AURUM PACIFIC FINANCE LTD v. T & V INTERNATIONAL HOLDINGS LTD AND ANOTHER

HCA 295/2023

[2024] HKCFI 1798

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 295 OF 2023

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D E C I S I O N

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1.  The Plaintiff (“P’) was and is a licensed money lender. It commenced this action on 28 February 2023 to claim (a) against the 1^st Defendant (“the Company”), pursuant to a loan agreement dated 21 March 2019 (“the Loan Agreement”), for the repayment of the balance of the unpaid principal of the loan at HK$4,800,000 and interest accrued up to 28 February 2023 at HK$1,429,728 and interest thereafter at the contractual rate of 10% per annum until judgment and (b) against the 2^nd Defendant (“Wong”) as guarantor under a Deed of Guarantee also dated 21 March 2019 (“the Guarantee”).

2.  On 24 March 2023, the Company filed its Defence. On 29 June 2023, Wong filed his Defence.

3.  On 12 October 2023, Master Isaac Chan, after a contested hearing before him, acceded to P’s application by summons dated 16 June 2023 and ordered that summary judgment be entered as against the Company in the amounts as claimed. By that application, P only applied for summary judgment against the Company and not against Wong.

4.  By a Notice of Appeal filed on 3 January 2024, the Company seeks to appeal against the Master’s said order. By a summons filed on the same day, the Company seeks leave to appeal out of time.

5.  It is trite and not disputed that in deciding whether to grant leave to appeal out of time, the Court has to consider all relevant factors, particularly (a) the length of delay, (b) the reasons for the delay, (c) the merits of the proposed appeal, and (d) the degree of prejudice to the other party (Hong Kong Civil Procedure 2024 §58/1/9).

6.  The applicable principles on summary judgment applications are also trite and not disputed, and I would not rehearse them here.

The factual background

7.  The Company was and is a private company incorporated under the laws of Hong Kong. Wong at the time of the signing of the Loan Agreement was the sole shareholder and director of the Company. It is not disputed that the Company had been used by Wong to hold the real property known as House No. H22, St. Andrews Place, No 38 Kam Chui Road, Sheung Shui, N.T. (“the House”). The House was the Company’s only asset.

8.  By the Loan Agreement, P agreed to lend, and the Company agreed to borrow, HK$5,000,000 for a period of 18 months (from 21 March 2019 to 20 September 2020) with an annual interest of 10% (“the Loan”). As said, the Loan was guaranteed by Wong who signed the Deed of Guarantee on the same date the Loan Agreement was signed.

9.  It is not disputed that on the same day, a Drawndown Notice was issued by the Company and the Loan was advanced to the Company by a cheque issued by P to Wong as the payee, and that the amount was duly received.

10.  It is Wong’s case that though he signed the Loan Agreement and all the related documents on behalf of the Company and signed the Deed of Guarantee, the Loan and the Loan Agreement was in fact a sham. I will return to this in due course.

11.  Under the Loan Agreement, the repayment of the Loan was to be made by paying (a) on 20 September 2019 interest at HK$252,055, (b) on 20 March 2020 interest at HK$249,016, and (c) on 20 September 2020 interest at HK$251,367 and the principal of HK$5,000,000.

12.  According to P, the Company only made the first payment of interest in the said sum of HK$252,055 on 14 February 2020 instead of on the due date of 20 September 2019.

13.  The Company has defaulted on the 2^nd payment of interest on 20 March 2020, and also defaulted on the payment of the 3^rd payment of interest and principal on 20 September 2020.

14.  According to P, the Company then on 27 October 2020 made another payment of interest accrued on the Loan from 21 September 2019 to 20 March 2020 in the sum of HK$249,016, and the Company also made a partial repayment of principal in the sum of HK$200,000 on 29 January 2021.

15.  Wong denied that the Company or him has made any of the above-mentioned 3 repayments to P.

16.  It is not disputed that in the meantime around late August 2020, Wong on the one part and Madam Ho Tin Yee Tinny and her husband Mr Chua Kien Han John (“the Chuas”) on the other entered into a provisional agreement for the sale and purchase of the entire shareholding of the Company at the consideration of HK$50 million (respectively “the SPA” and “the Sale”) with the intent and purpose that thereby the Chuas would be purchasing the House from Wong.

17.  The Sale were conducted and eventually completed on 11 December 2020 by Wong and the Chuas through their respective solicitors.

18.  According to the Chuas and not disputed by Wong, Wong has never informed or disclosed to the Chuas the existence of the Loan.

19.  On 21 June 2022, P through its solicitors issued demand letters respectively to the Company and Wong demanding repayment.

20.  According to the Chuas, it was upon receiving the said demand letter that they became aware for the first time of the existence of the Loan.

21.  The Company and Wong did not make any repayment despite the demand. P commenced this action on 28 February 2023.

22.  On the same date the Company filed its Defence, ie. 24 March 2023, the Company filed a Notice of Contribution and/or Indemnity against Wong pursuant to Order 16 Rule 8, which was later amended.

23.  By a joint application by Consent Summons filed on 28 April 2023, judgment was entered by consent in favour of the Company against Wong whereby Wong is to indemnify the Company its liability for P’s claim and for P’s costs and the Company’s own costs in defending P’s claim.

The Company’s defence

24.  In its Defence filed on 24 March 2023, the Company’s plea by way of defence is that “It was not the actual borrower of the Loan Principal”[1] and “The borrowing of the Loan Principal as appeared on the Loan Agreement was in fact a scheme devised by [Wong] and/or the Plaintiff; [the Company] was made use as an agent to borrow the Loan Principal purportedly in accordance with the terms of the Loan Agreement”[2].

25.  The Company then pleaded extensively the terms of the SPA and the circumstances of the Sale and that Wong executed a Deed of Guarantee and Indemnity dated 11 December 2022 in respect of the Sale in favour of the Chuas and averred that the Loan and the Loan Agreement “were intentionally and deliberately concealed by [Wong]” and that Wong “committed a flagrant breach of [the SPA] and [the Deed of Guarantee and Indemnity] and perpetrated a fraud on [the Chuas] and/or [the Company]”[3]. The Company further pleaded the correspondence from Wong’s solicitors to the effect that Wong agreed to assume liability for repayment of the Loan if the Loan was held to be valid and enforceable.

26.  The Company also pleaded various non-admissions and denials regarding P’s averments in respect of P’s claim.

27.  Evidently, and Mr Ko did not dispute otherwise, that these matters pleaded in the Defence of the Company do not raise an arguable defence or triable issue as against P’s claim, save maybe the Company’s rather unclear averment, and bare assertion, that the Loan was “a scheme devised by [Wong] and the Plaintiff”.

28.  In opposition to P’s summary judgment application, the Company sought to rely on Wong’s affirmation filed on 11 September 2023 in which Wong raised by way of defence, and in his own words:

“ The gist of the Defence is that the Purported Loan was (a) a sham and never intended to create binding legal relations between the parties; (b) procured by way of misrepresentation / non est factum; and, further or alternatively, (c) if the Court finds the Purported Agreement to be enforceable, it was executed by the 1^st / 2^nd Defendant as agent of Mr Chiu Ngai Hung with the Plaintiff’s constructive knowledge.”[4]

29.  Mr Yung, counsel for P, submitted that I should completely disregard Wong’s affirmation as it was filed by Wong in support of his own case or cause. I do not accept that submission. Wong was the director of the Company at the material time signing all the documents in relation to the Loan on behalf of the Company, and as such surely he could act as a witness in support of the opposition by the Company.

30.  Mr Yung further pointed out that the matters raised in Wong’s affirmation were not pleaded in the Defence of the Company but were only pleaded in Wong’s own Defence. However, if there are indeed shown to be triable defence/issues raised by these matters, though they have not yet been so formally pleaded, the Court would usually consider granting leave to amend the Defence to include these matters instead of granting summary judgment against the Company. I therefore indicated at the hearing that I would not preclude the Company from relying on or raising these matters.

31.  In this appeal, the main contentions pursued by the Company against the granting of summary judgment were that the Loan and the Loan Agreement were sham, and that there are features in this case that warrant further investigation making the granting of summary judgment inappropriate. Mr Ko expressly confirmed that the Company was not relying on non est factum.

Arguable defence that the Loan and the Loan Agreement were sham ?

32.  Mr Ko referred this Court to a number of cases on the principles relating to sham transactions. They were not disputed by Mr Yung. It would suffice just to refer to the following.

33.  As explained by Diplock LJ (as he then was) in Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at 802C-F, a sham in law means:

“ … acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities … that for acts or documents to be a ‘sham,’ with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.” (my emphasis)

34.  Arden LJ (as she then was) gave a general analysis of the doctrine on sham transactions in Stone & Ors v Hitch [2001] STC 214, at §§63-69:

“ 63. The particular type of sham transaction with which we are concerned is that described by Diplock LJ in Snook v London & West Riding Investments Ltd [1967] 2 QB 786. It is of the essence of this type of sham transaction that the parties to a transaction intend to create one set of rights and obligations but do acts or enter into documents which they intend should give third parties, in this case the Revenue, or the court, the appearance of creating different rights and obligations. …

64. An inquiry as to whether an act or document is a sham requires careful analysis of the facts and the following points emerge from the authorities.

65. First, in the case of a document, the court is not restricted to examining the four corners of the document. It may examine external evidence. This will include the parties' explanations and circumstantial evidence, such as evidence of the subsequent conduct of the parties.

66. Second, as the passage from Snook makes clear, the test of intention is subjective. The parties must have intended to create different rights and obligations from those appearing from (say) the relevant document, and in addition they must have intended to give a false impression of those rights and obligations to third parties.

67. Third, the fact that the act or document is uncommercial, or even artificial, does not mean that it is a sham. A distinction is to be drawn between the situation where parties make an agreement which is unfavourable to one of them, or artificial, and a situation where they intend some other arrangement to bind them. In the former situation, they intend the agreement to take effect according to its tenor. In the latter situation, the agreement is not to bind their relationship.

68. Fourth, the fact that parties subsequently depart from an agreement does not necessarily mean that they never intended the agreement to be effective and binding. The proper conclusion to draw may be that they agreed to vary their agreement and that they have become bound by the agreement as varied: (see for example Garnac Grain Co Inc v HMF Faure & Fairclough Ltd [1966] 1 QB 650 at 683-684 per Diplock LJ, which was cited by Mr Price).

69. Fifth, the intention must be a common intention: see Snook …”

(my emphasis)

35.  I have added emphases on the above quotes to highlight one important aspect of the relevant principles which is that it must be shown that all the parties thereto have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. The importance of establishing this commonality in intention was well illustrated by the following passage by Rimer J in Shalson and Others v Russo and Others [2005] Ch 281, 342A-D applying that requirement to the dispute before him (which passage was cited with approval by Au-yeung J in H & W & Others HCMC 6/2008, unrep., 10 September 2013 §342):

“ … When a settlor creates a settlement he purports to divest himself of assets in favour of the trustee, and the trustee accepts them on the basis of the trusts of the settlement. The settlor may have an unspoken intention that the assets are in fact to be treated as his own and that the trustee will accede to his every request on demand. But unless that intention is from the outset shared by the trustee (or later becomes so shared), I fail to see how the settlement can be regarded as a sham. Once the assets are vested in the trustee, they will be held on the declared trusts, and he is entitled to regard them as so held and to ignore any demands from the settlor as to how to deal with them. I cannot understand on what basis a third party could claim, merely by reference to the unilateral intentions of the settlor, that the settlement was a sham and that the assets in fact remained the settlor's property. One might as well say that an apparently outright gift made by a donor can subsequently be held to be a sham on the basis of some unspoken intention by the donor not to part with the property in it. But if the donee accepted the gift on the footing that it was a genuine gift, the donor's undeclared intentions cannot turn an ostensibly valid disposition of his property into no disposition at all. To set that sort of case up the donee must also be shown to be a party to the alleged sham. In my judgment, in the case of a settlement executed by a settlor and a trustee, it is insufficient in considering whether or not it is a sham to look merely at the intentions of the settlor. It is essential also to look at those of the trustee.”

36.  Another important principle is that the court does not lightly find a transaction to be a sham. In A v A [2007] 2 FLR 467, Munby J at para 53-54 observed:

“ 53. An allegation of sham is a serious matter. As Neuberger J said in National Westminster Bank plc v Jones [2000] BPIR 1092 at para [59]:

‘ there is a very strong presumption indeed that parties intend to be bound by the provisions of agreements into which they enter, and, even more, intend the agreements they enter into to take effect.’

Moreover, and because as Neuberger J pointed out (see paras [40], [46] and [59]) ‘a degree of dishonesty is involved in a sham’, it follows (see para [59]) that:

‘ there is a strong and natural presumption against holding a provision or a document a sham.’

54. Moreover, it has to be borne in mind that a finding of sham may have serious implication …”.

37.  I turn next to examine the factual basis deposed by Wong in alleging that the Loan and the Loan Agreement were sham and therefore not intended to create binding legal obligations on the Company.

38.  In Wong’s affirmation (§§10-28), he deposed:

(a)  The Loan “was contemplated” by one Mr Chiu Ngai Hung (“Chiu”), whom Wong did not know and have never met, but was introduced to him by his brother Wong Wai Sing Nelson (“Nelson”).

(b)  Wong understood from Nelson that Chiu was a successful businessman and was the majority shareholder of Aurum Pacific (China) Group Limited (now known as Wuxi Life International Holdings Group Limited) listed in the HKEX with Stock Code 8148.

(c)  Wong understood from Nelson that Chiu called Nelson in or around March 2019 and told Nelson that (§13)

(i)  Chiu wanted to obtain some loan(s) from companies / money lenders controlled by Chiu;

(ii)  Such loan(s) were to be made by independent and credit-worthy third party as purported borrowers on behalf of Chiu to avoid potentially complicated approval and regulatory process;

(iii)  The purported borrowers would not be required to make repayments and Chiu would be responsible for paying the principal(s) and interests of these loans; and

(iv)  The money lender providing the loan will not institute recovery action against the purported borrowers.

(d)  In view of Chiu’s standing and as a favour to him and based on promises Chiu made to Nelson, Wong agreed to assist Chiu.

(e)  Wong did not give much thought to the matter as he trusted Nelson who told him that Chiu was a trustworthy person.

(f)  Wong then attended offices of 2 money lenders, bringing along company chops. One of the offices was P’s.

(g)  Neither Chiu, Nelson or any one from P informed Wong of any particulars in relation to “the purported loan” before he attended P’s office.

(h)  At P’s office, no one explained to Wong the contents of the documents but simply pointed to the location Wong should sign. Wong did not pay any attention to the documents he was signing. The entire visit to P’s office lasted no more than 10 minutes.

(i)  “Based on the behaviour of the Loans Officer, [Wong] verily believe that at the material time, the Plaintiff was fully aware that (a) I was signing the purported loan document on behalf of Mr Chiu and Mr Chiu will receive the money and (b) the purported loan document was a sham and does not intend to create any legally enforceable relationship” (§22).

(j)  Wong only brought along the chop of the Company and nothing else. He remembered that he did not bring anything else when he left P’s office, and therefore P could not have had provided to him a set of the loan documents for record.

(k)  Wong in his affirmation said nothing about receiving a cheque from P or going to the bank to deposit the cheque and then made the transfer.

(l)  Wong only said that based on bank records, he now understood that HK$5,000,000 was transferred to his account with Bank of China on 21 March 2029 and which sum was immediately transferred to Yield Point Trading Limited’s account with DBS Bank, such that the same could be transferred to Chiu.

(m)  Days later on 25 March 2019, Wong was again asked by Chiu to obtain another loan of HK$5,000,000 from Success Fortune Planning Limited, which Wong duly did in the same manner as that when he attended P’s office. The loan amount under this loan was also paid by Wong to Yield Point Trading Limited by a cheque issued by Wong dated 27 March 2019.

39.  From Wong’s own affirmation evidence (particularly §13 of his affirmation), he deposed that the transaction the Company intended to enter into was a loan, and not any other transaction of any different nature. Therefore, there is no difference in the nature of the legal rights and obligations as appeared to have been created by the Loan and the Loan Agreement from the actual legal rights and obligations intended to be thereby created.

40.  Moreover, there is no dispute that Wong actually executed and signed the Loan Agreement and other related documents on behalf of the Company and that the Company did receive the Loan amount (which was purportedly transferred to Chiu by the Company after the Company has received it).

41.  Wong’s case was only that he relied on various promises and representations made by Chiu and decided to help Chiu by obtaining the Loan from P on Chiu’s behalf, and that in such circumstance allegedly the person borrowing and using the Loan was Chiu and not the Company.

42.  So properly understood, the case alleged by Wong is far from a case of “sham”, but is an allegation that he has decided to use the Company to stand in as the borrower to borrow money on Chiu’s behalf, as Wong said in §8 of his affirmation, that the Company and him executed the Loan Agreement as agent on behalf of Chiu.

43.  However, it is trite and well-established law that an agent is personally liable in contract where the existence of the principal is undisclosed at the time the contract is made by the agent in the agent's own name but in fact on the principal's behalf. Thus, the Company so acting for an undisclosed principal (ie. Chiu) has made itself liable to P when it entered into the Loan Agreement in its own name as the borrower (though purportedly on behalf of Chiu).

44.  Wong alleged that P was fully aware of the “sham”, as I mentioned in paragraph 38(i) above. However, the only factual allegation deposed by Wong that P knew about the “sham” was that “Based on the behaviour of the Loans Officer, I verily believe that at the material time, the Plaintiff was fully aware …” (§22 of his affirmation). It was therefore just Wong’s own subjective and bare allegation and conclusion. The so-called “behaviour of the Loans Officer” based on which Wong came to that conclusion and the identity of “the Loans Officer” were not even identified. According to Wong, he barely talked to or interacted with any one while in P’s office, the person in question only gave him documents to sign and pointed at the locations he should sign, and he remained in P’s office for a duration of less than 10 minutes.

45.  I thus find Wong’s allegation that P was fully aware of the “sham” a mere and completely unsubstantiated assertion. I find it not capable of belief.

46.  Another very important aspect, as I emphasized above, is that the Company must show that it and P have a common intention that the Loan and the Loan Agreement were not to create the legal rights and obligations which they give the appearance of creating. In this appeal, the Company at least has to proffer believable evidence that such a common intention is a triable issue. However, there is simply no such believable evidence proffered by the Company to raise it as a triable issue.

47.  Furthermore, it is Wong’s case that all the promises or representations were made by Chiu, and not P, to him. Evidently, what Chiu promised and represented to Wong are matters between Chiu and Wong, and there is no cause shown by Wong or the Company as to why P would be liable for Chiu’s promises or representations made to Wong.

48.  Mr Ko also highlighted the fact that P was very and unusually laxed in enforcing the Loan as against the Company and especially as against Wong, in that P allowed the Company to fall into arrears in its payments without chasing it closely and P did not apply for summary judgment against Wong.

49.  Mr Ko also pointed out that there are apparently alterations on the dates of the 3 repayment confirmations in that they were all originally dated 21 March 2019, which dates were crossed and then dated respectively 14 February 2020, 27 October 2020 and 29 January 2021. He submitted that such alterations were suspicious and tend to corroborate with Wong’s version.

50.  In light of my analysis and views above, the matters mentioned in the 2 preceding paragraphs are of little relevance and consequence and are clearly insufficient to elevate the “sham” defence to an arguable defence or raise any triable issue.

No other triable issues or reasons for trial

51.  As have mentioned respectively in paragraphs 43 and 47 above, the so-called agency defence must fail and there is no cause shown to make P liable for the alleged promises and representations made by Chiu to Wong.

52.  Mr Ko emphasized that the Chuas were victims in the whole matter, that there was much suspicion on the matters as mentioned in paragraphs 48 and 49 above, and he submitted that P’s claim should go to trial such that these matters could be investigated.

53.  I am not at all persuaded that there are other reasons for P’s claim to go to trial. Rather, on the factual case put forth by Wong and the Chuas, the Chuas should obtain redress from Wong (which they did) and Wong, if he desires, should seek redress from Chiu and there is no reason or evidence before me that implicate or should drag P into the disputes between Wong and the Chuas and between Wong and Chiu. In my judgment, it is unjust and not right to insist P to expend further costs and time to litigate a claim which is clearly established against the Company, just so that Wong, the Chuas and the Company could so-called “investigate”.

54.  In my view, this is a clear case for summary judgment to be granted to P, and there is no other reason to refuse summary judgment and to send P’s claim to trial.

No extension of time

55.  The Company did not proffer any good explanation for the delay. The Company merely said that it need time to consider the Master’s order. Moreover and pivotally, having reached the conclusion that summary judgment ought to be granted and therefore the appeal would have to be dismissed on merits, it would be futile to grant any extension of time to appeal.

Disposal

56.  I thus refuse the Company’s application to extend time to appeal against the Master’s order for summary judgment, which appeal as I indicated above, I would have dismissed in any case.

57.  The Company’s Notice of Appeal and summons to extend time are thus dismissed, and, on a nisi basis, with costs to be taxed if not agreed; and the nisi order will become absolute in 14 days unless any party applies to vary within that time.

58.  Lastly, I thank counsel for their assistance.