CHINA EVERBRIGHT HOLDINGS CO. LTD. v. ORIENT INTERNATIONAL HOLDINGS HONG KONG CO. LTD. AND ANOTHER

HCA939/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.939 OF 2002

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J U D G M E N T

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1. This is an appeal from a refusal by Master Levy to enter summary judgment under Order 14 against the 1st defendant and against an order setting aside a default judgment in favour of the plaintiff against the 2nd defendant.

2. The action is brought in respect of a loan of US$20,000,000 made by the plaintiff to the 1st defendant which was guaranteed by the 2nd defendant.

3. Counsel are agreed that if the 1st defendant is given leave to defend then the order setting aside the default judgment must also remain notwithstanding that the test for setting aside a regularly obtained judgment is a higher one than the onus which a defendant must discharge under Order 14.

4. The loan agreement and the guarantee, of course, are both in writing. It is agreed that the 1st defendant was advanced the loan and the guarantee in support of it was executed on behalf of the 2nd defendant. I will need to refer to some of the terms of these documents presently, where Mr Benjamin Chaine, who appears for the plaintiff, submits that this is a perfectly straightforward claim where the amount due and owing under the loan has not been repaid and in consequence the guarantor must also be held liable under the terms of its guarantee.

5. Mr Coleman, for both defendants, submits that there is far more to this than meets the eye. He says that when one looks at the surrounding circumstances what emerges is a sham transaction with a lot of, to use the demotic, "dodgey" dealing going on with the result that the court could never feel sufficiently confident in the claim to deprive the defendants of a trial.

The Loan Agreement

6. This is dated 27 March 1999 (page 196 of the bundle). Nothing turns on its terms which can be described as usual for this type of matter. Mr Coleman has drawn attention to Clause 2.02 (page 199) which is in these terms :

"The proceeds of the facility (referring to the loan itself) shall be used by the Borrower for general working capital. The Lender shall have no responsibility to see to the application of the proceeds by the Borrower."

I draw attention to this clause now because Mr Coleman relies on it as one of a number of points that he has sought to make in support of his case that the transaction is a sham. I will need to return to it when I consider the argument presently. As to the mechanics of the loan and the arithmetic supporting the claim these can be stated shortly. The US$20,000,000 was drawn down by the 1st defendant on 27 March 1999. Pursuant to Clause 2.03 the entire loan was repayable on the "Repayment Date" which is defined in Clause 1.01 as the business day immediately following the expiry of three calendar months from the drawing down of the loan. Accordingly, the loan was repayable on 27 June. This was not done but on 27 September 1999 the 1st defendant repaid the sum of US$2,500,000. As at close of business on 18 October 2001 the outstanding principal owing was US$18,868,472.22 plus accrued interest of US$7,255,844.80, the substantial interest provisions in the agreement running at 10% above prime rate. The amount of the claim therefore is US$26,124,317.02 plus accruing contractual interest at the rate of 10% above prime. The calculations do not appear to be in dispute. This therefore is how the 1st defendant's liability is calculated. The guarantee (page 223) assumes those liabilities by the 2nd defendant on behalf of the 1st defendant of which it is a subsidiary.

The defence

7. Once this primary liability is made out by the plaintiff the 1st defendant has the onus of demonstrating that there are triable issues. The 1st defendant must show that it has "a real or bona fide defence"; see Ackner LJ (as he then was) in Banque de Paris v. Costa de Naray [1984] 1 Lloyd's Report 21 at 23 and generally the authorities cited at 14/4/9 (page 154) Hong Kong Civil Procedure 2002.

8. The defence is based entirely on the background to the loan agreement coming into existence and principally the activities of a Mr Lau Hei Wing ("Mr Lau"), a director and majority shareholder of a company called Synergy International Group Ltd ("Synergy"). In order to properly understand the defence it is helpful to have in mind the main cast of characters who are said to have played their various parts in this matter.

9. They are Mr Z.K. Wang and Mr L.K. Wang, chairman and director respectively of the 1st defendant, who signed the loan agreement on its behalf. Mr Zhu Xiao Hua ("Mr Zhu") is the plaintiff's chairman. Their respective roles, together with Mr Lau, who has the main part in this matter, and their dealings with Mr Lau will become apparent in my consideration of how the loan came to be negotiated and how the loan itself was used.

How the loan was negotiated

10. Mr Coleman says that Mr Lau's role in all of this is pivotal. This can be picked up from the affirmation (page 157) of Mr Z.K. Wang, chairman of both defendants and from that of Mr L.K. Wang (page 175). Mr Z.K. Wang had known Mr Lau professionally since 1990 and Mr L.K. Wang for a little longer than that. He was known to both of them as chairman of Synergy who since the 1980's had purchased for export manufactured clothing produced by one of the 2nd defendant's subsidiaries. According to Mr L.K. Wang, he was contacted by Mr Lau in about January 1999 who told him that Synergy was badly in need of funds and required the 1st defendant's assistance. According to Mr Lau, Mr Zhu had indicated to him that the plaintiff was prepared to grant Synergy a loan of US$20,000,000 provided the loan was routed through a nominee intermediary rather than by way of a direct loan to Synergy. As will emerge in a moment, Synergy were at this time heavily indebted to the plaintiff. Mr L.K. Wang says that Mr Lau did not explain to him why the plaintiff was not prepared to make the loan directly to Synergy and Mr L.K. Wang, may I say quite extraordinary, did not ask Mr Lau why this US$20,000,000 loan should have to be made through an intermediary. His explanation for not having asked is that he felt it "inappropriate" to make such an enquiry about his arrangements with Mr Zhu and the plaintiff. In the event he says that he was persuaded to accept Mr Lau's proposal that the 1st defendant should act as Synergy's nominee. Apparently Mr Lau was aware that the 1st defendant was in need of funds for its own business purposes and he agreed that the 1st defendant should borrow US$2,500,000 out of the US$20,000,000 provided it acted as Synergy's nominee. Mr Lau assured Mr L.K. Wang that the 1st defendant would incur no liability for the loan which would merely pass through the 1st defendant's bank account directly into Synergy's who would be the real borrower and as such liable for its repayment. As to the loan documentation Mr Lau told Mr L.K. Wang that he need not concern himself with this as he would take charge of that. Mr Lau also told Mr L.K. Wang that Mr Zhu has authorised him to approach the 1st defendant and conduct these negotiations on the plaintiff's behalf. Throughout this and their subsequent discussions Mr Lau repeatedly assured Mr L.K. Wang that he represented both his company Synergy and the plaintiff. Mr L.K. Wang also says that up till then the defendants had not had any previous dealings with the plaintiff who was known to him to be a part of one of China's largest non-banking financial institutions and that Mr Zhu its chairman had formerly been Vice Governor of the People's Bank of China as well as Chief of the State Foreign Exchange Administration. He was therefore a man of great position and influence.

11. After this Mr L.K. Wang reported his meeting with Mr Lau to his superior Mr Z.K. Wang. He considered the proposal and having done so he said that he was prepared to allow the 1st defendant to act as Synergy's nominee in the loan provided the assurances were forthcoming that the 1st defendant would incur no liability.

12. The next stage in this was a meeting on 26 February 1999 when Mr Lau brought Mr L.K. Wang to the offices of the plaintiff to meet its general manager Mr Zhang and Mr Zhang's assistant Miss Tse. This was the only time that he met Mr Zhang and it appeared to him that the purpose of this was so that he could be introduced to Mr Zhang. There was a brief discussion about the loan and how the funds would be transmitted from the 1st defendant's account into Mr Lau's account. Mr Zhang appeared to be fully aware of the 1st defendant's nominee status. Mr Lau required the 1st defendant to open a Hong Kong dollar account with HSBC so that the funds might be transmitted quickly.

13. From 11 March to 14 March both Mr Wangs' had to be back in Hong Kong from their base in Shanghai. They had a meeting with Mr Lau at the Kimberley Hotel in Kowloon. According to Mr L.K. Wang notwithstanding that the 1st defendant would have no liability in this matter Mr Lau sought to re-assure Mr Z.K. Wang and himself by saying that Synergy would provide the 1st defendant with security for its participation by mortgaging its interest in the Kimberley Hotel which Knight Frank and Rutley valued at HK$200,000,000 although much of this valuation had already been subjected to securing other indebtedness. Nevertheless, there appeared to be ample left over to provide the 1st defendant with security. These documents are exhibit WLK1 at pages 191 and 192 including an agreement whereunder the 1st defendant was to lend US$17,500,000 to Synergy which was to be paid on or before 3 March. Synergy appears to have agreed to pay US$10,000,000 of this to the plaintiff and US$7,500,000 was to be paid into Mr Lau's personal bank account. This agreement is dated 26 February 1999. The date of 3 March mentioned in this agreement must have been predicated on the basis that the plaintiff was expected to pay the US$20,000,000 into the 1st defendant's account on or before 3 March but as we now know this was not drawn down until 27 March. At the same meeting, Mr Lau produced what Mr L.K. Wang has carefully described as the Purported Nominal Loan Agreement for him and Mr Z.K. Wang to sign. It had already been signed by Mr Zhang on behalf of the plaintiff, this being the loan agreement which is the subject matter of this action. Mr Lau again gave his assurance that Synergy would be responsible for repayment of US$17,500,000 and the 1st defendant's liability would be restricted to US$2,500,000. They both signed it and fixed the company's seal to it. They signed it but could not read it because it was in English and "a complicated document" as he describes it. Mr Lau then produced a note in Chinese on the plaintiff's letterhead which described the principal terms of the loan. See page 214A and B. From the "footer" on the original at page 214 it appears that the document had been created on 15 April 1998, some eleven months beforehand. Mr Lau then produced a document which purported to be the 1st defendant's board resolution created on 26 February 1999 authorising and approving the loan. See page 216. Mr L.K. Wang says that because it was in English he and his associate could not and did not read it but signed it on the same assurance that the 1st defendant would only be nominee for Synergy. Mr Lau also produced a notice of draw down, again in English, which they were asked to sign. Finally, and towards the end of the meeting Mr Lau produced the guarantee. This presented a problem, because initially, Mr Z.K. Wang refused to sign because he lacked authorization from the 2nd defendant's board and necessary approval from the State Administration of Foreign Exchange. Mr Lau then said that Mr Zhu had asked that it be signed, otherwise the matter could not proceed. It was required as a necessary formality even though it would be invalid. On that basis only, and apparently aware that the guarantee would be invalid Mr Z.K. Wang signed it. See page 223. It does not bear the 2nd defendant's company stamp or chop. A further counter guarantee was required by the plaintiff to be provided by the 2nd defendant. The funds for the loan were to come from a bank on the Mainland paid initially to the plaintiff who would then pay the funds out to the 1st defendant. The counter guarantee, so-called, was to provide the plaintiff with an indemnity from the 2nd defendant in the event that the bank called upon the plaintiff to repay this money to it. Mr Z.K. Wang refused to sign this document because the 2nd defendant's board would never countenance such an obligation and, in any event, permission would be required from the State Administration. This request for a counter guarantee was again asked for some three months later in June 1999 following the draw down of the funds but again rejected by the 2nd defendant.

How the funds were circulated

14. Much reliance is placed by the defendants on this circulation of money. On 24 March Mr L.K. Wang and colleagues from the 1st defendant attended the plaintiff's offices where they met Miss Tse who took them to meet Ms Della Cheung, Assistant Project Finance Manager at HSBC, so that the 1st defendant might open an account there. Given the introduction of the 1st defendant by Miss Tse the bank was willing to facilitate the opening of a corporate account without a written board resolution signed by at least two directors. The account was opened and only later, that day, a second director's signature was forthcoming by fax from Shanghai. Then, some time between 24 and 26 March at Miss Tse's request, Mr L.K. Wang gave her two instruction letters from the 1st defendant to HSBC instructing it to transfer funds from its account to Mr Lau's account. The letter at page 238 is a direction to transfer the equivalent of US$17,500,000 to Mr Lau's account with HSBC. The letter at page 239 is an instruction to transfer the balance, equivalent of US$2,500,000 to the 1st defendant's account with the Bank of Communications. This was due to take place on 26 March but Mr Lau went to Switzerland that day and the transfers were held back a day. On the following day, Miss Tse informed Mr Yu of the 1st defendant that the transactions had in fact been completed that day and that he should go to the plaintiff's offices to collect the transfer records.

15. Mr Coleman submits that these transfers and what had gone before simply cannot be taken at face value and the matter demands a trial when the detail and the motives for how this was done will be investigated through oral testimony. These records start at page 242 and they bear repetition here. This all occurred on 27 March. At 9:22 a.m., the equivalent of US$20,000,000 in Hong Kong dollars went from the plaintiff's account with HSBC into the 1st defendant's newly-established account with the same bank. A minute later at 9:23 a.m., the Hong Kong dollars equivalent of US$17,500,000 went to Mr Lau's account with HSBC. Then two minutes later at 9:25 a.m. and a further two minutes after that at 9:27 a.m., the equivalent of US$17,500,000 went from Mr Lau's account to the plaintiff's account by two separate transfers of HK$55,465,750 and HK$80,000,000. So at 9:22 a.m. the equivalent of US$20,000,000 left the plaintiff's account, US$17,500,000 of which was returned within five minutes.

16. All of this, says Mr L.K. Wang, appears to have been orchestrated by Mr Lau and executed on the plaintiff's behalf by Miss Tse. Her letter to the bank dated 26 March had set out all these instructions. See page 134.

17. Mr L.K. Wang then draws attention by means of news reports that Mr Zhu has had a very sharp fall from grace. I have seen a cutting from the SCMP dated 11 October 2002 which reports that Mr Zhu is now serving a 15-year prison sentence on the Mainland for taking bribes and there are other cuttings which tell of Mr Lau's arrest in China for related activities and for his connection with Mr Zhu. Mr Coleman submits that I cannot simply ignore these reports as I am invited to by Mr Chaine having regard to the evidential status of such newspaper and magazine articles.

18. Mr Coleman has submitted that the evidence must at least give rise at this stage to a triable issue as to whether Mr Lau who has arranged this on both sides must be held to have acted as the plaintiff's agent as well as for the real borrower, his company Synergy. The whole thing is a sham he says. Look at Clause 2.02 of the loan agreement supra (page 199) which is to the effect that the loan will be used as working capital by the plaintiff. Within a minute, US$17,500,000 had left the 1st defendant's account that amount was back with it via Mr Lau's account and all of this directed by him and executed by the plaintiff's Miss Tse see her letter to HSBC at page 134. None of this is above board he says and in doing so Mr Coleman had not particularly pressed either defendant's impeccable credentials. It is plain that the inference is there to be drawn that they too (the two Wangs) must have had a fair idea of what this was all about.

19. Never mind all of that, says Mr Chaine. He seeks to import legal orthodoxy into these transactions. These documents must be taken at face value. There is not a hint of the 1st defendant being a nominal borrower. Both defendants ought to be bound by what they have signed. He has referred to correspondence after the event which he says tends to demonstrate that so far as the plaintiff was concerned leaving Mr Zhu aside the loan was to the 1st defendant. See page 300A. What is clear from the correspondence is that the plaintiff had been pressing the 1st defendant for repayment for some time. This is not a case of having let the matter lapse and then late in the day, not having got satisfaction from Synergy, the plaintiff has decided to resurrect the loan agreement against the 1st defendant. I have looked at all the other correspondence, pages 305A, 307A, 309A and 310A. It shows that the 1st defendant acknowledges liability for US$2,500,000 but not for the balance.

20. It seems to me that whilst Mr Chaine is undoubtedly right on the law as set out in Bowstead, 17th Edition, 8-022 and in his citation of Snook v. London & West Riding Investments Ltd [1967] 2 QB 786 on when an agreement might be considered a sham, I am afraid the facts are not sufficiently clear to assist him.

21. Whilst the 1st defendant and the 2nd defendant have much to answer for, the whole nature of this transaction is redolent of shady dealing on both sides. This is one of the sort of situations contemplated by the English Court of Appeal in Extraktionstechnik Gesellschaft Für Anlagenbau Mbh v. Oskar (1984) 128 SJ 417 and adopted by the Court of Appeal in Billion Silver Development Ltd v. All Wide Investments Ltd [2000] 2 HKC 262, see Ribeiro J (as he then was) at 269A-E :

" The principle as decided by the English Court of Appeal appears as follows :

We agree that it is proper to look first at the defence in isolation, in order to see whether there is a lack of good faith or the defence is a sham and so forth, in the course of considering whether the Defendant can discharge the burden of establishing that he should have leave to defend.

But the decision as to the imposition of a condition, if one or more of those flaws in the defence is found to exist, cannot, in our view, properly be made before an examination is also undertaken of the Plaintiffs' case, having regard to any attack that has been made on affidavit upon it. If that examination arouses suspicions that the claim may be made in bad faith or there is something shadowy about it or, worse, that it may be tainted with illegality, no measuring, however approximate, of the respective degrees of possible bad faith should be made and no opinion expressed, however tentative, as to which case appears to be the stronger at that time.

That in our judgment is a classic instance in which in principle the court should give unconditional leave to defend.

We do (sic) regard this case. On any view of it, including Webster J's other observations to which we have not referred, on charge and counter-charge, we fail to see how it can rightly be said other than that there are features of both claim and defence, as they are so far explained, which are disturbing, because they bear the appearance of falsity and disreputable business dealings. It would not be seemly in this judgment to be more expansive than that about those features."

22. On fact I harbour the gravest doubts about the bona fides of the plaintiff's case whilst expressing no great affection for the defendants' case either. I am left in the situation that, as matters presently stand, this will need to be played out before the trial judge who with the benefit of live evidence and cross-examination must make up his mind as to where the truth lies and whether, based on those conclusions, the plaintiff ought to succeed against the defendants. The master was correct to give unconditional leave to defend and to set aside the judgment in default. This appeal must therefore stand dismissed.

23. I propose to say that the costs below and the costs of this appeal should be costs in the cause. Notwithstanding the fact that the defendants have now succeeded twice, here and below, the issue of costs should be left to the court of trial in circumstances when neither party is likely to come out of this covered in glory. It is too early to start penalising the losers in costs at this interlocutory stage. This order for costs will be an order nisi in the usual way.