THE BANK OF EAST ASIA, LTD v. LABOUR BUILDINGS LTD AND OTHERS

CACV 33/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 33 OF 2008

(ON APPEAL FROM HCMP NO. 769 OF 2002)

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J U D G M E N T

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Hon Rogers VP:

1.  This was an appeal from a judgment of Deputy High Court Judge Gill given on 23 January 2008.  By that judgment the judge made a declaration that the property known as No. 11 Changsha Street, Kowloon (“the property”) was charged to the plaintiff by way of legal mortgage under a debenture entered into in 1999 with repayment to the plaintiff of the indebtedness; the judge ordered payment by the first defendant to the plaintiff of the sum of HK$86,159,095.98 with interest on that sum at the judgment rate from 24 January 2008 until payment and, in default of such payment, possession of the property to the plaintiff.  As against the second defendant the judge gave judgment for possession of the property with mesne profits payable by the second defendant to the first defendant from 1 March 2002 until possession of the property was obtained.  At the conclusion of the hearing of this appeal judgment was reserved which we now give.

Background

2.  Originally, the first defendant was owned to a very large extent by those who had connections with the Kuomintang political party in Taiwan with smaller holdings by certain trade union interests in Hong Kong.  The first defendant’s major asset was the property.  In 1996 a company by the name of APH Hong Kong Ltd (“APH”) acquired 73.2% of the first defendant.  APH acquired those shares by transfer and itself appears to have been owned by the Kuomintang.

3.  In 1997 a debenture dated 26 February 1997 (“the 1997 debenture”) was executed whereby the first defendant was to obtain a loan of some $40 million from the plaintiff in order for the first defendant to be able to redevelop the property.  Later that same year, it seems that it was recognised that the first defendant would require further funds in order to be able to complete the redevelopment.  In consequence the question of a further advance was discussed and the plaintiff referred the matter to its solicitors, who had advised in respect of the 1997 debenture.  On this occasion the solicitors recognised that the original debenture was for an amount that was very far in excess of what was permitted under the first defendant’s Articles without sanction of the shareholders.  As such the solicitors recommended that the original debenture should be ratified.  For that purpose an EGM was called to be held in November of that year.

4.  In 1999 the first defendant requested the plaintiff to provide an extension of the repayment terms as well as an increase in the advance.  For this purpose a further debenture was executed and the 1997 debenture was released on payment of the funds from a further debenture, dated 29 October 1999 (“the 1999 debenture”).

5.  As the judge recorded in paragraph 127 of the judgement, on 13 September 2001 APH disposed of all its shares in the first defendant to a company called Yan Hei Holdings Ltd (“Yan Hei”).  By then the property had been redeveloped using money obtained under the debenture.  The consideration for the sale was a mere $2,781,600.  However, in addition, clause 5 of the assignment provided that:

“5.  The Transferee and the Transferor must preserve the Bank of East Asia loan to ensure the loan agreement of the Bank of East Asia unchanged, so as to prevent from causing financial confusion, to avoid causing loss.”

6.  At that time the debt due to the plaintiff then stood at $46,785,385.

7.  At about the same time there was a considerable change in the directors of the first defendant.  Six of the directors who had been appointed when APH first acquired its interest in the first defendant resigned when the sale of the shares was completed.  Two of the other directors had retired prior thereto.  However, apparently, on the same date Mr Lee Kwok Keung was appointed.  Mr Lee was the sole witness for the defendants at the trial.  Yan Hei was appointed to the board of the first defendant in May 2002 and in September 2002 the second defendant, China States Limited (“CSL”), also became a director.

8.  The holdings of the shares in the various companies was examined by the judge following submissions which had been made and at paragraph 141-2 the judge said:

“141.  So, what comes out of this is that David Chan, solicitor, has by virtue of his control over C C Services Ltd and DWTC Services Ltd total control over Yan Hei.  And Yan Hei is the majority shareholder of LBL (the first defendant), and a director of LBL.

142.  sHe is also through his control of C C Services Ltd a voice on the board of CSL.”

9.  The matter is of particular significance.  This action was commenced in March 2002 following a failure by the first defendant to continue to make payments under the 1999 debenture.  At an EGM of the first defendant on 18 April 2002 it was resolved that David WT Chan solicitors should represent the first defendant in the litigation and it was also resolved that Yan Hei would be responsible for the legal costs.  As noted in paragraphs 143-8 of the judgment the judge was highly sceptical of the instructions given to the defendants’ counsel that Yan Hei was not funding the litigation.  The judge summarised his conclusions on this aspect when he said:

“164.  ….. the following circumstances, which have emerged since APH HK left the scene and Yan Hei came to it:

(1)  Until APH HK sold there had been no default with the Bank and no claim of irregularity in the debentures or of misconduct including fraud and forgery.

(2)  This emerged four years after the first drawdown, in October 2001 when Yan Hei became the majority shareholder of LBL.  David Chan controls Yan Hei and all along has been its solicitor.  He became solicitor for LBL.  He also controls CSL, and is its solicitor.  He has represented LBL and CSL throughout the litigation.

(3)  Yan Hei has funded the litigation through the 5½ years to trial, and 42 days of trial.  Four counsel were engaged for the trial.

(4)  To avoid perjuring himself, K K Lee was obliged to strike out large pieces of his witness statement, in circumstances giving rise to the prospect that parts of it had been made up (in the sinister meaning of those words).

165.  In the circumstances I am satisfied that whilst the defendants are LBL and CSL the litigator is in reality Yan Hei, orchestrated and controlled by David Chan.”

10.  The judge defined the issues in the case in paragraph 166 of his judgment as follows:

“1.  Was there a political issue, called the Kuomintang Factor, which caused senior management of BEA to disregard getting the loan documents and procedures right?

2.  Was the 1997 Debenture invalid because power to authorize the borrowing was outside the directors’ powers, and or because the meeting authorising its execution was inquorate?

3.  Did BEA dishonestly assist or turn a blind eye to the misappropriation of some of the loan?

4.  (a)    Was the 1997 Debenture ratified by the shareholders and did they authorize the further advance?

     (b)    Did they give the directors unlimited borrowing powers?

5.  Was the 1999 Debenture invalid because of irregularities in the authorizing of its execution; in particular, because the Board minutes of 17 September 1999 were a forgery?

6.  If there were any irregularities in the process leading up to the execution of the securities as to render them invalid but for ratification and or the rule in Turquand’s case, is the integrity of the securities saved by exercise of the rule?

7.  In any event can BEA rely on the doctrine of estoppel to enforce repayment?

8.  If the debentures, in particular the 1999 Debenture, are invalid, is BEA entitled to recover the amount advanced and interest thereon by restitution?”

11.  Whilst holding that the “Kuomintang Factor” did not amount to anything the judge dismissed the suggestion that the plaintiff had assisted or at least turned a blind eye to irregularities which included the channelling of some of the borrowed money away from its proper destination namely the construction project and into the pockets of the Kuomintang.  The defendants had attempted to mount such a case on the basis of the known wish of the plaintiff to open a branch in Taipei.  The judge considered fully the evidence of the plaintiff in this regard and came to the conclusion that there was nothing in the allegation.

12.  In this context it is important to note that Mr Lee required material parts of his witness statement to be deleted because they were incorrect.  One of the passages read:

“The 1^st Defendant was merely the conduit of funding of HKTU missions by Kuomintang.  From my experience and knowledge of the practice of Kuomintang, the alleged sum of $7,649,411 ($2,859,304 + $4,790,107) should be funds for carrying out different political missions by different groups of Kuomintang members.”

13.  This was one of a number of passages in his witness statement which was designed to lead to the conclusion that the plaintiff had used the debenture as a means of channelling money to the Kuomintang.  It transpired that Mr Chan had prepared witness statements for Mr Lee and that Mr Lee had only read the statements shortly before the hearing, hence it was then that he required the deletion of the allegations that money was being channelled to the Kuomintang.  The judge considered that there was a real prospect that the correct descriptions for the deleted parts of Mr Lee’s witness statement were “invented” or “fabricated”.

14.  Turning to the other issues that the judge had identified, the plaintiff accepted that the board’s authorisation to borrow under the 1997 debenture was invalid because of the proviso of Regulation 81 of Table A that had been adopted as incorporated into the Articles of the first defendant.  That proviso read:

“Provided that the amount for the time being remaining undischarged of moneys borrowed or secured by the directors as aforesaid (apart from temporary loans obtained from the company’s bankers in the ordinary course of business) shall not at any time, without the previous sanction of the company in general meeting, exceed the nominal amount of the share capital of the company for the time being issued, but nevertheless no lender or other person dealing with the company shall be concerned to see or inquire whether this limit is observed.  No debt incurred or security given in excess of such limit shall be invalid or ineffectual except in the case of express notice to the lender or the recipient of the security at the time when the debt was incurred or security given that the limit hereby imposed had been or was thereby exceeded.”

15.  As already noted, in 1997, the plaintiff’s solicitors reviewed the documentation relating to the debenture because the first defendant required to borrow a further $10 million.  In October that year the solicitors advised that it was necessary for the first defendant to hold an EGM to ratify the borrowing.  There is no doubt that a meeting was held 26 November 1997.  The defendants had argued that there had been inadequate notice of the meeting and that the resolution passed at the meeting was not as recorded at the Companies Registry but had been ineffective to nullify the restriction in Regulation 81.  The judge held against the defendants on both points.

16.  As regards the attack on the validity of the 1999 debenture because it was said that there never had been a board meeting to authorise that debenture and that in consequence the minute of a board meeting of 17 September 1999 had been a forgery, the judge said that although it had been conceded that there had been no board meeting on 17 September, it had not been established that there had been no board authorisation which would have satisfied the requirements of a meeting and he was not prepared to hold that the minutes were a forgery. 

17.  The judge held that, if indeed there had been nothing which would have satisfied the requirements of a meeting, the plaintiff would not be able to rely on the rule in The Royal British Bank v Turquand [1856] 6 E&B 327 because the plaintiff’s solicitors would have had knowledge of the relevant facts that would have led to that conclusion.  On the other hand the plaintiff would have been able to rely on estoppel constituted by the first defendant’s conduct to prevent it relying on any supposed lack of proper board authorisation.  Finally, the judge held that the question of the plaintiff’s fallback reliance on restitution did not arise because of its success in respect of the primary point.

This appeal

18.  After judgment had been given in the court below the first defendant resisted payment of the money that the judge had found owing to the plaintiff on the basis that it had good grounds for appeal.  It was not until a very few days before this appeal was to be heard, and after the skeleton argument of the plaintiff in respect of the claim to restitution had been filed, that the skeleton argument for the defendants was filed.  In that skeleton it was conceded, for the first time, that the plaintiff was entitled to restitution.  It was said, however, that the amount which the plaintiff would recover on a restitutionary basis was less than the amount it would recover under the debenture because the rates of interest which a court would order on a restitutionary claim would be lower than under the debenture.  Whether that would be so is, probably, highly questionable.  In my view, that question does not fall to be considered.

19.  Mr Chan SC, who appeared on behalf of the defendants on this appeal, took three main points.  In the first place he challenged the finding of the judge that the EGM on 26 November 1997 had not been shown to be invalidly convened by reason of short notice.  In the second place he argued that even if notice of the EGM had been validly given and in time, the special resolution which had been passed did not have the effect of removing the proviso of Regulation 81 of Table A from the first defendant’s Articles.  In the third place he argued that there had clearly never been any board meeting on 17 September and hence the 1999 debenture had not been approved.  His argument went on that the plaintiff was not entitled to rely on either the rule in Turquand’s case or upon estoppel.

Short notice of the EGM held on 26 November 1997

20.  At the outset it may be observed that approximately 97% in value of the shareholders attended the meeting on 26 November 1997.  The purpose of that meeting was clearly to ratify, retrospectively, the 1997 debenture and increase the directors’ power to borrow money.  It can also be observed that since it is the defendants’ case that the meeting was called on short notice it is primarily for the defendants themselves to show that the first defendant’s procedure was wrong.  No discovery was given of the notice calling the meeting.  An excuse was proffered in argument in this court that when the company was taken over by Yan Hei, there were no documents handed over.

21.  It may then also be observed that there was no oral evidence called by the defendants to show that the notice of the meeting had been short.  Mr Whitehead SC, who has appeared for the plaintiff throughout in these proceedings, observed that the defendants had assembled nine shareholders of the first defendant to give witness statements.  This court did not see those statements.  Nevertheless the fact remains that none of those shareholders who had been shareholders at the time, were called to give evidence.  Although paragraph 17 of Mr Lee’s witness statement had originally contained the statement that no notice of the meeting “was sent to all the shareholders” that was one of the passages Mr Lee had insisted be deleted.  Furthermore the EGM had been attended by the first defendant’s own solicitor.  Had the notice calling the meeting been short he could have proposed a motion at the meeting to rectify the situation.  It would seem, also, that the solicitor could have given evidence at the trial.

22.  It is fair to say that Mr Chan did not rely heavily on this point and, indeed, it was one which was founded upon an attempt to draw an inference based on correspondence.  The judge was not prepared to draw any such inference.  In my view there is no compelling reason why this court should hold that the judge was wrong not to have drawn any inference that the notice was short.  This is a question of fact.  The judge was entitled to find the fact in the way he did.  I do not consider that this court should disturb that finding.

The effect of the special resolution

23.  In argument Mr Chan contended that the formal wording of the resolution that had been drawn up by the solicitor did not reflect the resolution which had been passed.  In this respect he relied upon the minutes of the meeting in comparison with the wording as drawn up by the solicitor when the formal minute was prepared after the meeting.  For completeness I set the two out below:

The translation of the relevant part of the minutes of the meeting read:

“The directors may exercise all the powers of the company to borrow money, even to exceed the nominal amount of the share capital of the company for the time being issued and to mortgage or charge in undertaking, property and uncalled capital, or any part thereof, and to issue debentures, debenture stock, and, subject to section 57B of the Ordinance, convertible debentures and convertible debentures stock, and other securities whether outright or as security for any debt, liability or obligation of the company or of any third party.”

The relevant part of minute as filed at the Companies Registries reads:

“The proviso of rule 81 of Table A does not apply to the Articles of Association of the Company.  Thus, the Directors may exercise all the powers of the Company to borrow money, and to mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and to issue debentures, debenture Stock, and subject to section 57B of the Companies Ordinance, convertible debentures and convertible debenture stock, and other securities whether outright or as security for any debt, liability or obligation of the Company or of any third party.”

24.  In my view the minute as prepared and filed at the Companies Registry is an unexceptionable formal encapsulation of the clear intent and meaning of the minutes of the meeting and I see no grounds for holding it is invalid.

The board meeting of 17 September 1999

25.  As, very properly, conceded by Mr Whitehead it is clear that there could not have been a meeting either in September or October 1999 when all the persons said to have been present were in Taiwan.  Whilst the judge was prepared to accept that there could be other ways of holding a meeting other than by physical presence in the same place, nothing has been shown that there was a conference call or some other arrangement.  No doubt Mr Ma, who signed the minutes of the meeting, considered that all the directors were in agreement with the recorded outcome and there is nothing to suggest otherwise.  In this respect I consider that it is dangerous to assume that a meeting was held in what might otherwise be considered an unusual manner when it was recorded as being held by persons being present.

26.  The point taken by the defendants is, nevertheless, in my view wholly unmeritorious.  The board minute was intended to be a formal record of what was clearly the first defendant’s intention.  The plaintiff advanced all monies due under the 1997 debenture.  The debt owing under that debenture was subsequently refinanced by the 1999 debenture.  There was never any suggestion prior to the 1999 debenture that the first defendant was not required to observe the terms of that document.  Indeed the 1999 debenture came into existence precisely because the first defendant considered itself bound by the 1997 debenture.  Thereafter the first defendant not only did not dispute the validity of the 1999 debenture but acted upon it and made repayments totalling HK$4.2 million in the period up to the time when the majority ownership of the first defendant was purchased by Yan Hei.  As already noted, clause 5 of the purchase agreement required Yan Hei to recognise the validity of the loans from the plaintiff.  All the documents emanating from the first defendant, in so far as they still exist, point to the validity of the loans.  Indeed, specifically, the first defendant’s accounts, which were duly audited, demonstrate that.  In my view the plaintiff is entitled to rely upon estoppel in this respect.

27.  In those circumstances, the plaintiff’s case on the main ground must succeed and the plaintiff does not need to rely on a claim in restitution.

28.  I would therefore dismiss this appeal and make an order nisi of costs in favour of the plaintiff.

Hon Le Pichon JA:

29.  I agree.

Hon Barma J:

30.  I agree.