loan Agreement”.[3]

40.  Mr Deng on behalf of Vincent argues that the said Clause 4 only applies to security agreements entered into by D1.  That certainly seems to be the literal meaning of Clause 4.  In other words, Mr Deng argues that Clause 4 of the Amendment Agreement does not apply to the LOUs and need not be considered.

41.  Mr Chan SC on behalf of Ps responds that Clause 4 cannot properly be read literally, as to do so robs it of any meaning whatsoever.  That is because if one considers the security agreements to be provided under the 1^st and 2^nd Loan Agreements, none of them were to be entered into by D1, but D1 was obliged to procure that they all be provided.  Significantly, Mr Chan SC submits that Clause 4 should be read as substituting the words “entered into” with “provided”.

42.  I now consider it necessary to address Ps’ pleaded case and the notice given to Vincent as to Ps’ case on the question of discharge of liability under the LOUs.

43.  Contrary to Ps’ submissions, the burden is on the creditor, Ps, to establish an exception to the general rule of discharge upon variation of the principal contract.  I note that Ps do not appear to have adequately pleaded their case.

(1) Although Vincent had expressly pleaded the discharge of the LOUs by reason of the Amendment Agreements, Ps had not sought to make any positive plea in reply.

(2) Ps had indeed pleaded the Amendment Agreements in their Amended Statement of Claim including Clause 4 thereof, but:

(i) they have not pleaded that Clause 4 should be rectified or construed in a manner other than its literal or natural meaning,

(ii) nor have Ps pleaded that by Clause 4 of the Amendment Agreements, either (i) Carlos and Vincent had agreed to the amendments or (ii) Ps had reserved their rights against Carlos and Vincent as guarantors.

(3) Warren Allderige’s 12^th affidavit (ie Ps’ reply evidence on the 2^nd Summary Judgment Summons) stated at para 32 that the LOUs were not discharged because of Clause 4 of the Amendment Agreements[4].

(4) Mr Chan’s skeleton argument submitted that Clause 4 of each Amendment Agreement operated as a reservation of rights of P1 against Carlos and Vincent as guarantors, which would prevent the Amendment Agreement from operating to discharge either guarantor.

(5) The express argument that Clause 4 should be construed in a manner other than its literal meaning only arose in Ps’ oral argument at the hearing.  The “construction” argument really requires certain words of Clause 4 to be replaced by others.  It might more accurately be described as a rectification argument.

(6) Whilst Mr Deng did not complain about the lack of notice of these arguments, it would seem to me to be unsatisfactory for the court to be determining matters on a summary basis that have not been properly pleaded or notified, with the resulting lack of argument on important matters.

(7) If I had thought that the construction argument might arguably have got Ps home in their claim under the LOUs, I would have been most reluctant to allow it at this stage in light of the state of pleadings and inadequate evidence and analysis.

44.  However, I do not consider it necessary to decide the construction point because it does not assist me in deciding whether it is arguable that either of the two exceptions to the guarantee discharge rule apply.

45.  Firstly, on the consent issue, as Mr Deng argued, Clause 4 of each Amendment Agreement is effective only between those parties who have agreed to it.  That must be right.

(1) Vincent did consent to the variations.

(2) There is no question that Carlos did not agree to Clause 4 or any part of the Amendment Agreement, as he had died by that time.

46.  Also on the consent issue, Mr Deng argued that, unlike other documents within the suite of security documentation executed in support of the 1^st and 2^nd Loan Agreements, the LOUs did not permit Ps and D1 to make any variations to the principal contract without further consent from Carlos and Vincent.  Mr Deng referred to Clause 6 of the IHAL Share Pledge Agreements[5] and Clause 2.5 of Carlos’ personal guarantee[6] to make this point good.

(1) So, Mr Deng argued, if the parties had intended that the LOUs remain intact and enforceable notwithstanding a variation to the 1^st or 2^nd Loan Agreements, there would have been an equivalent provision in the LOUs.

(2) I accept that, as far as it goes.  The effect of Clause 6 of the IHAL Share Pledge Agreements, and Clause 2.5 of Carlos’ personal guarantee, is that the terms of the loans could be varied without discharging the IHAL share pledge or Carlos’ personal guarantee, without need for any further agreement from IHAL or Carlos.

(3) However, what we are concerned with is whether, where there is no prior consent in the LOUs, Clause 4 serves as consent by the guarantors that the LOUs remain in place notwithstanding the variation. 

(4) So, although Mr Deng’s observation is correct, it does not advance matters for present purposes.

47.  Secondly, on the issue of reservation of rights: Ps have not persuaded me that Clause 4 of the Amendment Agreement would operate as a reservation of Ps’ rights as against Carlos and Vincent under the LOUs, so as to amount to an exception to the general rule of discharge of the sureties.  Indeed there was really only a bare submission on the point, without developed argument.

(1) As I understand the rationale for the exception, the reservation must operate so that the creditor could enforce any existing rights under the guarantee, allowing the guarantor to sue the principal debtor.

(2) In this case, Clause 4 of the Amendment Agreements, even on the Ps’ construction, provides for the continuation of the LOUs, where liability thereunder is only triggered by an exercise of the right under Clause 7.2 of the Loan Agreements to give notice of default and a failure by D1 to pay within 15 days thereafter.  If the variation of the Loan Agreements means that there is no notice of event of default, then there are no rights against the sureties which have been reserved.

(3) This is to be contrasted with the hypothetical situation of the variation agreement effectively providing that the creditor can immediately pursue the surety as if there were no variation of the principal contract.

48.  Accordingly, it seems to me to be at least arguable that Carlos was discharged from liability under the LOUs by the Amendment Agreements.

49.  What then is the impact on Vincent’s liability under the LOUs?

50.  It seems clear that if Carlos and Vincent are jointly liable under the LOUs, then discharge of Carlos’ liability would affect Vincent’s ability to seek a contribution from Carlos and accordingly also discharge Vincent as co‑surety.

51.  Mr Chan SC did not suggest that I was in a position to determine whether the LOUs gave rise to joint or joint and several liabilities of Carlos and Vincent.  He gamely attempted a hypothetical analysis of the potential ownership structure of the Guangzhou Property by reference to Hong Kong law principles of succession and property law, but  I do not find that to be of assistance.

52.  It therefore seems to me to be a triable issue as to whether the liabilities of Carlos and Vincent under the LOUs were joint (in which case, the discharge of Carlos would serve to discharge Vincent), or joint and several (in which case, there is an issue of law to be considered as to Vincent’s liability).

53.  Mr Chan submitted that it would be wrong for Vincent to benefit from the discharge of Carlos when Vincent consented to the variations on his own behalf and knew that Carlos’ interest was unrepresented.  Mr Chan did not cite any authority in support.  Indeed his submission seems to run contrary to Polak v Everett.  Although Vincent consented on his own behalf, Vincent did not represent Carlos’ interest and it was not Vincent’s duty to warn P1 that without obtaining Carlos’ consent, there was a risk of discharge of the LOUs.

54.  Accordingly, I find that Vincent has an arguable defence to Ps’ claim under the LOUs.  Insofar as I deal with the availability of specific performance of the LOUs below, I do so for completeness’ sake only.

SPECIFIC PERFORMANCE

55.  The elements for the relief of specific performance are (1) that there is a complete, binding and valid contract (2) that the contractual terms are sufficiently certain and (3) that damages are not an adequate remedy. See Ma, Equity and Trusts Law in Hong Kong (2014) at para 23‑4.

56.  I understood Mr Deng to dispute Ps’ entitlement to specific performance on the basis that damages would be an adequate remedy.  In the context of the IHAL Share Pledge Agreements, Mr Deng also argued that there was no need for an order of specific performance in light of the factual circumstances (considered further below).

57.  There has been a growing tendency by the courts not to treat the adequacy of damages as a necessary threshold to surpass, but rather to ask the ultimate question of whether it would be more just to grant specific performance than to award damages. See Spry, The Principles of Equitable Remedies (2014) at 62‑63.

58.  If the subject-matter of the contract is shares of a company, and if it would be problematic and difficult to assess the value of the shares at the present stage, and thus the damages which might be awarded, then damages would not be an adequate remedy and specific performance should be ordered.  See Advertasia Street Furniture Ltd v China Outdoor Media Investment (Hong Kong) Co Ltd (HCCL 145/1999, 8 October 2004) at paras 57‑58 (Stone J); and Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349 (EWCA) at 380C (Sachs LJ).

59.  Where there is a risk that the defendant will be unable to satisfy an order for damages (eg the defendant has an unknown financial status), that would in and of itself be enough to justify the conclusion that damages are inadequate.  See Evans Marshall & Co Ltd v Bertola SA (1973) at 380H‑381B (Sachs LJ).

60.  As to the LOUs, there is at present no evidence of the value or nature of the Guangzhou Property.  Ps’ written submissions asserted that Vincent, inter alia, would not be able to repay the loan debts, so that he would not be good for damages.  Mr Deng did not, I think, dispute this.

61.  As to the IHAL Share Pledge Agreements, Mr Deng argued that the court should not make an order that would serve no purpose.  He submitted that where D2 owned 95% of the IHAL shares, and Vincent owned 5%, and receivers had been appointed to manage D2’s IHAL shares, then Ps could recover their debt from the 95% interest, and specific performance of the pledge over Vincent’s 5% would only be more trouble for the court (in terms of directions and supervision), and be superfluous.  I am unable to accept that submission.  As Mr Chan SC responded, the 5% interest must necessarily have value of its own.  Indeed, one can see that a realisation of 100% of a private company may well be more attractive than the 95% stake, with a sitting 5% minority shareholder.

62.  I see no reason why there should not be an order for specific performance of the IHAL Share Pledge Agreements.

ORDER

63.  Accordingly, I order as follows:

(1) leave to Ps to amend the prayer of the ASOC to claim specific performance of the IHAL Share Pledge Agreements against Vincent, with costs of and incidental to the amendment to Vincent;

(2) as against D4, specific performance of the FSCL Share Pledge Agreements with costs to Ps;

(3) as against D6, specific performance of the Shanghai Bund Share Pledge Agreements with costs to Ps;

(4) as against Vincent, specific performance of the IHAL Share Pledge Agreements;

(5) leave to Vincent to defend the claim for specific performance of the LOUs; and

(6) liberty to the Plaintiffs to apply for directions in respect of the specific performance ordered under paras (2), (3) and (4) above.

64.  As to costs:

(1) The costs orders made above are nisi.

(2) The costs of the claims in respect of the LOUs and IHAL Share Pledge Agreements are to be determined following written submissions.  I note that the evidence filed in support of the 2^nd Summary Judgment Summons was largely irrelevant by the time of the hearing because the initial dispute apparently related to the indebtedness of D1, which was not argued at the hearing.  However, the bulk of the hearing was concerned with the issue of discharge of the guarantee liabilities under the LOUs, in which the Ps were unsuccessful.

(3) Insofar as the parties to seek to challenge the orders nisi, or make submissions as to the balance of the costs on the 2^nd Summary Judgment Summons, then they should provide brief written submissions within 14 days, with submissions in answer 14 days thereafter.

(4) Certificate for two counsel is granted in any event.