RICH PROFIT CREATION LTD v. KO CHUNG LUN AND OTHERS

HCA1207/2017 and HCA 1865/2017

[2020] HKCFI 1459

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1207 OF 2017 AND 1865 OF 2017

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(Consolidated by the Order of Master Ho dated 1^st March 2019)

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DECISION

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A. INTRODUCTION

1.  This is the plaintiff’s appeal against the Master’s order made on 13 January 2020 whereby he dismissed the plaintiff’s application by summons dated 3 October 2019 for interim payment against the defendants. Although the summons was issued against all defendants, the plaintiff confirmed at the hearing that it is seeking interim payment against the 1^st, 2^nd and 6^th defendants only. It is trite that this appeal is a hearing de novo.

2.  The 1^st defendant is a de facto director of the plaintiff, and the 2^nd and 6^th defendants are his nominees. The 2^nd defendant, representing the 1^st defendant’s interest, is a shareholder of the plaintiff. The plaintiff claims that, in 2011, it had given two sums of money to the 1^st, 2^nd and 6^th defendants, which were intended to be used as loans to be advanced to a joint venture in the Mainland to which the plaintiff was a party. However, it was discovered subsequently that the defendants did not use the money for such purpose; they lent monies to the joint venture in their own names (rather than in the name of the plaintiff) instead. Hence, the defendants are liable to account for the money that they had received. The defendant’s case is that, out of the money received by them, part of it was in fact partial repayment of shareholders’ loan from the plaintiff, and the remaining sum were a personal loan advanced by the plaintiff to the 1^st defendant which he had repaid in 2012. The plaintiff seeks interim payment on the ground that the defendants’ case is wholly unbelievable.

B.  THE PLAINTIFF’S CLAIM

3.  The plaintiff, incorporated in about 2009, was initially used as an investment vehicle by Mr Ng Kwan Wan (“Mr Ng”) and Mr Choi Siu Pang Jusiah (“Mr Choi”) to participate in a Sino-foreign joint venture property development project in Tianjin (“the JV”). It was a 49% shareholder in the joint venture company for such project (“the JV Company”). On or about 6 August 2010, the plaintiff executed a joint venture agreement with the Mainland partner (“the JV Agreement”). Clause 9 of the JV Agreement provided, inter alia, that the plaintiff shall inject RMB¥49million into the JV.

4.  Mr Ng and Mr Choi invited the 1^st defendant to participate in the JV. Hence, on or about 14 January 2011, the 2^nd defendant, being the corporate vehicle of the 1^st defendant, became a shareholder of the plaintiff holding 4,350 shares (43.5%). Target Well Investment Development Ltd (“Target Well”), representing the interest of Mr Ng and Mr Choi, became the other shareholder holding 5,650 shares (56.5%). Although the 1^st defendant was not formally appointed as a director, it is not in dispute that he acted as a de facto director of the plaintiff.

5.  On 17 January 2011, Target Well and the 2^nd defendant signed a shareholders’ agreement (“the Shareholders’ Agreement”). Under clause 5 of the Shareholders’ Agreement, each shareholder agreed to advance a sum of HK$ equivalent to RMB¥15million by way of interest free loans to the plaintiff; and the 2^nd defendant further agreed to procure an external borrowing of a sum of HK$ equivalent to RMB¥19 million to be advanced to the plaintiff. The total sum would be RMB¥49million, which was indeed the sum that the plaintiff was obliged to inject into the JV Company under the JV Agreement.

6.  In addition to the RMB¥49 million just mentioned, the plaintiff was required to advance further loans to the JV Company from time to time.

7.  The present claim concerns two sums of the money. The first sum involves HK$3,580,380.00 (“the First Sum”):

(a)  By an email dated 16 May 2011, Mr Ng on behalf of the plaintiff instructed the 1^st defendant to remit RMB¥3million to the JV Company’s bank account in Tianjin, and stated that he would arrange the plaintiff to transfer an equivalent amount in HK$ to an account designated by the 1^st defendant.

(b)  On 23 May 2011, the plaintiff transferred a sum of HK$3,580,380.00 (equivalent to RMB¥3million) to an account of the 6^th defendant, which was another corporate vehicle used by the 1^st defendant.

8.  The second sum involves US$4,728,132.00 (“the Second Sum”):

(a)  By an email dated 9 September 2011, Mr Ng instructed the 1^st defendant to transfer RMB¥30million to the JV Company’s same bank account in Tianjin, and stated that the plaintiff would transfer the same amount in HK$ to the 1^st defendant’s designated account.

(b)  On 14 September 2011, the plaintiff transferred a sum of US$4,728,132.00 (equivalent to RMB¥30million) to a joint account held by the 1^st defendant and his wife, the 4^th defendant.

9.  The plaintiff discovered subsequently that, in fact, the 1^st defendant purported to lend a total sum of RMB¥33million to the JV Company through himself and his associates. By a board resolution of the JV Company passed on 21 May 2015, it was resolved that the JV Company shall repay the loan of RMB¥33million with interest at 10% per annum lent by the 1^st defendant and his associated companies. The 1^st defendant admitted that the JV Company had in fact repaid the said sum to him.

10.  The plaintiff’s case is that the 1^st, 2^nd and 6^th defendants are liable to account for the First and Second Sums because they had not been used for their intended purpose.

C.  THE DEFENDANTS’ DEFENCE

11.  The defendants allege that, as of May 2011, the JV had no progress. Hence, Mr Ng and Mr Choi suggested, and he agreed, to reduce the shareholders’ loan by RMB¥1.5million for each shareholder respectively ie a total sum of RMB¥3million (“the 1^st Loan Retrieval Agreement”). Hence, the 1^st Sum was paid on 18 May 2011 to the 6^th defendant for distributing the money to the parties. The 1^st defendant then distributed half of the sum to Mr Ng’s camp.

12.  The 1^st defendant further alleges that, about 4 months later in September 2011, they again agreed to reduce the shareholders’ loan by RMB¥5milliion to each shareholder respectively i.e. a total sum of RMB¥10million (“the 2^nd Loan Retrieval Agreement”). At the same time, it was agreed that 1^st defendant would borrow personally RMB¥20million from the plaintiff (“the 1^st Defendant’s Loan Arrangement”). Hence, on 14 September 2011, pursuant to these two agreements, the plaintiff paid the Second Sum. The 1^st defendant said he had dispatched RMB¥1million and RMB¥1.45million to Mr Ng’s bank account and Mr Choi’s bank account respectively on 11 May 2011 and 19 September 2011. The 1^st defendant also claims that he repaid the personal loan of RMB¥20million to the plaintiff in May 2012.

D.  THE PRINCIPLES FOR INTERIM PAYMENT APPLICATION

13.  Order 29, rule 11(1)(c) of the Rules of the High Court (Cap. 4) (“RHC”) provides that:

“If, on the hearing of an application under rule 10 in an action for damages, the Court is satisfied…that, if the action proceeded to trial, the plaintiff would obtain judgment for substantial damages against the respondent or, where there are two or more defendants, against any of them, the Court may, if it thinks fit and subject to paragraph (2), order the respondent to make an interim payment of such amount as it thinks just, not exceeding a reasonable proportion of the damages which in the opinion of the Court are likely to be recovered by the plaintiff after taking into account any relevant contributory negligence and any set-off, cross claim or counterclaim on which the respondent may be entitled to rely.”

14.  Order 12, rule 12(c), RHC, provides further that:

“If, on the hearing of an application under rule 10, the Court is satisfied that, if the action proceeded to trial, the plaintiff would obtain judgment against the defendant for a substantial sum of money apart from any damages or costs, the Court may, if it thinks fit, and without prejudice to any contentions of the parties as to the nature or character of the sum to be paid by the defendant, order the defendant to make an interim payment of such amount as it thinks just, after taking into account any set-off, cross-claim or counterclaim on which the defendant may be entitled to rely.”

15.  It is trite that the Court must be satisfied that if the claim were to go to trial, then, on the material before the judge at the time of the application for interim payment, the plaintiff would succeed in his claim, and would obtain a substantial amount of damages; the court must be satisfied on the balance of probabilities, and need not be satisfied beyond reasonable doubt. However, it is insufficient that the plaintiff is likely to succeed. The court must be satisfied that the defendant has no arguable defence or that there are sufficient doubts regarding the genuineness of the defence, so that the court would not grant the defendant unconditional leave to defend in a summary judgment application. The test is essentially the same as that for granting conditional leave to defend, namely, whether the defence can be said to be shadowy. See Hong Kong Civil Procedure 2020, vol. 1, §29/11/1 at p. 795; Hollywood Palace Co Ltd v Trans-Global Hong Kong Investment Ltd [2011] 1 HKLRD 833 at 838-839, §§16-18.

16.  In addition, the Court should read Order 29, rules 11 and 12 together and ask the single question whether the application fulfils the requirements of those rules as a whole rather than considering separately and exclusively the applicant’s entitlement under each rule (Ho Kuen Fai v Chun Wo Construction & Engineering co Ltd, HCA1790/2007 (7 August 2008, unreported), §§29-31).

E.  ANALYSIS

17.  What is in issue is the purpose of the First and Second Sums. The plaintiff’s case is simple and straightforward, and is supported by the contemporaneous emails and bank records. In contrast, for the following reasons, I take the view that the defendants’ defence is, to say the least, shadowy.

18.  First, there is no document whatsoever supporting the existence of the alleged 1^st or 2^nd Loan Retrieval Agreements, or the 1^st Defendant Loan Arrangement.

19.  Second, the defendants’ alleged agreements are contradicted by the contemporaneous emails produced by the plaintiff, which stated clearly the purpose of the 1^st and 2^nd Sums.

20.  Third, the defendants’ alleged agreements are lacking in particulars. They have not stated precisely when, where and how they were made.

21.  Fourth, the defendants’ alleged agreements were inherently improbable. It is clear that in May 2011, the JV was ongoing and in need of funds from time to time. It is inconceivable why Target Well and the 2^nd defendant would have seen fit to agree on the return of a substantial part of the shareholders’ loans at that point of time.

22.  Fifth, if it was intended that the same amount should be returned to the two shareholders respectively, the most natural and convenient way should be for the plaintiff to return two separate sums to them separately. It is difficult to understand why the plaintiff would have to pay the whole sum to the 1^st defendant first, and then for the 1^st defendant to return half of that sum to Target Well (or Mr Ng and Mr Choi).

23.  Sixth, there is no evidence that the 1^st defendant had in fact paid over half of the sums returned from the plaintiff to Target Well (or Mr Ng and Mr Choi).

24.  Seventh, the 1^st defendant’s claim that he had repaid RMB¥20million to the plaintiff is contradicted by the contemporaneous emails and bank records. In an email dated 4 March 2012, the 1^st defendant was requested to inject a sum of HK$ equivalent to RMB¥20 million as contribution to the issued capital of the JV Company. There was another email dated 16 May 2012 in which Mr Ng asked the 1^st defendant to make payment by 23 May 2012 due to the urgency of the matter. According to a transfer advice issued by Bank SinoPac on 21 May 2012, the 2^nd defendant transferred HK$11,850,015.00 to the plaintiff “for investment”. In an email dated 23 May 2012, the 1^st defendant’s assistant, Ida, informed the parties that the sum of HK$11,850,000, described as an investment (投資款項), had been transferred into the said bank account on 21 May 2012. According to another transfer advice issued by Bank SinoPac on 7 June 2012, the 2^nd defendant transferred another sum of HK$12,000,015.00 to the plaintiff “for investment”. In an email dated 7 June 2012, Ida informed the parties that the sum of HK$12,000,000.00, described as the second instalment of the investment (第二筆投資款項), had been transferred into the bank account on that day. These two sums added up to HK$23.85 million, which was equivalent to RMB¥20 million. The said documents show clearly that they were not repayment of any loan at all.

25.  The 1^st defendant also contends that it would be unlawful under the Mainland law for him to transfer monies from Hong Kong (as requested by the plaintiff) to the Mainland without the approval of the State Administration of Foreign Exchange. First, no such defence has been pleaded in the Defence. Second, there is no evidence that any unlawful act under the Mainland law has in fact been committed by anybody. Apparently, the 1^st defendant is trying to say that it was unlikely that the parties would agree to do something which would be unlawful. However, on the 1^st defendant’s own case, he and his associates managed to lend RMB¥33 million in their own names to the JV Company without any apparent difficulty. If there was any genuine difficulty, one would have thought that the 1^st defendant would raise such concern there and then. There is no evidence that he had done so.

26.  The next question concerns the legal consequences in case the plaintiff’ case would succeed at trial. In the instructions given to his Mainland lawyer as stated on p. 2 of the legal opinion of S & D Partners dated 15 November 2019, the 1^st defendant admitted that he and his associates paid RMB¥3million on 18 May 2011 and RMB¥30million on 14 September 2011 to the JV Company.  The 1^st and 2^nd Sums were paid to the defendants on 23 May 2011 and 14 September 2011 respectively.  In my view, the 1^st and 2^nd Sums were intended to reimburse the 1^st defendant in HK$ equivalent in return for the 1^st defendant’s arranging the transfer of RMB¥33million on behalf of the plaintiff to the JV Company. When, on the 1^st defendant’s own case, he had not in fact advanced RMB¥33million to the JV Company on behalf of the plaintiff, there is no conceivable reason for the defendants to keep the 1^st and 2^nd Sums. The plaintiff has a clear case to claim for the return of the 1^st and 2^nd Sums in restitution on the ground of unjust enrichment. In Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at §67, Ribeiro PJ held that a useful framework for approaching such claims involves asking four questions: (a) was the defendant enriched? (b) was the enrichment at the plaintiff’s expense? (c) was the enrichment unjust? (d) are any of the defences applicable?. The defendants have been enriched at the plaintiff’s expense by receiving the 1^st and 2^nd Sums. The enrichment was unjust as the Sums had not been used for the intended purpose; and there was no other reason justifying the defendants’ receipt and retention of those sums. This was a case of total failure of consideration; “consideration” in the context of a restitutionary claim is the “basis or purpose” of the payment (Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at §79). The defendants have not advanced any arguable applicable defence to such claim. It follows that the plaintiff should, at least, be entitled to the return of the 1^st and 2^nd Sums, leaving aside interests on those sums and other remedies that it may have in equity. It is unnecessary for me to consider whether the plaintiff’s claim may succeed on any other legal basis.

27.  For these reasons, I am satisfied that if the action proceeded to trial, the plaintiff would obtain judgment against the 1^st, 2^nd and 6^th defendants for a substantial sum of money i.e. an amount equivalent to the 1^st and 2^nd Sums. I am also satisfied that this would be an appropriate case to exercise the Court’s discretion to order interim payment. As the defence is, to say the least, shadowy; and the defendants have not pleaded any set-off, cross-claim or counterclaim, I take the view that it is fair to require the defendants to make interim payment representing the whole of the 1^st and 2^nd Sums.

F.  CONCLUSION AND ORDER

28.  For the above reasons, I shall allow the plaintiff’s appeal and set aside the Master’s order. An order for interim payment should specify to whom the payment is to be made and fix a time for payment; normally payment is to the plaintiff (Order 29, rule 13(1), RHC; Hong Kong Civil Procedure 2020, vol. 1, §29/11/8 at p. 797). I cannot see, and the defendants have not suggested, any reason why the Court should depart from the normal rule that the interim payment should be paid to the plaintiff. In the plaintiff’s summons, the plaintiff asks for the interim payment to be paid within 21 days. Having regard to the size of the interim payment, I shall give 90 days (around 3 months) to the defendants to make the payment.

29.  Accordingly, I order that:

(a)  The 1^st, 2^nd and 6^th defendants shall make interim payment in the sum of HK$3,580,380.00 to the plaintiff within 90 days; and

(b) The 1^st and 2^nd defendants shall make interim payment in the sum of US$4,728,132.00 to the plaintiff within 90 days.

30.  I also make a costs order nisi that the costs of and incidental to the plaintiff’s summons including the costs of the hearing before the Master and this hearing shall be paid by the 1^st, 2^nd and 6^th defendants to the plaintiff in any event to be taxed if not agreed.