張月清 v. TSUI YIU HEI

HCMP 40/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 40 OF 2013

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J U D G M E N T
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1. The plaintiff (“Cheung”) commenced these proceedings against the defendant (“Tsui”) in enforcement of a share mortgage in respect of the latter’s shares in Wise Line Limited (“Wise Line”). Cheung applied for and obtained interim injunction restraining Tsui from effectively jeopardising the status quo and assets of Wise Line. Tsui then took out an application for an order in similar terms against Cheung. This is the hearing of the originating summons as well as these summonses.

BACKGROUND

2. By a deed of share mortgage dated 7 December 2012 (“the Share Mortgage”), Tsui mortgaged his shares in his wholly owned Wise Line to secure the loan extended by Cheung to 4 borrowers and contractual interest in the total sum of RMB 61,250,000 in late 2012.

3. The Share Mortgage empowered Cheung to register the shares in Wise Line in his name or that of his nominee at any time for the purpose of perfecting and completing the assignment of rights[1]. Tsui was obliged to execute and sign all the transfers which Cheung might require for vesting the shares in him or his nominee[2].

4. Pursuant to that, Tsui signed the incidental instrument of transfer as well as bought and sold notes in respect of the shares in Wise Line.  He also signed a letter of resignation from the board as well as board resolutions approving the transfer of the shares and the appointment of Cheung’s nominee as director.

5. By the end of 2012, the borrowers defaulted in repaying the loan; and Cheung set out to enforce the Share Mortgage.  Taking the view that Tsui has failed, among others, to cooperate for the purpose, Cheung commenced these proceedings.

6. By his acknowledgement of service, Tsui indicated the intention to contest these proceedings.

7. In the meantime, Cheung sought to secure the value of the security.  The known asset of Wise Line is its wholly owned PRC subsidiary at Qingyuan City in Guangdong, namely, 祥豐（清遠）實業有限公司 (“the PRC Subsidiary”), which in turn owns numerous real estates in the Mainland.  Application was made to the Qingyuan authority to replace the then legal representative of the PRC Subsidiary by Cheung’s nominee.

8. Cheung’s application failed, because apparently Tsui raised objection on the ground that Wise Line, under him, had resolved to appoint himself in place of Cheung’s nominee as the director.  Tsui further appointed himself as the legal representative of the PRC Subsidiary.

9. Tsui had also sought to file returns with the Companies Registry in Hong Kong to increase the share capital of Wise Line together with allotment of the newly issued shares to himself.  That would have resulted in dilution of the value of the existing shares in Wise Line 100 fold to 1%.  Cheung managed to have his objection to that heeded and the move stalled.

10. The concern of Cheung escalated when it was discovered that Tsui had apparently entered into a share transfer agreement for the purpose of disposing of the shares of the PRC Subsidiary.

11. Tsui took the above steps within a fortnight between late May and early June 2013. That drove Cheung to apply for an interim injunction restraining Tsui from effectively acting or purporting to act further in any way purportedly on behalf of Wise Line or the PRC Subsidiary that would jeopardise the status quo and the assets of these companies to the detriment of Cheung as the secured creditor.

12. Cheung’s summons came before me on 7 June 2013, when Tsui put forward his affirmation in these proceedings yet to be filed.  The application was adjourned for argument; and until then, an interim injunction was granted.  At the same time, I also gave leave to Cheung to amend the relief claimed in the originating summons.

13. By the amended originating summons, Cheung seeks relief to the following effect:

(1) Declaration that Cheung is entitled to foreclose and to dispose of the shares[3];

(2) Alternatively, declaration that Cheung is entitled to sell the shares and to apply the proceeds in discharge of the indebtedness; and order that the shares be sold without further reference to the court and such further consequential directions of the court as the court thinks fit[4];

(3) Declaration that Cheung is a member or beneficial owner of the shares entitled to be registered as a member of Wise Line; and pursuant to the documents executed by Tsui together with the Deed as mentioned above, Cheung’s nominee[5] is and continues to be the sole duly appointed director of Wise Line[6];

(4) injunction restraining Tsui from exercising any power as a purported shareholder or director of Wise Line, or managing or participating in any affairs of Wise Line, or dealing with the company’s assets including but not limited to the PRC Subsidiary[7];

(5) order/injunction that Tsui forthwith produces to Cheung the company seals and documents of Wise Line[8];

(6) Costs.

14. As mentioned, Tsui subsequently took out his application before another judge for an injunction in similar terms against Cheung, as a shareholder of Wise Line, and effectively setting aside of the abovementioned interim order.  Not surprisingly, the application was refused.

15. In his submissions, Mr Wong, appearing with Miss Ling, for Cheung summarises the following grounds of defence discerned from Tsui’s affirmations:

(1) The loan is in breach of the Money Lenders’ Ordinance, Cap 163 (“MLO”) and unenforceable.

(2) The loan has been replaced by a 3^rd loan agreement.

(3) Tsui is not bound by the Share Mortgage.

(4) Enforcement of the Share Mortgage would be in breach of the PRC law.

(5) The debt has been satisfied by virtue of the enforcement action in the PRC.

(6) Tsui would suffer hardship.

16. However the position of Tsui has changed when the adjourned hearing resumed.

17. First, Mr Hingorani, appearing with Mr Slutsky, for Tsui abandoned his client’s application for interim injunction.  Accordingly, that application was dismissed with costs.

18. Secondly, he accepted that Cheung’s interim injunction against his client should continue until the determination of the amended originating summons.  Suffice it to say that this would have been the outcome by the hands of this court, in view of the evidence and the balance of convenience.

19. Third, the substantive defence in these proceedings is two-fold: (i) the relevant guarantee signed by Tsui fails for lack of consideration; and (ii) the Share Mortgage is void and unenforceable.  In court, Mr Hingorani confirms that these are now the grounds of defence that, he says, warrant a full hearing.

20. In the circumstances, I could be brief about the grounds of defence summarised by Mr Wong above.  Ground (3) above overlaps with the grounds now argued, which I shall address in detail.  As to the others, suffice it to say for the record that I agree with the analysis of Mr Wong in his written submission in respect of them.

21. In view of what Tsui asserts in connection with the 2 grounds of defence now, it is necessary to understand the events leading to the execution of the Share Mortgage.

WHAT LED TO THE SHARE MORTGAGE

22. It started with a joint venture between Tsui and Chen Jian Quan (“Chen”) for the acquisition of the real estates owned by the PRC Subsidiary, which, as mentioned, is in turn wholly owned by Wise Line.  Tsui had committed to purchase from the previous owners of the shares in Wise Line[9].  Pursuant to the joint venture agreement in June 2012, Chen would fund the purchase; and Tsui would develop on site a LED business and clientele.  Both would become beneficial owners of the venture.

23. On 28 September 2012, Cheung and Chen entered into a Chinese loan agreement (“the 1^st Loan Agreement”), whereby the former agreed to lend and the latter agreed to borrow RMB 28,000,000.  The principal and interest (in the sum of RMB 750,000) were repayable by 3 specified instalments by the end of December 2012.  It was made known that the loan would be utilised to purchase the shares of the PRC Subsidiary being held by Wise Line (clause 2).

24. The 1^st Loan Agreement provided that Chen would provide shares and immovable to secure the debt (clause 9).  That included the shares in his own company (also in Qingyuan); and for such purpose, separate agreement would be entered into (clause 10).  That also included the shares in the PRC Subsidiary of market value not less than RMB 50,000,000; and for such purpose, separate agreement would be entered into (clause 11).  In default of that, Chen should provide other immovable as security by the aforesaid deadline (clause 12).  PRC was the law and jurisdiction chosen to govern the agreement (clause 25).

25. On the same day, Chen transferred RMB 22,000,000 to Tsui for settling part of the purchase price of the shares in Wise Line.

26. On 12 October 2012, Cheung as the lender and Chen, together with his 3 other family members, as the borrowers entered into another Chinese loan agreement (“the 2^nd Loan Agreement”).  The loan amount was RMB 31,000,000. The principal and interest (in the sum of RMB 1,500,000) were repayable by 3 specified instalments by early January 2013.  The terms were basically similar to those of the 1^st Loan Agreement.  Only that this time Chen also agreed to provide a guarantee by Tsui as security for the repayment (clause 9).  Further Chen agreed to provide a list of properties registered in the name of his own company as security (clause 10).  Provisions similar to clauses 11 and 12 of the 1^st Loan Agreement were also repeated in this agreement (also clauses 11 and 12).

27. On the same day, Tsui tendered a Chinese irrevocable guarantee (or “不可撤銷連帶担保書”) to Cheung (“the Guarantee”).  The Guarantee referred to the 2^nd Loan Agreement and the amount of the loan RMB 31,000,000.  Tsui acknowledged the purpose of the loan was to acquire Wise Line and the PRC Subsidiary. Specifically Tsui agreed at the request of Cheung to pledge (or “押給”) the shares in Wise Line to Cheung’s nominee.

28. On the same day, Chen transferred RMB 22,800,000 to Tsui for settling the purchase price of the shares in Wise Line.

29. On 22 October 2012, the shares were transferred by the vendor of Wise Line to Tsui. Tsui became the sole shareholder and director of Wise Line.

30. On 7 December 2012, Tsui, as the mortgager, and Cheung, as the lender, entered into the Share Mortgage and executed the other incidental documents as mentioned above.  The Share Mortgage is governed by Hong Kong law (clause 15).

CONSIDERATION

31. Tsui now argues that Cheung has provided no valuable consideration for the Guarantee.  The Guarantee is thus unenforceable.  Admittedly this argument has never been raised before.

32. Mr Hingorani refers to Halsbury’s Laws of England (Vol.20) at §§101 and 115 essentially for the point that mere existence of a debt (or an antecedent debt) is insufficient to support a person’s promise to assume secondary liability as a guarantor.  On this basis, he points out that the Guarantee referred to the loan under the 2^nd Loan Agreement, but did not on its face disclose fresh consideration provided by Cheung for his promise to act as the guarantor.

33. I do not agree that the argument reflects the reality.  As mentioned above, the 2^nd Loan Agreement specifically provided for the agreement by Chen to provide security, including a guarantee from Tsui, in respect of the loan.  The parties entered into the respective contractual documents, including the Guarantee, all dated the same date; and Cheung accordingly parted with the loan to Chen, enabling Chen’s transfer of the money to Tsui also on the same day for settling part of the purchase price for the Shares.  This was not a case of a guarantee entered into in respect of a truly antecedent debt.

34. Further, Tsui’s argument is premised on the assumption that the enforceability of the Guarantee is governed by Hong Kong law.  Unlike the 2^nd Loan Agreement, the Guarantee does not contain express provision in respect of choice of law or jurisdiction.  They were executed in the Mainland and dated the date as the 2^nd Loan Agreement.  The circumstances were such that the Guarantee is probably governed by the Mainland law as well.

35. This also seems to be stance of Tsui.  At one stage, Tsui through his solicitors actually obtained a legal opinion from the Mainland lawyer on, among other things, the binding effect of the Guarantee.  The opinion so provided in mid-June 2013 considered that the Guarantee is contractually binding according to the Mainland law, and never suggested that it may be invalid on the ground of lack of consideration as now argued.  Of course, the legal opinion, as evidence of foreign law, is a matter of fact.  Nevertheless the evidence was adduced on behalf of Tsui.

36. As far as the Share Mortgage is said to depend on the enforceability of the Guarantee, the contention that the Guarantee fails for past consideration is bad.  As far as the Share Mortgage was nevertheless entered into after the loans had already been extended, there is likewise no issue of consideration according to Hong Kong law, for the Share Mortgage was by way of deed.

VOID AND UNFORCEABLE

37. Mr Hingorani’s other argument focuses on the contents of the Share Mortgage, particularly the recital.  The Share Mortgage recites that it affords security for Cheung’s loans (plus contractual interest) extended pursuant to both the 1^st Loan Agreement and the 2^nd Loan Agreement; and it is a condition precedent to the making of such loans that Tsui entered into the Share Mortgage.

38. Mr Hingorani refers to Tsui’s allegation that he knows no English, and the Share Mortgage was not explained to him before he signed it.  Alternatively, any explanation of the recital would amount to misrepresentation because the 1^st Loan Agreement made no mention of Tsui; and only the 2^nd Loan Agreement provided that Chen should secure a guarantee by Tsui.  The Guarantee only referred to the 2^nd Loan Agreement and the loan extended thereunder.  Neither loan agreement provided that the loan was extended subject to the condition precedent of Tsui’s entering into the Share Mortgage.  As a further alternative, Tsui’s liability should in any event be limited to the indebtedness under the 2^nd Loan Agreement.

39. It is notable that the the above argument advanced during the hearing does not really fall in line with the case of Tsui as presented by his affirmations.

40. By his 1^st affirmation filed in June 2013, some 5 months after his acknowledgement of service, Tsui raised the following allegations in respect of how he came to sign the Share Mortgage:

(1) By the end of 2012, Tsui was aware that Chen had failed to repay the loans under both the 1^st Loan Agreement and the 2^nd Loan Agreement.  At the same time, he allegedly needed cash for the development of the LED factory.

(2) In December 2012, Tsui met with the nominee of Cheung and his alleged business partner[10] for the purpose of negotiating for a new loan of RMB 12,000,000 to Tsui.

(3) In the course of the meeting, it was allegedly agreed or represented to Tsui that Cheung would extend a new loan for RMB 12,000,000 to Tsui, and would release or discharge all the securities provided by Chen for his indebtedness, including the title deeds to the properties of Chen’s company that had been pledged to Cheung.  In return, Tsui would have to sign some documents at the office of Cheung’s solicitors simply as a matter of formality.

(4) On 7 December 2012, Tsui attended the office of Cheung’s solicitors to sign various documents, which turned out to be the Share Mortgage and the incidental share transfer documents.  The solicitor neither explained these English documents to him nor advised him of his right to seek independent legal advice.

(5) It was allegedly misrepresentation in that the new loan was never advanced.  Nor was Chen released from the securities provided under the 2 loan agreements.  The documents signed were not mere formality but his further commitment without his consent.

41. So the assertion is whilst Chen has defaulted repayment of the loans under both loan agreements, it was allegedly agreed or represented on Cheung’s behalf that not only a new loan of RMB 12,000,000 would be extended to him but all the securities previously provided by Chen for his indebtedness to Cheung would also be cancelled.  In return, all Tsui would allegedly be required to do was to sign some documents, which would be nothing but mere formality.  The assertion defies commercial and common sense. That the documents would need to be signed at a solicitors’ office but were at the same time mere formality adds to the nonsense.

42. A month later, Tsui filed his 4^th affirmation whereby the allegations about misrepresentation have undergone the following transformation:

(1) The alleged representation became that Cheung would co-operate with Tsui in investing in Wise Line and the PRC Subsidiary; and Cheung would be responsible for the funding of the investment in a similar manner as Chen did under the joint venture agreement with him.

(2) It was also allegedly represented that the repayment pursuant to the 1^st Loan Agreement and the 2^nd Loan Agreement could be withheld.

(3) In return, Tsui would have to terminate the joint venture agreement with Chen so that Chen would no longer be involved in the investment of Wise Line and the PRC Subsidiary.

(4) Further, Tsui would have to sign some documents at the office of Cheung’s solicitors to put on record the new loan of RMB 12,000,000 and the mutual intent of investment between Cheung and Tsui as alleged above.  The signing of the documents was allegedly represented to be simply a matter of formality.

43. Apart from the transformation of his case, the fact was that there was never any new loan from Cheung to him.  Chen was never released from his liability under the 2 loan agreements.  Nor was any of the securities that he had put up for the loans released.  The joint venture between Chen and Tsui had not been terminated.  There is also no evidence of record of complaint by Tsui, be it about the alleged misrepresentation or breach of agreement, until these versions of events were consecutively put forwards in these proceedings.

44. Tsui complains that the solicitor for Cheung wrote under the attestation clause of the Share Mortgage that he had interpreted the document to the parties, which he says did not happen.  As to that, the solicitor also filed his affidavit in denial of that.  Yet one should not forget that besides the Share Mortgage, Tsui signed at the same time various documents of transfer of his shares in Wise Line.  It was not the first time when he was presented with documents of a kind that he had not come across before.  The documents of transfer were not materially different from those he signed just more than a month ago when he acquired the same shares from his predecessor.  Whether or not Tsui knows English, to say that he had no idea whatsoever that the documents that he signed related to the transfer of his shares in Wise Line is inherently implausible.

45. More importantly, whichever version above is adopted, the premise of Tsui’s case, according to his affirmations, is that he signed the Share Transfer and the incidental documents of transfer of his shares in Wise Line merely as a matter of formality.  That could only be understood to mean that the documents signed were not understood to be legally binding.  This would be so, irrespective of what the documents provided and whether or not they were explained before signing.  This is at variance with his case now presented in court, namely that he did not realise that the Share Mortgage covers the indebtedness under both loan agreements, because it was not explained to him before signing.

46. Mr Hingorani submits that if the Share Mortgage had indeed been explained to his client before signing, such explanation would amount to misrepresentation because the recital so read to his client is untrue as a matter of fact.  In view of his primary case that the documents had not been explained to him before signing, Tsui cannot at the same time run a positive case of misrepresentation. It is simply not open to Tsui to argue that as his purported alternative case.

47. For completeness, I would point out a couple of notable things in respect of the materiality of the recital to the validity of the Share Mortgage.  First, it was contemplated between Cheung and Chen under both loan agreements, as mentioned, that the (immovable) assets of the PRC Subsidiary would be pledged as security for the loans.  However Chen was in no position to do so, as he was the legal owner of neither Wise Line nor the PRC Subsidiary.  Second, pursuant to the 2^nd Loan Agreement, Tsui provided the Guarantee, including his undertaking to pledge the shares of Wise Line as security.  He was in a position to do so, but only after completion of the sale and purchase of the shares, which did not happen until 22 October 2012.  All those had to be within the knowledge and understanding of the parties concerned.

48. In other words, for the security to be provided, the contemplated reality was that that had to happen subsequent to the making of the loans.  The criticism about the reference to conditions precedent in the recital, whether or not they were true, is immaterial to its binding effect, when the parties concerned understood that it was a subsequently executed document for security.  As mentioned, there is no issue of consideration as the Share Mortgage was by way of deed.

49. Whilst the Guarantee provides that Tsui agreed to pledge his shares in Wise Line to Cheung’s nominee, it is eventually the terms of the Share Mortgage that govern what Tsui agreed and what Cheung is entitled to enforce.  Once the assertion that the Share Mortgage was not meant to be legally binding is rejected; and the Share Mortgage and the incidental share transfer documents are not vitiated for the reasons advanced, Tsui is bound by what he entered into.

CONCLUSION

50. Neither the affirmations nor the arguments in the hearing gives rise to a valid defence to the enforcement of the Share Mortgage that would warrant a trial.  I agree with Mr Wong that the originating summons could be disposed of.

ORDER

51. I have summarised above the effect of the terms of the originating summons.  I grant an order in terms of §§(2) of the originating summons with liberty to apply for consequential directions, if necessary, as well as in terms of §§(3), (4) and (5) of the originating summons.

52. Following this event, Cheung should have the costs of this action, including those of and occasioned by his application for interlocutory injunction.  Costs shall be taxed, if not agreed, with certificate for two counsel.  In the absence of application in 14 days for variation, the costs order shall become absolute.

53. I thank counsel for their assistance.