STEPHEN LIU YIU KEUNG v. AKAN GROUP LTD

HCA926, 927 & 929/2004

(Heard Together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 926 OF 2004

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ACTION NO. 928 OF 2004

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BETWEEN

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ACTION NO. 929 OF 2004

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BETWEEN

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(Heard Together)

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J U D G M E N T

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1.  By three summonses issued on 9 August 2004, the plaintiff in each of the three actions applies for summary judgment and alternatively, for interlocutory mandatory injunction orders.  As the facts and issues involved are substantially the same, the three applications were listed and heard together.

2.  In all the three actions, the plaintiff as receiver appointed under three legal charges seeks to recover vacant possession of the properties charged and other relief against the defendants, who claim to be tenants under three tenancy agreements created by the charger.  The dispute turns on whether the tenancy agreements are validly created under the relevant legal charges and whether the defendants are entitled to remain in possession on the ground that legal charges are void or liable to be set aside by reason of fraudulent misrepresentation.  

The facts

3.  Keen Lloyd Resources Limited (formerly known as Keen Lloyd (Holdings) Limited) (“KL”) is the registered owner of three properties known as:

(1)      Flat No. 97, 19/F., Tower 18, Hong Kong Parkview and car parking space no.224 (“Parkview property”);

(2)      Penthouse B, 41^st and 42^nd Floors, Tower 4, Dynasty Court and car parking space nos. 78 & 78A on Level LG2 (“Dynasty Court property”); and

(3)      3^rd and 4^th Floors of House no. E2, Altadena House, No.27 Barker Road, The Peak, and car parking space nos. 12 & 13 on the Lower Ground Floor (“Altadena House property”).

4.  KL was controlled by Mr Chun Kam Chiu.  In March 2004, Mr Chun and his co-director Miss Tsang Siu Lan were convicted of conspiracy to defraud the Sin Hua Bank Limited. Mr Chun is now serving a sentence of 6-1/2 years imprisonment.

5.  Between 1 May 1997 and 5 March 1998, KL created eight Legal Charges over the three properties in favour of Sin Hua Bank Limited (“the Bank”) to secure banking facilities for KL and other companies within the Keen Lloyd group of companies, including Keen Lloyd Energy Limited (“KL Energy”).  They are as follows:

          Parkview Property

(1)     1^st Legal Charge dated 9 January 1998

(2)     2^nd Legal Charge dated 9 January 1998

          Dynasty Court Property

(1)    1^st Legal Charge dated 19 June 1997

(2)     2^nd Legal Charge dated 5 March 1998

(3)     3^rd Legal Charge dated 5 March 1998

          Altadena House Property

(1)     1^st Lega1 Charge dated 1 May 1997

(2)      2^nd Legal Charge dated 5 March 1998

(3)      3^rd Legal Charge dated 5 March 1998

6.  The provisions and contents of the deeds creating the eight legal charges are similar. 

7.  Since about March 2000, KL has defaulted in making repayments to the Bank.

8.  At the request of KL and KL Energy to withhold taking immediate legal proceeding, the bank and KL and KL Energy signed a Memorandum of Agreement dated 14 April 2000 (“MOA”), which is in essence a debt restructuring agreement.  Under the MOA, the Bank shall have no right to take legal action against KL and KL Energy upon KL and KL Energy doing a number of things, including selling no less than two of the charged properties, surrendering possession of some of the charged properties and settling partial outstanding loans by instalments.

9.  KL and KL Energy defaulted in their obligations under the MOA.   On 3 October 2000, the Bank commenced three actions against KL and KL Energy under HCA 9309, 9310 and 9311 of 2000 to recover the outstanding indebtedness.

10.  The Bank also exercised its power to appoint receiver under clause 11 of each of the1st Legal Charge over the three properties.  By a Deed of Appointment dated 15 February 2001, the plaintiff and Mr O’Driscoll of Messrs. Ernst & Young were appointed the Receivers of the three properties.  Notice of the appointment was given to KL and the Registrar of Companies.  Mr O’Driscoll ceased to be a Receiver on 1 November 2003.

11.  On 23 March 2001, KL and KL Energy commenced HCA 1319 of 2001 against the Bank and the Receivers claiming that the Bank had acted in breach of the MOA.  KL and KL Energy further applied and obtained interim injunction restraining the Bank from proceeding with the three High Court actions and restraining the Receivers from acting as receivers over 57 properties that were mortgaged to the Bank by KL and KL Energy.

12.  On 23 July 2003, KL was ordered to be compulsorily wound up in High Court Winding-up proceedings no. HCCW 1134 of 2002.  The Official Receiver was constituted the Provisional Liquidator of the affairs of KL.  On 8 August 2003, the plaintiff and Mr Kenneth Yeo were appointed the agents of the Official Receiver and Provisional Liquidator.

13.  On 1 November 2003, the injunction over the Receivers in respect of 46 properties charged by KL to the Bank, including the three properties in question, was discharged.  The injunction in respect of the remaining 11 properties that were charged to the Bank by KL Energy was discharged on 16 April 2004.

14.  After the winding-up order was made, the plaintiff and the agents of the Official Receiver and Provisional Liquidator took steps to recover possession of the three properties in question.

15.  By a letter dated 19 September 2003, the defendant in HCA 928 of 2003 (“Open Share”) claimed to be the tenant of the Dynasty Court property under a tenancy agreement dated 13 September 2002 made between Open Share and KL.  Under the tenancy agreement, Open Share was entitled to rent the Dynasty Court property for a term of 5 years commencing on 16 September 2002 at a monthly rent of $90,000 inclusive of management fees, rates and government rent.  It was further stipulated that the monthly rental was to be offset from an outstanding indebtedness of $5.4 million owed by KL to Open Share.

16.  By a letter dated 23 September 2003, the defendant in HCA 926 of 2003 (“Akan”) claimed itself to be the tenant of the Parkview property under a tenancy agreement dated 18 April 2003 and signed by KL and Akan.   Under the tenancy agreement, Akan was entitled to rent the Parkview property for a term of 3 years commencing on 20 April 2002 at a monthly rent of $75,000 inclusive of management fees, government rates and rent, air-conditioning fees and club membership fee.  It was further stipulated that the monthly rental was to be offset from an outstanding indebtedness of $2.7 million owed by KL to Akan.

17.  By a letter dated 3 October 2003, the defendant in HCA 929 of 2003 (“Winko”) claimed itself to be the tenant of the Altadena House Property under a tenancy agreement dated 27 June 2002 made between KL and Winko. 

18.  In a letter dated 7 October 2003, Winko informed the Official Receiver that the tenancy agreement was made pursuant to a Memorandum of Understanding dated 6 September 2000 made between Winko and KL.  Under the Memorandum, Winko was to make a $15.6 million interest free loan to KL to be “repaid in non-monetary manner which interprets that the loan, either in full or in part, could be offset by way of deduction from rental of a premises owned by [KL] and it is an entire right of [Winko] to choose a premises which he/she desires to rent amongst the list of estate properties owned by [KL] by the time [Winko] exercises this right”: clause 2.3.3 of the Memorandum.

19.  Under the tenancy agreement signed by Winko and KL, the Altadena House property was let for a term of 7 years commencing on 1 July 2002 at a monthly rental of $150,000 inclusive of management fee, government rates and rent.  It was also stipulated that the monthly rental was to be offset from the outstanding indebtedness owed from KL to Winko, which was stated to be $12.6 million.

20.  All the three defendants are BVI companies and admittedly are subsidiaries of KL and companies within the Keen Lloyd group.

21.  Inquiries conducted by the plaintiff shows that the Altadena House property has all along been occupied by Mr Chun Kam Chiu and his family.  

22.  Upon receipt of the defendants’ claims to be tenants of the properties, the plaintiff had by letters requested the defendants for details of the loans and indebtedness stated in the tenancy agreements and other information.  All three defendants refused to answer the queries or to provide the information requested.

The actions

23.  On 21 April 2004, the plaintiff commenced the three actions herein.  The plaintiff’s claims in the three actions are similar.  They are for (1) a declaration that the three tenancy agreements are null and void and of no effect as against the plaintiff, (2) vacant possession of the three properties, (4) an injunction restraining the defendants from remaining in possession or occupying the properties and (5) mesne profits with interest.

24.  On 21 June 2004, leave to serve the Writs outside jurisdiction was granted.  On 29 July 2004, the defendants through Messrs Paul Chan & Co gave notice of intention to defend the actions.  On 9 August 2004, the plaintiff issued the three summonses for summary judgment and alternatively, interim injunctive relief.  The summonses and the supporting affidavits were served on the same day.  On 18 August 2004, the defendants applied by summonses to adjourn the hearing of the plaintiff summonses scheduled for 25 August 2004.  On 24 August 2004, I dismissed the adjournment application. 

25.  At the hearing of the plaintiff’s summonses, the defendants sought leave to file and use two affirmations.  The application was opposed by the plaintiff.  In the end, I granted leave for the affirmations to be filed and used.  The first of the affirmations is by Leung Suk Ching, Angela that relates to all three actions.  The other affirmation of Ng Ling Wai is only in relation to HCA 929 of 2004.  Mr Hui who appears for the defendants also asked to hear only HCA 929 of 2004 first and to adjourn the applications in the other two actions.  In the end, however, he did not insist on this course, which in my view is unjustified.

The defendants’ case

26.  The defendants resist the applications for summary judgment  on the basis that there are triable issues that warrant the actions proceeding to trial. In substance, the defendants raise three grounds of defence.  Firstly, it is said that the Legal Charges over the three properties are liable to be set aside by reason of fraudulent misrepresentation made by the Bank.  Secondly, it is said that the three tenancy agreements are genuine commercial transactions. Thirdly, it is said that the Bank had given consent and had constructive notice of the tenancy agreements.  The defendants also contend that the O.14 procedure is inappropriate given that there are allegations of fraud.   As to the alternative applications for interlocutory mandatory injunction, the defendants say that the balance of convenience should lie in favour of refusing the relief. 

The Bank’s consent or notice

27.  I will deal firstly with the defence that the Bank had given consent and had constructive notice of the three tenancies, which is a very short point.

28.  All the 1^st Legal Charges of the three properties contain restriction against alienation by KL.  Clause 9.16 of the three 1^st Legal Charges provides that:

“[KL] shall not, except with the prior written consent of the [Bank] and then only in conformity with any conditions which the [Bank] may in its absolute discretion impose during the subsistence of this security, part with the use, occupation or possession of the Property or any part thereof in any way whatsoever whether by way of letting, subletting, lending, sharing, assigning or other means whereby any person other than [KL] obtains the use, occupation or possession of the Property or any part thereof, irrespective of whether any rental or other consideration is given for such use, occupation or possession.”

29.  Plainly, for the three tenancy agreements to be binding on the Bank and the plaintiff, it must be shown that the Bank had given prior written consent to the creation of the tenancies or to KL parting with the use occupation or possession of the properties in favour of the defendants. 

30.  None of the defendants has adduced any evidence that the requisite prior written consent had been obtained from the Bank.  All that is said in the affirmations is that Mr Chun had told them that “the personnel [sic] in Sin Hua Bank, Castle Peak Road sub-branch were aware of the existence of the three tenancies” and “Miss Kwan, the property manager of [Keen Lloyd Group] told the same to the three tenants”: paragraph (14) of the affirmation of Angela Leung.

31.  The assertion that the Bank had given consent and had constructive notice of the three tenancies are mere bare assertions.  That is hardly sufficient for the purpose of resisting an Order 14 application given that the burden is on a defendant to condescend on particulars.   The defendants have therefore failed to make good this defence.

Fraudulent misrepresentation

32.  The defendants’ case on fraudulent misrepresentation can be summarized as follows:

(1)     In mid-1997, Mr Chun requested the Bank to increase the credit facilities granted to the Keen Lloyd group from $1.827 billion to $2.3 billion.   This was agreed to on condition that the group would put up more securities.  Consequently, the Dynasty Court property and the Altadena House property and other properties were charged to the Bank. 

(2)     Initially, the group was able to utilise an additional $200 million facilities.  The Bank later requested for more securities because of the falling property market, and the Parkview property and further properties were charged to the Bank.  Despite this, the Bank had not extended further facilities to the group as promised. 

(3)     At the criminal trial of Mr Chun, it was revealed that by reason of the lending restrictions under the guidelines issued by the Hong Kong Monetary Authority, the Bank was not in a position and had no intention to increase the banking facilities of the Keen Lloyd group to $2.3 billion as promised.  The bank had therefore deceived Mr Chun into charging the three properties to the Bank.

(4)     Upon discovery of the fraudulent misrepresentation, Mr Chun had caused KL Energy to commence proceedings under HCA 1299 of 2004 against the Bank for damages and other relief. 

33.  Mr Fung SC for the plaintiff submits that this defence of fraudulent misrepresentation is incredible and untenable.  I agree.

34.  Firstly, Miss Angela Leung, who was Mr Chun’s personal assistant, said in her affirmation that Mr Chun had on 1 August 1997  written a letter to the Bank to press for a reply to the request to increase the facilities to $2.3 billion, and that in December 1997, Mr Chun was told the Bank had approved the request.  However, the 1^st Legal Charge of the Altadena House property and that of the Dynasty Court property were created as early as 1 May and 19 June 1997.  They could not have been charged to the Bank in consequence or in furtherance of the alleged promise to increase the facilities. 

35.  Secondly, the Altadena House property and the Dynasty Court property were acquired on 1^st May and 19 June 1997 respectively and were charged to the bank on the same day as their acquisitions.  Clearly, the Legal Charges were for the purpose of financing the acquisitions.  This is inconsistent with, if not directly contradictory to, the contention that it was charged to the Bank as a condition for increasing the banking facilities for the group.  The creation of further legal charges over these properties in 1998 is also inconsistent with the defence case that the Bank demanded further securities be put up for the increased facilities because the property market was falling.  

36.  Thirdly, Miss Leung stated that according to Mr Chun, but for the fraudulent misrepresentation, he could have diverted part of the group’s business to other banks and would have charged the properties in question to other banks.  However, from the extracts of the transcript of Mr Chun’s criminal trial, it can be seen that counsel for Mr Chun had put it to Mr Ng Chi Leong, a former officer of the Bank, that in 1998 Mr Chun was complaining about the Bank not extending extra facilities to him and had threatened to pull his accounts from the Bank, to which Mr Ng agreed.   Mr Chun was therefore fully aware then that further facilities Bank were not forthcoming.  Yet he continued to create further legal charges over the properties in the course of 1998.

37.  Not only that, KL and KL Energy had as late as April 2000 requested the Bank to refrain from immediate legal proceedings to enforce the Legal Charges and to recover the indebtedness due and further entered into debt restructuring agreement with the Bank under the MOA.  By then, Mr Chun or the Keen Lloyd group must be fully aware that the Bank had not honoured its alleged promise. 

38.  Fourthly, HCA 1299 of 2004 is brought by KL Energy, who does not own the three properties in question.  The liquidators of KL have not been made a party to the action.  In her affirmation, Miss Angela Leung described the action as “representative proceedings”.  That is not understood.

39.  Further, although the Writ was issued on 1 June 2004, no statement of claim has been filed.  According to the endorsement on the Writ, KL Energy’s claim is only for $5 billion damages.  No relief for setting aside any transaction, let alone the Legal Charges in issue, is sought.  The institution of HCA 1299 of 2004 is hardly a fact in support of the defence case of fraudulent misrepresentation or that upon realising the fraudulent misrepresentation, Mr Chun had taken steps to set aside the Legal Charges.

40.   Fifthly, in the second affirmation of Paul Chan filed in support of the defendants’ adjournment application, the matter was put on the basis of a failure of consideration that entitled KL to set aside the Legal Charges in issue.  This affirmation was made only two days before Miss Leung and Miss Ng made their affirmations in opposition to the plaintiff’s application.  There was then no allegation or suggestion of fraud.

41.  In my view, the defence that the Legal Charges are liable to be set aside for fraudulent misrepresentation has no substance.

42.  That being the case, it is not necessary to consider the argument that because of the allegation of fraud, this is not an appropriate case for Order 14.   In any case, this is not a case in which the plaintiff is alleging fraud.

Genuineness of the tenancy agreements

43.  It is the plaintiff’s secondary case that the tenancy agreements are not genuine or bona fide.  The defendants on the other hand assert that they are genuine commercial transactions.  In my view, there are a number of matters that cast doubt on the genuineness and fides of the three tenancies.

44.  Firstly, the defendants are the subsidiaries of and companies related to KL.  As such, they ought to be aware of the restrictions on alienation contained in the Legal Charges and also the fact that the Bank has been taking steps to enforce the Legal Charges.  Secondly, the terms are unusual.  Thirdly, despite requests from the plaintiff and the agent of the Official Receiver and Provisional Liquidators, the defendants had refused without good reason to provide details and further information on the loans and indebtedness said to have given rise to the creation of the tenancies.  Fourthly, in the case of the Altadena House property, it was occupied by Mr Chun and remains to be occupied by his family. 

45.  Notwithstanding their assertion that the tenancy agreements are genuine transactions, the defendants have in these proceedings provided no evidence to substantiate the alleged loans and indebtedness due from KL to each of them.   The fact that Mr Chun is imprisoned is not a reason for the vacuum in the evidence since the defendants are themselves parties to the alleged loans and indebtedness. 

46.  In short, the plaintiff has in each of the three actions made out a case for summary judgment against the defendants.  The defendants have filed to show there are any triable issues.  In the circumstances, it is not necessary to deal with the alternative application for interlocutory mandatory injunction.     

Conclusion

47. For the reasons set out above, the plaintiff in each of the three actions is entitled to summary judgment as sought.  Accordingly, I enter final judgment for the plaintiff against the respective defendant in terms of the relief sought in paragraphs 1 to 6 of the plaintiff’s respective summonses.  Applying the normal rule of costs follow event, I also make an order nisi that the defendants pay the plaintiff the costs of their respective action, including the costs of the application for summary judgment, to be taxed if not agreed.  There is a certificate for two counsel.