NEW HORIZON FINANCE (HK) LTD v. EASY LUCK (HK) LTD AND OTHERS

HCA 3343/2016

[2018] HKCFI 1283

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3343 OF 2016

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D E C I S I O N

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1.  This is an appeal from an order of Master Elaine Liu dated 29 November 2017 granting summary judgment to New Horizon Finance (HK) Ltd (“the plaintiff”) against Easy-Luck (HK) Ltd (“D1”) as principal debtor and Chan Wai Sun (“D2”), Chan Cheung Ngan Ping (“D3”) and Dynasty Management Limited (“D4”) (D2 – D4 as guarantors) (collectively “the defendants”) in the sum of $13,290,333 together with interest with costs on an indemnity basis. At the conclusion of the hearing judgment was reserved which I now give.

Background facts

2.  D2 and D3 are the only directors and shareholders of D1 and D4.  D2 and D3 are also the controlling minds of both D1 and D4.

3.  D1 obtained 2 loans each of HK $4 million from the plaintiff on 26 August 2015 (“the 1^st loan”) and 13 October 2015 (“the 2^nd loan”) respectively (collectively “the loans”).

4.  D2 and D3 are guarantors of the loans under guarantees executed on 26 August 2015 (“the 1^st guarantee”) and on 13 October 2015 (“the 2^nd guarantee”) respectively (collectively “the guarantees”).  D4 is guarantor under two guarantees both dated 18 March 2016 in respect of the 1^st loan (“the 1^st corporate guarantee”) and the 2^nd loan (“the 2^nd corporate guarantee”) (collectively “the corporate guarantees”).

5.  The plaintiff issued proceedings on 19 December 2016 against D1 to recover the principal amounts of the loans and interest, as against D2 – D3 under the guarantees and as against D4 under the corporate guarantees.  On 25 April 2017 the plaintiff took out a summons for summary judgment which it obtained on 29 November 2017.  

6.  The plaintiff’s pleaded case is that the plaintiff agreed to extend the final repayment dates of the 1^st and 2^nd loans on two occasions, namely:

(1)  from 25 February to 25 July 2016 (“the 1^st extended due date”) conditional upon D4 providing corporate guarantees; and

(2)  from 25 July to 25 October 2016 (“the 2^nd extended due date”) upon execution of the pledge agreements. 

7.  D1 defaulted and has not repaid the outstanding amounts owing notwithstanding demands made after 25 October 2016, the 2^nd extended due date.  The plaintiff seeks summary judgment on that basis.

8.  The defendants have brought this appeal on the basis that they have raised a credible defence and the matter should proceed to trial.  This requires an understanding of the timeline of the events in question. 

Chronology

9.  The key events are the following:

(a)  26 August 2015 —

Drawdown of $4 million under the 1^st loan.  The principal was repayable on the 3^rd interest payment date (being 3 months from the drawdown subject to D1’s option (which was exercised) to extend it for a further 3 months to 25 February 2016.

However, it is to be noted that §6.01 of the 1^st loan agreement (which was not referred to by the parties) gave the plaintiff an“overriding right to require immediate repayment on demand”(emphasis added) of the loan and interest notwithstanding the other provisions of the 1^st loan agreement.

(b)  15 October 2015 —

Drawdown of $4 million under the 2^nd loan agreement dated 13 October.  The principal was repayable on the earlier of 25 February 2016 or the date on which the facility is terminated under the provisions of the 2^nd loan agreement.

§6.01 gave the plaintiff the same “overriding right” as in the 1^st loan agreement to demand immediate repayment.

(c)  December 2015 —

D1 failed to make any interest payment in December and obtained an extension for the December interest on both loans to be paid in January in respect of which it paid the requisite default interest.

(d)  Mid-January and 25 January 2016 —

D1 paid two instalments of interest on the 2^nd loan in mid-January but failed to make payment of interest due under the 1^st loan on 25 January 2016.

(e)  30 January 2016 —

A meeting took place between Lau Kim Hung Jack (“Lau”) a director of the plaintiff and D2 (“the January meeting”) at which the parties apparently reached an agreement to vary and extend therepayment obligations of D1 under the loans.  As will become apparent, what was agreed is central to the present appeal.

(f)  After 30 January but prior to 16 March 2016 —

Protracted negotiations took place between Cecilia Leung an executive director of the plaintiff and D2 concerning the “further security” to be provided pursuant to the variation agreed at the January meeting. 

(g)  18 March 2016 —

D4 executed the corporate guarantees by way of further security. 

(h)  18 March 2016 —

Letters from the plaintiff to D1 (“the March letters”) extending the repayment date to 25 July 2016 in consideration of the relevant corporate guarantee, the plaintiff agreeing not to enforce the relevant corporate guarantee before 25 July 2016 and not be the first to take enforcement action within the same period.

(i)  29 June and 5 July 2016 —

Letters to D1 from the plaintiff’s solicitors and the plaintiff respectively demanding repayment on the 1^st extended due date (25 July 2016).

(j)  Between 5 and 19 July 2016 —

Cecilia Leung called D2 to discuss further security for the loans in the course of which D2 made a “proposal”.

(k)  19 July 2016 —

Cecilia Leung responded to D2’s “proposal” to pledge certain chattels by email dated 19 July and also sought information required to finalise the pledge agreements, proposing alternative dates for execution.

(l)  22 July 2016 —

Further security in the form of pledge agreements was provided by D2.

(m)  25 November 2016 —

The sale of one of the pledged items for HK$618,000 net at auction.

(n)  19 December 2016 —

Writ issued.

This appeal

10.  The defence is founded upon what D2/the defendants contend was actually agreed at the January meeting which materially differs from the plaintiff’s case.  That was set out in their defence filed on 29 March 2017, some 4 weeks prior to the summons for summary judgment.

11.  It is to be noted that the statement of claim (“SOC”) which founds the claim did not mention the January meeting at all.  Rather, it merely referred to the fact that D1 “sought an extension of time to repay” the loans without specifying the date of the request and pleaded (in §22 of the SOC) that:

“ the plaintiff eventually agreed to withhold any legal actions … until 25 July 2016 (in effect granting an extension of time to repay the 1^st and 2^nd [loans] up to 25 July 2016) in consideration of corporate guarantees”. (emphasis added)

12.  The pleaded defence (at §19) stated that at the January meeting it was agreed between Lau acting on behalf of the plaintiff and D2 on behalf of D1 that, “in exchange for further security”, the loan agreements would be varied as follows:

“ (a) The ‘Final Repayment Date’ would be the earlier of the date on which the Bank instigated legal proceedings against [D1, D2 and/or D3] or the date on which repayment was in fact made by [D1]. The effect of the variation, as intended by the parties, was that, absent such act on the part of the Bank, the 1^st and 2^nd Loans would continue to accrue simple interest but would be repayable at will by [D1]; and

(b) all accrued interest would be paid in one lump sum together with principle (sic) as at the Final Repayment Date.

(the ‘Variation’).”

13.  D2’s evidence is to the effect he informed Lau at the meeting that D1 was heavily indebted to the banks, that two properties it owned had been charged as security and that the banks were willing to work on a restructuring proposal to allow D1 more time to repay its indebtedness and, meanwhile, would not initiate proceedings to recover the debt from D1. 

14.  D2 stated in §12 of his affirmation that:

“ any recovery action by the Plaintiff would lead to a lose–lose situation whereby the Defendants will be subject to various proceedings, in particular, enforcement of the charges over the Properties by BEA and/or DSB, leaving the Plaintiff in a difficult position to recover the Loans from [D1]”.

15.  It was in those circumstances that D2 indicated to Lau that if repayment of the loans could be delayed until D1 was in a position to make repayment, he would procure further security to be provided.

16.  One aspect of the outcome of the January meeting appears not to be controversial, namely, that the plaintiff would refrain from taking enforcement action against D4 and would not be the first one to take enforcement actions against D1.  What is controversial is whether the non-enforcement agreement was only valid for a limited period (up to the 1^st extended due date) as the plaintiff contends or whether it was open-ended without a back-stop.  Meanwhile, so long as the banks did not takeenforcement action, the loans would continue to accrue simple interest but would be repayable at will. 

17.  It should be noted that the SOC is silent as regards both the date the request was made and, if different, when it was concluded.  It only emerged in §18 of Lau’s 1^st affirmation dated 25 April 2017 (“Lau 1”) (filed after the date of the defendants’ defence) that the meeting with D2 at which the agreement was made took place on 30 January.  

18.  It should also be noted that the only condition pleaded in the SOC as consideration for the extension requested was the provision of corporate guarantees.  However, it would appear from Lau 1 (§18) that there were further conditions (not pleaded in the SOC) that were agreed at the January meeting, namely, proof that the facility agreements with BEA and DSB (“the banks”) had been renewed and that interest payments were “current and up-to-date”.  In that regard, Lau 1 is inconsistent with the plaintiff’s pleaded case. 

19.  In §17 of D2’s affirmation, D2 stated that after the January meeting he was contacted by Cecilia Leung an executive director of the plaintiff “to discuss further security for the 1^st and 2^nd loans in accordance with the variation”.  After protracted negotiations, it was agreed that additional security would be in the form of the corporate guarantees rather than a pledge of the shares in D4 as Cecilia Leung had initially sought.

20.  It is unclear whether the ‘contact’ made was by telephone or email.  It is likely to be the former since no emails passing between them have been produced.  In any event, Lau’s reply affirmation dated 14 July 2017 (“Lau 2”) did not challenge D2’s allegation that he was contacted by Cecilia Leung and protracted negotiations ensued culminating in the corporate guarantees.  Further, there is no evidence to the contrary from Cecilia Leung.

21.  The plaintiff relied heavily on (a) two letters dated 18 March 2016 from the plaintiff to D1 relating to the 1^st and 2^nd loans respectively; and (b) letters of (i) 29 June 2016 from the plaintiff’s solicitors to D1 and (ii) 5 July 2016 from the plaintiff.  The letters made express reference to 25 July 2016: see §9(h) and (i) above and §§22 and 29 below.

22.  As regards the 18 March letters, they were written by the plaintiff to D4 for the attention of D2 and referred to the corporate guarantees executed by D4 that day.  It went on to state that the plaintiff agreed not to take any action to enforce guarantees within the period up to25 July 2016 and not be the first one to take enforcement action against D1 within that period.

23.  Although the 18 March letters were exhibited (see Lau 1 §21) the method of delivery was not mentioned.  At the hearing, Mr Wong counsel for the plaintiff suggested that they were “sent” but that the plaintiff could not produce a postal receipt.

24.  In fact, in §10 of Lau 2, it is stated that the letters had been “given” to D2/D4.  However, only D2 attended the plaintiff’s solicitors’ office to execute the corporate guarantees.  The plaintiff/Lau was not present.  The letter was not a solicitor’s letter but from the plaintiff itself.  While it is possible that the letters were prepared in anticipation of the corporate guarantees and given beforehand by the plaintiff to its solicitors, in view of their tenor, that would be nothing more than speculation in the absence of evidence in that regard.

25.  D2 stated at §24(c) of his affirmation that he had not seen either of the letters until they were exhibited to Lau 1.  In those circumstances, it cannot be said that D2’s account is not credible.

26.  It is part of the plaintiff’s case that when D1 was unable to make repayment by the 1^st extended due date, D2 offered to pledge certainchattels in exchange for a further extension of 3 months to 25 October 2016.  The recital to the pledge agreements dated 22 July 2016 mentioned the original due date of 25 July 2016 and the 3 months’ extension.  Under the pledge agreements the repayment date was extended for another 3 months unless action is taken by any other creditor for recovery of debts against the defendants or any of them.

27.  It is common ground that the 29 June letter was sent by the plaintiff’s solicitors demanding payment on or before 25 July 2016 being the 1^st extended due date. That was followed by a letter from the plaintiff on 5 July 2016 in the same vein.

28.  According to D2, after receipt of the 5 July letter, Cecilia Leung called D2 to discuss further security for the loans.  It would appear from Cecilia Leung’s email of 19 July that during the discussion D2 made the “subsequent proposal” mentioned.  

29.  §18 of D2’s affirmation went on to state:

“ She told me that this further security was simply to provide ‘peace of mind’ to the Plaintiff and reassured me that the Plaintiff would continue to abide by the Variation and to honour the Promise and not commence any legal actions against the Defendants unless and until BEA and/or DSB instigated any legal proceedings against D1.”

30.  It is the defendant’s case that the pledge agreements culminating from those discussions were but a continuation of the variation made at the January meeting.  The fact that discussions did take place is supported by Cecilia Leung’s email of 19 July 2016 to which was attached a draft pledge agreement for comment and alternative dates proposed for execution at the plaintiff’s solicitors’ office.

31.  The plaintiff did not adduce any evidence from Cecilia Leung concerning her discussions with D2 in February/March or in July 2016 and Lau 2 did not challenge D2’s account of the February/March and July discussions.

Have the defendants raised a credible defence?

32.  The plaintiff submitted that the defence is ‘moonshine’ being inherently improbable.  It was said that it is inconceivable that any finance company in the business of lending would agree to unsecured advances being repayable at will by the borrower without a back-stop date.  Moreover, all the documentary evidence supports the plaintiff’s case that there were two extended due dates—25 July and 25 October 2016—which expired without repayment having been made by D1.

33.  The plaintiff criticized D1/D2 for not complaining after receiving the 29 June and 5 July letters.  In addition, D2 also executed pledge agreements that clearly recited the postponement of the 1^st extendeddue date for another 3 months from 25 July 2016 assuming no enforcement action is taken by any other creditor.  It was submitted that that is plainly inconsistent with the defence advanced.

34.  Mr Tang who represented the defendants submitted that what was agreed at the January meeting is critical.  As the available affirmation evidence is conflicting, that can only be resolved at trial through cross examination of the relevant witnesses, namely D2, Lau and Cecilia Leung. While there are affirmations from Lau, Cecilia Leung’s evidence is an unknown.

35.  In response to the criticism that there was no reply to the 29 June and 5 July letters that culminated in the pledge agreements, Mr Tang referred to §18 of D2’s affirmation concerning his discussions with Cecilia Leung following his being contacted by her after the 5 July letter. It was stressed in his evidence that Cecilia Leung reassured him that the plaintiff would continue to abide by the variation agreed at the January meeting.

36.  On the issue of inherent improbability, while the documents do not support the defendants’ case, at the same time, the plaintiff has not sought to rebut the defendants’ evidence that Cecilia Leung confirmed the variation/oral agreement in July 2016.

37.  Mr Tang also referred to Sterling Services Ltd v Tan Kee Cheang and Ko Siu Shing [2003] 3 HKLRD 894 as an illustration of an application for summary judgment being dismissed because it was abundantly clear that there was an issue in dispute which ought to be tried notwithstanding that the defendant’s case was unsupported by contemporaneous documentation.

38.  In my view, what transpired between Lau and D2 at the January meeting, whether an agreement was reached and its terms as well as what transpired between D2 and Cecilia Leung in July 2016 would be critical in determining the outcome of the dispute between the parties.  While the notion that a loan is to be made repayable at will by the borrower would almost instinctively give rise to considerable scepticism, the circumstances of the present case are unusual.

39.  Given the available evidence which is far from complete and satisfactory, I am not persuaded that there is no serious issue to be tried.  In my view, this is hardly a clear case that would warrant summary judgment given the differing versions of what transpired at the January meeting. It is to be noted that when this summons was taken out on 25 April 2017, the plaintiff had full notice of the defence being raised.

Order

40.  Accordingly, the appeal is allowed and the plaintiff’s summons dismissed.  There is to be an order nisi that costs of the summons be to the defendants in any event.