XCHRX MACVIN INTERNATIONAL LTD. v. CHAN NAI KANG, NATHANAEL AND ANOTHER

HCA 7393/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. A7393 OF 1999

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REASONS FOR DECISION

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1. In this summons, the Plaintiff sought an order for summary judgment against the 1st Defendant its former director, and further or alternatively, for an account and inquiry as to the sum of US$16,575,000 paid by China National Light Industries Import and Export Company to Beijing Jing Tai Building Company Limited which was deposited with the Plaintiff and subsequently transferred by the 1st Defendant to a company called Harbour Finance Company Limited.

2. At the conclusion of the hearing of the summons, I dismissed the Summons with costs to the 1st Defendant in any event and said I would provide written reasons for my decision. I do so now.

3. Before I set out the reasons for my decision, it may be helpful to briefly summarise the relevant facts as they appeared on the papers before me.

The Plaintiff

4. The Plaintiff is a private company incorporated in Hong Kong. Before 14 October 1994, it was controlled by the 1st Defendant through his group of companies called the Vincor group. Pursuant to a transfer of shares, as from that date, control of the Plaintiff was transferred from the Vincor group to the Sunchase group of companies.

Jing Tai

5. Since 1992, the Plaintiff had been a shareholder in a joint venture PRC company called the Beijing Jing Tai Building Company Limited (`Jing Tai'). Jing Tai was the developer of a site in Beijing, on which a building to be called the Jing Tai Building was to be constructed.

Original arrangement for financing of development

6. At a directors' meeting of Jing Tai on 20 April 1992, it was resolved that funds required for the development would be borrowed from Swiss Bank Corporation (`SBC'), using advance rents and `the Jing Tai building' as security. It is not clear what this meant (unless it meant the building site) because the building itself had not yet been constructed.

Advance rents

7. By a Lease Agreement on 23 April 1992, Jing Tai agreed with China National Light Industries Import and Export Company (`the Tenant') to grant a long lease to the Tenant of certain parts of the building upon completion.

8. By a Payment Agreement in May 1992, the Tenant agreed with Jing Tai to remit advance rents to the Plaintiff's account in Hong Kong with SBC expressly "as a security and used for financing of the Jingtai Building Project in Beijing only".

9. Pursuant to this Payment Agreement, the Tenant began to remit funds to the Plaintiff's account with SBC.

Change of original financing arrangement

10. However, contrary to the original financing arrangement referred to in the minutes of Jing Tai's board meeting, no loans were made to Jing Tai either by SBC directly or by the Plaintiff. This is common ground.

11. It appears that the reason why the original financing arrangement was not implemented was firstly, because the land was not chargeable as it was owned by the PRC Government, and secondly because it was considered `inappropriate' for the Plaintiff, as a shareholder of Jing Tai, to lend funds to it.

12. These reasons were minuted in Jing Tai's directors' meeting on 25 November 1994. It was also minuted that as it was inappropriate for the Plaintiff as a shareholder of Jing Tai to lend money directly to it, the financing was done via Harbour Finance Company Limited (`Harbour').

Financing by Harbour

13. Consistently with the minuted matters, on 13 January 1993, a Loan Agreement in Chinese had been entered into between Harbour and Jing Tai (and its shareholders including the Plaintiff), whereby Harbour agreed to lend an aggregate amount of US$22.5m to Jing Tai for the development of the property. The term of loan was 2 1/2 years.

Harbour Loan Agreement

14. Under clause 4 of the Loan Agreement, it was agreed that all property rights of the building would be transferred to Harbour as security.

15. Clause 5 of the Loan Agreement read as follows:-

「五. 貸款利息計算

双方同意貸款利息，按香港銀行對房地產抵押貸款的利率按期計算，最後結算在中國輕工總公司收樓以後，其預付租金作為乙方收入清還貸款，甲方同意將輕工所預付房租（預付金存入銀行，作為貸款的保証，在輕工總公司收樓前任何一方不得動用），其存款的利息可作為乙方的收益，從支付貸款利息中予以扣除。」

("5. Calculation of Loan Interest

Both parties agree that the loan interest shall be calculated on each instalment in accordance with Hong Kong bank(s)' interest rates for loans secured by real property, final settlement shall be made after [the Tenant] has taken possession of the premises, its advance rents shall be treated as put in by [Jing Tai] for repayment of the loan, [Harbour] agrees to [put] the advance rents paid by [the Tenant] (advance rents deposited with the bank, to act as guarantee for the loan, either party shall not move/use prior to [the Tenant] taking possession of the premises), the deposit interest may be taken as Jing Tai's profit, deducted from interest payable on the loan".)

Mortgage Document

16. Further, on 25 March 1993, another document in Chinese (which has been referred to as "the Mortgage Document") was made by Jing Tai (and its shareholders including the Plaintiff) in favour of Harbour, providing that all property rights in the Jing Tai Building were security for the loan of US$22.5m.

Transfer of funds into Harbour's account

17. Shortly thereafter, in April 1993, funds from the Plaintiff's account (into which the advance rents were remitted) were transferred to Harbour's account.

18. It is these transfers which form the subject matter of the Plaintiff's claim against the 1st Defendant in the present action.

19. On the Plaintiff's case, by March 1994, a total of US$16.575m had been remitted by the Tenant as advance rents. By July 1994, US$11.685m of that had been transferred to Harbour's account. By October 1994, Harbour had lent a total of US$14.28m to Jing Tai to finance its development.

Sale of Plaintiff from Vincor to Sunchase

20. In the autumn of 1994, the Vincor group agreed to sell the Plaintiff to the Sunchase group. It would appear that completion on 14 October 1994 was effected by the execution of a number of deeds, including a Deed of Assignment whereby Harbour assigned to a Sunchase company called Hopetown all its (Harbour's) rights in the debt from Jing Tai and under the Loan Agreement with Jing Tai, and another Deed of Assignment whereby Harbour assigned to Hopetown all its benefits under the Mortgage Document.

1995 action

21. In 1995, an action was commenced by Sunchase, the Plaintiff and Hopetown against Vincor, the 1st Defendant in the present action and Harbour. No reference has been made by the Plaintiff to this action.

22. The defendants filed a counterclaim against Sunchase, Hopetown and another company called Longville. It would appear from the Defence and Counterclaim that this action involved the same transactions as those recounted above. I was informed that this action is still pending.

1999 action

23. It was against the background of the matters set out above that the present action was instituted by the Plaintiff against the 1st Defendant as its former director.

24. The Plaintiff's allegation, briefly, is that it was holding the advance rents as trustee for Jing Tai, and that the 1st Defendant had caused the Plaintiff to be in breach of that trust by transferring the funds from the Plaintiff's account to Harbour's account.

25. Briefly, the 1st Defendant's defence was that as a result of Harbour being substituted for the Plaintiff as the financier pursuant to the Loan Agreement, the advance rents were deposited with Harbour in the way that they would be deposited with the Plaintiff as security under the original financing arrangement, and the new owners of the Plaintiff were well aware of the transfer of the funds as the Plaintiff's bank statements and balance sheet had been supplied to the new owners prior to completion on 14 October 1994.

26. On 28 June 2000, after the 1st Defendant had filed his Defence and Further and Better Particulars thereof, the present summons was issued for summary judgment and for an account. The summons was transferred by a master for hearing by a judge.

Dismissal of summons

27. In the light of the background facts recounted above, it is clear that the matter is completely unsuitable for summary judgment or an order for an account, and that the summons should be dismissed.

Other proceedings

28. First of all, it would appear from the Defence and Counterclaim filed in the 1995 action and exhibited in these proceedings that the parties to this summons were already engaged in litigation over similar matters in the 1995 action. No explanation was proffered by the Plaintiff as to why it started this new action instead of including it in the 1995 action which is still extant.

29. The principle enunciated in Yat Tung Investments Ltd v Dao Heng Bank [1975] AC 581 does not permit parties to raise in subsequent proceedings issues which could and should have been raised in earlier proceedings.

Summons should not have been issued

30. Further, given the contents of the 1st Defendant's Defence (and Further and Better Particulars of it), the Plaintiff was aware of the 1st Defendant's defence and should have been aware that it would have entitled him to unconditional leave to defend.

31. It is common ground that under the original arrangement, the advance rents were to be remitted to the Plaintiff's account for the sole reason that the Plaintiff was intended to finance Jing Tai's development. No other reason was suggested by the Plaintiff as to why else it would receive the advance rents.

32. It is also common ground that this original arrangement was changed, and that Jing Tai then entered into a Loan Agreement with Harbour in place of the Plaintiff. It is also common ground that pursuant to that Loan Agreement, money had in fact been advanced by Harbour to Jing Tai.

33. In those circumstances, it is at least arguable that it follows that the advance rents should be put into Harbour's account in place of the Plaintiff's, as the latter had no further reason to hold those funds, having dropped out of the financing arrangement.

34. Indeed, it might even be said that it would be wrong for the Plaintiff (having dropped out of the financing arrangement) to hold the funds, because Jing Tai had agreed with the Tenant that the funds were to be used only for financing of the development.

35. The Plaintiff sought to argue that it would not have been illegal for the Plaintiff to have made the loan to Jing Tai, even though the Plaintiff was a shareholder. However, it matters not, for present purposes, whether it would have been illegal or merely inappropriate for the Plaintiff to have made the loan to Jing Tai. The fact remained that Jing Tai was prepared to, and did, obtain finance from Harbour under the Loan Agreement, instead of obtaining finance from the Plaintiff. This was referred to in Jing Tai's own minutes.

36. The Plaintiff also sought to argue that the only security that was granted to Harbour was the building itself pursuant to the Mortgage Document. This is however contrary to the Plaintiff's own evidence that the land itself was not available for charging as it was owned by the PRC Government. Therefore, it is at least arguable by the 1st Defendant that what was charged were property rights, and that advance rents were property rights.

37. Further, the Plaintiff sought to argue that the Loan Agreement did not provide that the advance rents should be paid into Harbour's account. However, Clause 5 of the Loan Agreement is by no means clear that that should not be so either.

38. Clause 5 provided that the advance rents were to be treated as Jing Tai's repayment of the loan from Harbour, and that the deposit interest would be deducted from the loan interest payable to Harbour. It is at least arguable that that presupposes that the funds were to be held by Harbour as security, as it could not deduct interest if it did not have control of it.

39. As to the agreement in Clause 5 that neither party should use the advance rents, there is no evidence that Harbour had `used' the funds that had been transferred into its account, and in any event, the present action is not between Jing Tai and Harbour, it is between the Plaintiff and its former director, and the cause of action is in breach of trust for only transferring the money to Harbour. What Harbour did with the money after that is not within the scope of this action as presently formulated.

Order

40. Clearly, the circumstances of this case did not permit summary judgment or an order for an account, and the summons was accordingly dismissed with costs to the 1st Defendant in any event.