YORK FIDELITY LTD v. KAM FAI TRADING CO LTD

HCMP 1576/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1576 OF 2005

____________

____________

____________

Dates of Hearing: 27 and 28 September 2006

_______________

J U D G M E N T

_______________

Introduction

1.  This is a mortgage action in which the Defendant says that it did not enter into a mortgage with the Plaintiff.  Such a fundamental dispute of fact would not normally lend itself to the matter proceeding by way of originating summons which is what this is but as the dispute of fact did not become apparent until after the Defendant had filed its evidence it was decided to press on in this form and direct that the affidavits stand as pleadings and that these be cross-examined on.

2.  The real dispute is between Mr Gregory Kennedy, an Australian, who is the chairman and owner of the Plaintiff, a private company which trades in a variety of enterprises ranging from oil and gas in East Africa to on-line gaming; and Mr Vincent Yu, a British-born Hong Konger, who is the owner of the Defendant company which is in turn the owner of a flat at Kailey Court, North Point, Hong Kong.  Their respective versions of this matter are so divergent as to be irreconcilable.  One of them is not being frank in his account to the court.

3.  The bare bones of the dispute can be shortly stated.  Mr Kennedy, being an international businessman, is always looking for what he judges to be an investment in businesses which he assesses to be likely to make him a profit.  Mr Yu’s line of work, which he has pursued for many years now, is to find potential investors for projects, mostly in Asia and now, increasingly so, in Mainland China.  He makes his livelihood through contacts built up over the years.  Where, for instance, a construction project needs investors to finance it he will find the individuals who will provide the funds and who in turn will share in the profits.

4.  This matter goes back to 9 January 2004 when Mr Yu went to Australia hoping to find investors for the building of an Obstetric and Gynaecological Hospital at Tsinghua University at Beijing.  One of the likely investors that he approached was Mr Kennedy who happened to be staying at the same hotel that he was staying at in Sydney.  The two men had met on previous occasions but had not conducted any business together.

5.  They had a mutual business acquaintance in Mr Michael Silver a London-based businessman who Mr Kennedy had consulted as to Mr Yu’s reputation which Mr Silver had been prepared to vouch for, he having invested his money with Mr Yu on previous occasions.

6.  So much for the background, about which there is no dispute.  It is from this point onwards that recollections diverge.  Mr Kennedy agreed to meet Mr Yu at the coffee shop in their hotel where Mr Yu gave Mr Kennedy the background to the hospital project.  Mr Yu says that this meeting was very brief.  It only lasted 15 minutes or so because Mr Kennedy could not spare more time.  Mr Kennedy says that it lasted for two hours.  I will need to return to the length of this meeting presently.

7.  Having heard what Mr Yu had told him, Mr Kennedy says that he was not interested in the investment — certainly not at that stage.  As he put it, he was too busy to look into it with the seriousness that he would have wished and that, in general, he was “too stretched” to do anything about it.  And so he turned down the offer of investing in the hospital.  Mr Yu agrees that he was turned down at that stage, but he then went on to ask Mr Kennedy whether he would be prepared to lend him AUD500,000.  Mr Kennedy says that he gathered, from what Mr Yu was telling him, that he was in urgent need of money which he presumed would be going into his Tsinghua University hospital project.

8.  Mr Kennedy agreed to lend him the money but that given the urgency and the amount he would have to levy an appropriately high interest rate as well as an arrangement fee.  Mr Yu agreed.  Mr Kennedy says that he also said that he would only be prepared to advance the money against suitable security and he asked Mr Yu what he could offer him.  Mr Yu said that he had a property in Hong Kong which he was prepared to offer to secure the loan.  On that basis Mr Kennedy says that he let him have the money.

9.  Mr Yu strongly disagrees with this version.  He says that there had been absolutely no question of security being provided.  This was a personal unencumbered loan to him based on the fact that Mr Kennedy had looked into his background with Mr Silver and was therefore content to advance him AUD500,000 as a short term loan to be repaid with interest in about a year’s time.

10.  Mr Kennedy says that it was simply out of the question that he would have parted with so much money without security to somebody that he knew very slightly, albeit recommended to him by Mr Silver.  It is in this regard that the length of the meeting becomes significant.  Mr Yu says it was all over and agreed in 15 minutes.  Mr Kennedy says that he would never have dealt with the matter in such a cavalier fashion — so quickly and without taking security.  He says their discussions took two hours which, when one considers the inherent likelihood of how such a discussion would proceed, is far more likely to be correct.  Nevertheless, the matter is not quite so simple.

The Payment of the Money

11.  What is certain is that the money came to Mr Yu on 30 January 2004.  It came in Swiss francs rather than Australian dollars because this was the currency that Mr Kennedy was then operating his business in.  The transfer is at B151.  The money went into Mr Yu’s personal account with HSBC from a company called Eastwest Communications Limited of Singapore which is another of Mr Kennedy’s companies’ and also where he is resident.  He says the loan went to Mr Yu personally because that is what Yu had asked him to do and he did not mind because he had the assurance of having the security of the flat at North Point which, so far as he was concerned, is what really mattered.

12.  Again this would not be especially unusual save for the fact that no mortgage was actually drawn up and entered into by Mr Yu on behalf of the Defendant until 8 December 2004 some 11 months after the meeting in Sydney.  How all of this has come about will ultimately be decisive in the outcome of the summons.

Why were the Documents not Drawn up and Entered into at the Time?

13.  Mr Kennedy says that having arranged for the transfer of the funds he found himself too busy to follow through with the paper work.  Mr Yu says that on the contrary the reason why there was no paper work at the time nor for many months afterwards is that there simply was no mortgage agreed between them.  This was just a simple personal loan without security.

What Caused a Change?

14.  In about June 2004, Mr Kennedy was by now persuaded to go to see the hospital project at Beijing with Mr Yu and Mr Sum who was Mr Yu’s partner.  Once he went up there and saw what was going on and what was being proposed Mr Kennedy says that he realized that there was no way in which this project could be profitable and it was this that made him realize that his solicitors should draw up the necessary paper work immediately to secure the loan that he had made to Mr Yu in January so as to reflect their agreement that the loan was to be secured on the property at North Point.  He immediately instructed his solicitors, Tanner de Witt to prepare the papers for signature by Mr Yu.

The Documents and Correspondence

15.  Ultimately, where both witnesses have given diametrically opposed evidence about how and why Mr Yu was persuaded to sign a loan agreement, a guarantee and a mortgage, it is the surrounding correspondence which to a large extent will determine the outcome of this case.  It is important to understand that Mr Yu’s case is that all of these documents were signed by him following Mr Kennedy’s visit to the Mainland after which he had been persuaded to invest in future projects there.  In order to re-assure him and give him “some comfort about investment in China” [see page A38 affirmation of Vincent Yu], Mr Yu says that he applied to Mr Kennedy for funding of AUD 500,000 and agreed to execute the mortgage, loan agreement and guarantee.  He says these documents were signed in escrow pending the draw down of the loan.  In the event the only amount that the Defendant company received was AUD38,000 which by agreement with Mr Kennedy was to be lent to redeem the then existing mortgage on the North Point flat with Wing Hang Bank, so as to give the Plaintiff a first mortgage on the property.  In the event, the loan was never made to the Defendant with the result that it can have no liability.  There was no loan and there was no mortgage.  The Plaintiff’s case, as put by Mr Kennedy, is that all of these documents related to the AUD500,000 loan, made in the equivalent Swiss francs, to Mr Yu on 30 January.  The documents that followed some 11 months later should have been executed shortly after the monies were sent to Mr Yu in January.  Mr Kennedy recognises that he should have seen to it that these matters had been attended to far earlier than they were.  It was the realisation that Mr Yu’s hospital project was likely to be an unprofitable venture that impelled him, as a matter of urgency, to have the papers put in place.

16.  I now propose to test, as best I can, these two conflicting versions by considering the contemporaneous correspondence.  In the course of the trial Mr Yu produced Exhibit D1, being an exchange of
e-mail correspondence dated 5 July 2004 from Mr Yu and Mr Kennedy’s response on 6 July 2004.

17.  On 5 July Mr Yu wrote:

“Dear Greg,

It was a pleasure meeting you and accompanying you on your first visit to China last week.  I hope you were as excited as I was with the way things are happening in China and that you are satisfied with the contacts you made during this your first of many further visits to China.  I have today arranged to set up a clean BVI company — Zenfield Management Limited with me as your trustee being initially the sole shareholder and director.  I will also set up a bank account for the company with the HSBC as soon as the funds arrived into my trustee account.

In line with your recommendation, documentations have been drawn up by my lawyer to reflect the 25% equity interests in each of the three projects for a total investment of USD10 million.  Zenfield Management Limited will own 20% equity interests in these projects for USD8 million.  Should you wish to apportion the 20% interest into other companies or issue shares of Zenfield to other persons please let me know.

In closing please be reminded to wire the required USD2 million at your earliest convenience to my HSBC account … so that we can ensure that these projects will be delivered for us on schedule.  These funds should reach my account no later than Friday 9 July 2004 …”

Mr Kennedy’s reply on 6 July said this:

“Dear Vincent

I had a great time in China and look forward to going back there in the near future.

You must appreciate that there is a matter of trust that needs to be rebuilt.  I would not transfer any funds into your account or any account in which I had no say in unless it was initially backed by security.  I am prepared to lend money to you as we have already discussed against the value of your properties until I am fully integrated into the new company.

This is the only way in which we can move forward quickly.

Otherwise we will need to ensure that the new company has been set up with myself as a shareholder with you and with both of us as signitors to the account.  It is important that we concentrate on rebuilding the trust that has taken a serious blow so that we can get back to where we were before.  I am sure that we can and that it will not take too long either.”

This exchange of e-mails, it seems to me does not entirely bear out the way Mr Kennedy wishes me to understand the matter although, he says, when his e-mail reply was put to him in cross-examination that this confirmed his evidence.  The fact is that it would appear that the journey to China had whet his appetite so that in fact three projects were under consideration and so far as Mr Yu was concerned a weighty investment of USD10 million was anticipated with the initial USD2 million to arrive almost immediately.  The first sentence of Mr Kennedy’s reply provides an optimistic outlook.  Whilst the e-mail speaks of trust being re-built and that he would not lend money unless it was backed with security, the terms of the e-mail are equivocal as to whether this refers to past loans [the one in January] as well as any future loans.  In these circumstances, I need to consider what then followed.

18.  Part of Exhibit D1 is an e-mail dated 5 September 2004 from Mr Yu to his partner Cannon Sum identifying the North Point property as the one which he proposed to offer as security.  The execution of the mortgage, the loan agreement and Mr Yu’s guarantee can be traced from the solicitors’ correspondence which is exhibited to the 2^nd affirmation of Norman Hau dated 27 September this year.  I have read all of it with care to see whether it is possible to discern whether the documents were being prepared in respect of the loan to Mr Yu in January 2004 or whether this was all being done to secure the lender’s position for prospective loans in the future.  The only pointer that I can discover is the letter from the Plaintiff’s solicitors dated 27 September 2004 where the language used can be taken to relate to a past situation and therefore supporting what Mr Kennedy has said.  Having enclosed the relevant documents the letter goes on in these terms:

“As discussed on a previous occasion, it is intended that the Loan Deed will be dated as at the date when the loan was (my emphasis) advance.”

Had the parties been contemplating a future loan I would have expected the writer of the letter to have referred to the matter as “when the loan is (emphasis) advance.” 

19.  What then follows from this is that the loan document [B75-103] is dated “as at 30 January 2004” which is when Mr Kennedy sent the Swiss francs [equivalent AUD500,000] to Mr Yu’s HSBC account.

20.  Nothing else in this clip of correspondence assists in deciding this issue.  It is entirely neutral — neither assisting nor being capable of contradicting either party’s case.

21.  Moving forward, the originating summons was issued on 29 July 2005.  The following month on 23 August 2005, Mr Yu sent the Plaintiff’s solicitors a letter which, for the first time, sets out his case as it is now presented in court.  Given its importance I will set it out in full [see B163]:

“Re:   HCMP 1576 of 2005

Property: Flat B, 22/F, Kailey Court 67, 69 and 71 King’s Road, Hong Kong

We refer to the above matter.

Under the Loan Agreement, York Fidelity Limited (“York Fidelity”) should immediately grant a loan in the sum of AUD500,000.00 to us after signing of the Loan Agreement and the signing of the Mortgage in escrow.  However, York Fidelity has failed to grant the loan to us, which is a condition precedent to be fulfilled before the Mortgage could be dated and take effect.  You have no right to date the Mortgage and you have no right to register the Mortgage against the Property without our consent and approval.

We reserve all our rights against you and York Fidelity, including but not limited to our right to file a complaint against you with the Law Society of Hong Kong.

Yours faithfully,

For and on behalf of

Kam Fai Trading Company Limited”

And so here is the case that all of these documents were signed by him in respect of a future loan which had not been advanced with the consequence that no liability could possibly attach to him nor to the Defendant company from these documents.

22.  I should observe that Mr Yu had signed all of the documents in the presence of his solicitors, all of them being Deeds under seal.

Findings of Fact

23.  It must be plain that for a seasoned commercial man Mr Kennedy has not gone about this in a sensible way.  He was prepared to lend the equivalent of AUD500,000, but only against proper security.  The loan came on 30 January 2004, some three weeks after the two men had met in Sydney and yet he had done nothing to have the mortgage prepared and then did nothing to follow this up until 9 months had elapsed.  This haphazard approach can hardly assist him.  I need to follow the course of this evidence with care.

24.  Firstly, as to the meeting in Sydney I am entirely satisfied that Mr Kennedy is correct in saying that it lasted about two hours and not just 15 minutes.  Mr Kennedy would not have parted with AUD500,000 on the basis of a brief discussion with a person that he did not know particularly well, and he certainly would not have lent money to Mr Yu after 15 minutes on an unsecured basis.  I am certain that he made it clear that he would require security and that Mr Yu agreed to provide it.  In the event, it was not called for until after the business trip to China in late June 2004 with Mr Yu and Mr Cannon Sum.

25.  Mr Kennedy says that once he saw the projects being offered in China he began to fear for his loan in January and that is why these documents were prepared.  Nevertheless, I am not sure that Mr Kennedy was quite as unenthusiastic about the prospects as he now says.  His e-mail of 6 July does not bear him out.  My view is that Mr Kennedy was prepared to give business in China serious consideration and that he had indicated this to Mr Yu, hence Mr Yu’s e-mail of 5 July which I have already set out.  My sense of the situation is, now that I have considered all of the evidence, that Mr Kennedy was now prepared to consider doing business with Mr Yu on a serious and perhaps substantial basis but before he did so he wished to secure his position and protect it as best he could and therefore required Mr Yu to enter into the mortgage deed and loan agreement relating to what had already taken place on 9 and 30 January 2004, hence the back-dating of the loan agreement.

26.  I am in no doubt that these documents related to the loan taken by Mr Yu in January.  I am also satisfied that had these documents related to a future position the correspondence between the solicitors would have reflected this.  I am afraid that once the proceedings had been issued against him Mr Yu, having reflected on the situation, saw his chance to muddy the waters, as it were, by writing the letter of 23 August 2005.  He saw an opportunity because the documentation was less than explicit and set out in his letter what I am satisfied is a false position.  I hold that Mr Kennedy has given the correct version and that Mr Yu, I am afraid, has not been frank.

27.  In any event, it seems to me that Mr Maurellet is right that where the documents are under seal that this must be a further basis for holding the Defendant liable on the mortgage where I need not therefore concern myself with the issue of consideration.  Mr Yu has bound the Defendant by agreeing to the position and liability by Deed.

The Result

28.  There having been clear default by the Defendant under the mortgage I propose to grant the Plaintiff the possession order that it seeks under the prayer to the Originating Summons.  As to the money judgment I will award the Plaintiff judgment up to today’s date based on the calculations set out in Mr Kennedy’s second affidavit [see para. 6] which is based on what was agreed between the parties and give liberty to apply as to the precise calculations in the event of a dispute as to this.  I should make clear that this would not be an invitation to re-open the matter, it would only go to the question of calculation based on the agreed interest rates, as I have found them to be in the mortgage document, of 6% and thereafter 14% based on default.  There will also be interest at the judgment rate from today until payment.  Costs will not be on the indemnity basis sought; I propose to order costs to the Plaintiff on a party and party basis.