TSIM WING LEUNG AND OTHERS v. CHENG HUNG KIT AND OTHERS

HCA 2150/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2150 OF 2013

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1. This was the plaintiffs’ application for summary judgment based on a Deed of Guarantee dated 9 September 2008 executed by Cheng Hung Kit, Cheng Hung Sang formerly Cheng Hung Sing and Hang Heung Cake Shop Company Ltd (respectively “the 1^st defendant”, “the 2^nd defendant” and “HHCS” and collectively “the defendants”).  At the conclusion of the hearing judgment was reserved which I now give.

PRELIMINARY MATTERS

2. The 1^st and 2^nd defendants on the one hand and HHCS on the other have separate representation.  Initially, the plaintiffs who are three brothers (“the Chim brothers”) had objected to Mr Jim and/or his firm Richard Chan, Kenneth Yuen & Co (“RCKY”) representing HHCS.  On further enquiry, the Chim brothers as well as the 1^st and 2^nd defendants were neutral on the subject.  On being satisfied that no conflict arose on the matter before the court, the hearing proceeded with Mr Jim representing HHCS.

3. It should also be mentioned that the master had made an order on 16 May 2014 that Robertsons cease acting for the 1^st and 2^nd defendants.  Mr Szeto, the partner in charge of this matter at Robertsons, explained that the 1^st and 2^nd defendants have not given notice of change under rule 1 or notice of intention to act in person under rule 4.  Under the terms of rule 6(1), Robertsons remain on the record as the solicitor for the 1^st and 2^nd defendants and his firm was not in a position to apply to this court for an order under Order 67, rule 6(1) as the master’s order had not yet been drawn up.  Accordingly, Mr Szeto attended court to render his assistance.

THE LOAN AGREEMENT AND GUARANTEE (“THE LOAN TRANSACTION”)

4. On 9 September 2008, the plaintiffs entered into a loan agreement with Hang Heung Hop Kee Investment Company Ltd (“HHHK”) whereby the plaintiffs agreed to lend to HHHK the sum of $3 million at an interest rate of 12.249% per annum.  The loan was to be repaid by 36 equal monthly instalments of $100,000 each on the ninth day of each month commencing 9 October 2008.

5. For the purpose of the 36 monthly instalments but not otherwise, HHHK procured HHCS to issue 36 post-dated cheques of $100,000 each which were provided to the plaintiffs.  Under the loan agreement, default in paying any of the instalments would render the whole of the balance of the loan due and repayable forthwith.

6. The defendants jointly and separately guaranteed the loan.  It is common ground that Ho & Wong solicitors for the Chim brothers had drafted the loan documentation.  The execution of the guarantee by the defendants was witnessed by Mr Jim of RCKY.

7. On 9 April 2010, HHHK defaulted in making repayment, that being the 19^th instalment.  No further repayments were made other than $100,000 paid on 9 September 2011.  The amount due under the guarantee (including interest) as at 10 October 2013 was approximately $2.24 million. 

8. On 12 October 2013, the plaintiffs made a written demand requiring payment within seven days but the demand remains unsatisfied.

THE 1^ST AND 2^ND DEFENDANTS’ DEFENCE

9. To understand the defence of the 1^st and 2^nd defendants, it is necessary to outline certain background facts concerning HHHK and HHCS, the underlying assets of those companies, the 1^st and 2^nd defendants’ interest in the companies and the ongoing litigation affecting the underlying assets.

Background facts

10. The 1^st and 2^nd defendants are some of the descendants of the Cheng family who with the Tsoi family founded a cake making business in Yuen Long in the 1920s under the name of “Hang Heung”.  HHCS was incorporated in 1981.  The major shareholders are the Chengs.

11. HHHK (incorporated in 1979) was the property holding company of the business.  It owned various properties.  Until at least July/August 2009, it owned what is called “the Main Factory” which HHCS occupied under various agreements to manufacture its traditional Chinese cakes.  HHHK also owned the property at 64 Castle Peak Road (“the Main Shop”) the flagship store of HHCS’ cake business as well as another factory known as “the Lotus Paste Factory”.

12. HHHK, HHCS, the 1^st and the 2^nd defendants are involved in numerous actions that are on‑going.

HCA 111/2013

13. HCA 111/2013 is an action commenced on 18 January 2013.  It concerns HHHK’s title to and HHCS’ right to occupy the Main Shop.  Honlex Investment Ltd (“Honlex”) a shareholder of both HHHK and HHCS has instituted those proceedings, inter alia, against the Chim brothers and Famous Benefit Ltd (“Famous Benefit”) one of the Chim companies.  Honlex’s application to commence a derivative action on behalf of HHHK is pending.

14. In 2007 to 2008 HHHK and HHCS were in dire need of funding to pay off its creditors.  In mid‑2007, the 1^st and 2^nd defendants had obtained a loan from the Chim brothers secured by the Lotus Paste Factory.  In early 2008, there were discussions for a proposed loan of $30 million by the Chim brothers to HHHK.  The loan that was made was effected by means of a sale of the Main Shop with an option to “buy back” but which, it is contended, failed to grant HHHK an option to purchase the shares in Famous Benefit or to “redeem” the Main Shop as a condition precedent of the sale of the Main Shop to Famous Benefit. 

15. HCA 111/2013 seeks to set aside a transaction (“the impugned transaction”) consisting of:

(1) “the Final PSPA” backdated to 28 May 2008 (but in fact signed in mid‑June) which provided for the sale of the Main Shop by HHHK to Famous Benefit for $30 million subject to the existing tenancy granted to HHCS at $160,000 per month;

(2) a typewritten or printed Chinese agreement dated 17 June 2008 between HHHK and the Chim brothers in relation to the shares of Famous Benefit; and

(3) an assignment of the Main Shop dated 9 September 2008 by HHHK to Famous Benefit.

16. It is also the defendants’ case that its solicitor Mr Jim/RCKY was not actively involved throughout the entirety of the transaction between HHHK and the Chim brothers in relation to the Main Shop and that a Ms Kwok (an estate agent acting for both parties) and/or the Chim brothers took steps to exclude Mr Jim/RCKY from participating in drafting the Final PSPA and the Chinese agreement and from being present when they were executed.

17. The action is based on misrepresentation and/or unconscionable dealing and/or undue influence exercised by the estate agent (Ms Kwok) representing both parties in the transaction and/or the Chim brothers.  The allegations are set out at length in the draft Amended Statement of Claim (“draft ASOC”) under which, in the event of the court granting Honlex’s application to commence a statutory derivative action as a member and shareholder of HHHK, HHHK would be substituted as plaintiff in place of Honlex.

18. The Chim brothers and Famous Benefit have taken out a summons to strike out HCA 111/2013.  That summons is due to be heard after the determination of the application by Honlex to bring a derivative action on behalf of HHHK. 

19. Lengthy affirmations from the Chim brothers and the 1^st and 2^nd defendants have been filed in respect of the striking out summons.  They throw light on how the loan transaction came into being. 

20. The sale of the Main Shop is dealt with in §§54 to 87 of the affirmation of Chim Wai Chung, the 3^rd defendant in HCA 111/2013, who made the affirmation of behalf of the Chim brothers in support of the striking out summons.  §§88 to 96 address the $3 million loan to release encumbrances against the Main Shop. 

21. According to the Chim brothers, during the period after 18 June 2008 and before completion on 9 September 2008, the 1^st defendant requested a loan of $3 million in order to redeem the third legal charge in favour of Chan Hei Lun, pay for the cancellation of a sale agreement with Siu Yuen Ping and pay the rental deposit and first month’s rental for HHCS, the sale consideration being insufficient. In the chronology provided by counsel for the Chim brothers, the request was stated as having been made on 8 August 2008 although the supporting reference (§88 of the Chim striking out affirmation) makes no reference to a specific date.

22. Be that as it may, §89 reads:

“To us, that would cause complication to the completion of the sale and purchase and that was something we did not want. Having considered the bigger picture, the 3 of us agreed to lend to HHHK a sum of $3,000,000 in our personal capacities. HHHK agreed to repay the loan by way of 36 monthly instalments each in the sum of $100,000. To secure repayment, HHHK agreed to issue 36 post-dated cheques to be provided to us upon execution of the Loan Agreement. Further, [the defendants] agreed to act as guarantors for HHHK in respect of the said loan.”

23. There are two letters dated 3 September 2008 from RCKY to H&W.  Those letters were written in relation to the sale of the Main Shop.  After specifying the split cheques totalling $24 million required “for payment of the balance of the purchase price”, in the first letter, RCKY referred to its understanding “that your client shall lend our client HK$3,000,000 to help making up the deficiency and shortfall for financing payments of …”.

24. The second letter gave split cheque instructions in relation to the sum of $3 million.

25. The 1^st and 2^nd defendant’s defence is that given that the loan transaction is so inextricably linked to the facts and matters being litigated in HCA 111/2013, if the transaction concerning the sale of the Main Shop were found to be tainted by the unconscionable conduct/undue influence/misrepresentation of the Chim brothers and/or Ms Kwok and set aside, the loan transaction would similarly be tainted.  Realistically, the facts in HCA 111/2013 could not be divorced from those of the loan transaction.

26. Ms Lan who appeared for the Chim brothers submitted that factually speaking, the loan transaction was an independent transaction to discharge encumbrances the defendants were obliged to discharge and the allegations concerning the Main Shop and its sale to the Chim brothers had nothing to do with the loan transaction.  She contended that even if the sale of the Main Shop were set aside, the $3 million loan still had to be repaid.  Further, it was said that it is not alleged in HCA 111/2013 that the loan transaction was invalid and/or unenforceable and/or liable to be set aside.  Ms Lan also drew attention to the fact that contrary to the 1^st and 2^nd defendants’ allegation that the Chim brothers had prevented them from seeking legal advice, Mr Jim and his firm were involved in the loan transaction given the matters mentioned in §§6, 22 and 23 above.

27. In the circumstances of this case, I do not consider that one could isolate the loan transaction from the impugned transaction regarding the Main Shop and treat it as entirely freestanding and independent.  To do so would be to adopt a blinkered view of events.  Equity looks at the substance and not the form of the transaction.  On one view, the loan could be considered very much part and parcel of the overall transaction between the parties and part of the overall loan advanced on the security of the Main Shop. I do not consider that it could be said that the defendants’ assertions in that regard are unbelievable.  That is a matter that requires investigation at trial including the role of Mr Jim/RCKY in the impugned transaction as well as the loan transaction.

28. In the event of the allegations of unconscionable conduct and/or undue influence and/or misrepresentation being made good in relation to the impugned transaction, one could not reasonably rule out the possibility that the same might well also infect the loan transaction and affect its validity.

29. Further, should the sale be set aside, the monies advanced (ie the “purchase price” of $30 million and the loan of $3 million) would still have to be repaid.  So the fact that the $3 million would have to be repaid is not a reason why the loan transaction should be treated as freestanding and independent. 

30. In my view, the application for summary judgment against the defendants falls to be rejected.

HHCS’ DEFENCE

31. HHCS adopt the defence of the 1^st and 2^nd defendants but it has also advanced additional defences which can be dealt with briefly as they add little that is of substance.

32. Lai Cheuk Ting Crystal who is and has since July 2011 being responsible for the management of HHCS has filed an affirmation opposing the application for summary judgment.  Ms Lai asserted that the 1^st defendant had settled the $3 million loan in connection with a development project for six village houses and in which the 1^st plaintiff had participated.

33. The difficulty with this assertion is that the 1^st defendant himself has not put it forward.  If there was any truth in the assertion, it is unthinkable that the 1^st defendant would not have been the first to put it forward as a defence.  That aside, the assertion is based on hearsay from one Wong Tit Fong.  Ms Lai’s account of that project/transaction was involved and difficult to follow and, it seems, purely speculative.

34. In his written submissions, Mr Jim (representing HHCS) sought to advance additional grounds that were not mentioned in Ms Lai’s affirmation.  Insofar as those submissions sought to introduce additional evidence in relation to the development project, or matters not raised by the defendants (such as the “Grand Spirit transaction”) or opinion evidence based on inferences drawn from various pieces of litigation involving the 1^st and 2^nd defendants, they must be disregarded for present purposes.

35. The only matter left arising from his written submissions is Mr Jim’s challenge to be outstanding indebtedness.  He sought to demonstrate that the table (to be found in §11 of the 3^rd plaintiff’s 2^nd affirmation) identifying the 17 unpaid instalments do not match the entries in the bank passbook exhibited.

36. The point taken lacks merit.  The passbook entries show that at least 16 cheques were returned unpaid.  Even if the dates are different, it is not suggested that those amounts are not outstanding.  Further, quite apart from the fact that no challenge has hitherto been made to the demand letters issued in October 2013, the guarantee contains a conclusive evidence clause.

ORDER

37. For the foregoing reasons, the summons for summary judgment is dismissed.  There is to be an order nisi of costs in favour of the defendants.