LIU QIAN v. SUNWAY INTERNATIONAL HOLDINGS LTD

CACV 88/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 88 OF 2017

(ON APPEAL FROM HCA NO 318 OF 2016)

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J U D G M E N T

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Hon Kwan JA (giving the judgment of the Court):

1.  This is an appeal against a summary judgment granted by Deputy High Court Judge Yip, SC on 13 March 2017, ordering the defendant, Sunway International Holdings Limited (“Sunway”), to pay damages to the plaintiff to be assessed. For ease of reference, the nomenclature in the judgment would be adopted.

Background

2.  The relevant background matters, as taken from the judgment, may be stated as follows.

“The plaintiff’s factual case

8. Sunway was and is a Bermuda limited company listed in the Hong Kong Stock Exchange.

9. On 22 April 2014, Sunway issued convertible notes in the principal amount of HK$300,000,000 due on 28 April 2017 (“the Notes”). There were 30 convertible bonds (with certificate numbers from 001 to 030) of HK$10 million each. They were all subject to the terms of the instrument as set out in the Terms and Conditions of the convertible notes.

10. By a written Agreement of Transfer of the Notes dated 19 May 2014 (“the Transfer Agreement”) entered into between Xiao Guang (“Xiao”) as the vendor, the plaintiff as the purchaser and Wang Zhining (“Wang”) as the repurchaser, Xiao agreed to sell and the plaintiff agreed to purchase HK$15 million worth of the principal amount of the Notes for a consideration of HK$12.75 million.

11. The plaintiff said she duly paid the consideration by cheque and produced the bank statement evidencing the said payment.

12. It is the plaintiff’s case that since the Notes were issued in HK$10 million each, but the plaintiff purchased only HK$15 million’s worth of the Notes, two Notes were transferred to the plaintiff and registered under her name, whilst the plaintiff would hold HK$5 million of the Notes on behalf of Xiao.

13. Since around 19 May 2014, the plaintiff has become the duly registered holder of two convertible notes of Sunway in the total principal amount of HK$20,000,000 (“the Convertible Notes”). Two new certificates numbered 031 and 032 were issued by Sunway to the plaintiff to replace the old notes which were in Xiao’s name.

14. The relevant transfer was entered into the register of Sunway on about 19 May 2014.

15. In May 2015, the plaintiff made two attempts on 26^th and 27^th to enforce the conversion rights by asking to meet Mr Leung of Sunway at the latter’s office. Both attempts failed. Furthermore, the plaintiff was told that her rights under the Convertible Notes could not be enforced and would not be recognised by Sunway because of a dispute between Sunway on the one part and Xiao and Wang on the other.

16. The plaintiff continued to demand Sunway to recognise her conversion rights and made written demand letters through a PRC firm in June 2015 and later through a firm in Hong Kong in November 2015, but without success.

17. On 3 February 2016, the plaintiff issued the Statement of Claim.

18. On 13 April 2016, Sunway filed its Defence, the Reply was filed on 3 June 2016.

19. In October 2016, the plaintiff issued her Order 14 application.”

“Sunway’s case

26. Sunway referred to a Share Sale Agreement dated 3 October 2013 (amended on 30 January 2014) under which Sunway’s wholly owned subsidiary First Billion Global Limited (“First Billion”) as the buyer, Sunway as the issuer, entered into agreement with Xiao and Wang.

27. Xiao was alleged to be the sole legal and beneficial owner of the entire issued shareholding (being 1 issued share of US$1 (“the Share”)) in Joint Expert Global Limited (“Joint Expert”). Joint Expert owned 100% of a Hong Kong company called Royal Asia International Limited (“Royal Asia”) which in turn owned 95% of a PRC company, Zhuhai Hoston Special Materials Co Ltd (“Zhuhai Hoston”). Zhuhai Hoston owned 70% of a PRC company called Guandong Hengjia which manufactured and sold construction materials.

28. Xiao also purported to be the beneficial owner of a shareholder’s loan owed by Royal Asia to himself (“the Shareholder’s Loan”).

29. By the Share Sale Agreement, Xiao agreed to sell the Share and Shareholder’s Loan to First Billion. Wang agreed to make the representations, warranties and guarantees under the Share Sale Agreement as a precondition to First Billion’s entering into the same.

30. The consideration to be paid by First Billion for this transaction was HK$550 million in the following manner:

(a) Banker’s cashier order of HK$150 million in favour of Xiao;

(b) Promissory note of HK$100 million in favour of Xiao; and

(c) First Billion to procure Sunway to issue convertible notes of a principal amount of HK$300 million in registered form and convertible into ordinary shares in the capital of Sunway in favour of Xiao.

31. The Share Sale Agreement was completed on 2 May 2014. As part of the consideration, Sunway issued 30 Convertible Notes each with a face value of HK$10 million, in favour of Xiao.

32. 011 – 012 were assigned by Xiao to the plaintiff under the Transfer Agreement in manner provided in para 10 above. New certificates numbered 031 – 032 were issued by Sunway, registering the plaintiff as the owner in place of Xiao under 011 – 012.

33. The third Convertible Note was pledged to the plaintiff. Notably, Sunway observed that instead of the plaintiff paying the HK$12.75 million to Xiao, it was recorded in the Transfer Agreement that the money was actually paid to the repurchaser, Wang.

34. Then, according to Sunway, Xiao and Wang were found to have committed various fraudulent misrepresentations and material breaches of the Share Sale Agreement vis-à-vis Sunway and First Billion, details of which do not require to be set out here.

35. This caused First Billion and Sunway to claim rescission of the Share Sale Agreement by issuing the Indorsement of Claim under HCA 1391/2015, claiming, inter alia, a declaration that the 30 convertible notes, save already redeemed or converted, are null and void. This of course includes the three convertible notes held by the plaintiff, two of which, namely, bearing certificate numbers 031 – 032, are the subject matter of her Order 14 application in the present case.

36. It is Sunway’s case that the plaintiff was a nominee of Wang, had knowledge of the plaintiff’s claims and rights to rescind and provided no consideration for the convertible notes.

37. Sunway and First Billion sought to join the plaintiff as the 3^rd defendant in HCA 1391/2015. I was told that the leave application will be heard in March 2017. For the purpose of this present application of the plaintiff, Sunway’s Amended Statement of Claim forms part of the evidence in the 2^nd Affirmation Leung Chi Fai pursuant to leave being granted herein.

38. The legal basis of her joinder is that she is a purported assignee/pledgee of three of the Convertible Notes (two of which concerns the Order 14 application), being part of the consideration paid under the Share Sale Agreement which Sunway and First Billion seek to rescind.”

The judge’s findings

3.  It is the plaintiff’s case that she was a bona fide purchaser for value without notice (“BFPV”) and thus she should take free of Sunway’s equity to rescind.  To contradict the plaintiff’s case, the defendant produced a document entitled Transfer Instructions of Convertible Notes (可換股債券轉讓指示)dated 5 September 2014 from Wang to Xiao, stating that the consideration in the Transfer Agreement with the plaintiff was merely for the purpose of making a declaration, that there was no actual payment of funds and that Xiao did not receive any cash or benefit in substance.

4.  The judge held that for the purpose of an application for summary judgment, the Transfer Instructions has raised a believable defence that the plaintiff might not have paid consideration, and hence would not be a BFPV.  That should be a matter for trial. The judge further held whether the plaintiff was a BFPV would have an impact on the plaintiff’s contention that Sunway was estopped from exercising its right to rescind the Convertible Notes against the plaintiff by registering her as the Noteholder, coupled with the express wordings of the Terms and Conditions, and this issue should also be dealt with at trial[1].

5.  The judge gave summary judgment for the plaintiff on the basis that even though she might not be a BFPV, she should take free of any equities including Sunway’s right to rescind the Convertible Notes by virtue of the express contractual exclusion of all equities.  As summarised in the judgment[2], the express contractual terms relied on by Mr Christopher Chain, who appeared for the plaintiff before the judge and on appeal, included the following:

“(a) Condition 1.4[3] of the Terms and Conditions whereby Sunway covenants to the Noteholder (Liu) that the company “will comply with and perform and observe all the provisions of this Instrument and the Terms and Conditions”.

(b)  Condition 2.2 of the Terms and Conditions which provides that “the Noteholder shall be treated … as absolute owner of the relevant Notes for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest in it or any writing on, or the theft or loss of, the certificate issued in respect of it)”.

(c)  Condition 2 of the Terms and Conditions relates to the requirements for effecting a transfer[4], and provides that “Title to the Notes passes only upon the entry of the Register of the relevant transfer” which register is kept and controlled by company itself [5].

(d)  Finally, Article 120 of Sunway’s own bye-law stipulates that “Debentures, debenture stock, bonds and other securities … may be made assignable free from any equities between the Company and the person to whom the same may be issued.” ”

6.  The judge held in favour of the plaintiff in respect of two issues: (a) whether the rule that an assignee of a chose in action takes subject to all equities between the assignor and the obligor (“the subject to equities principle”) can be excluded by contract; and (b) whether the exclusionary effect applies even though the assignee was not a BFPV.  In so holding, the judge relied on the decision of To J in Johnson Electric International Limited v Bel Global Resources Holdings Limited, HCA 1240/2012, 18 March 2014 (“Johnson Electric 2014”) at §§28 to 31 and 34 and the decision of Harman J in Hilger Analytical Ltd v Rank Precision Industries Ltd [1984] BCLC 301.[6]

7.  The judge went on to hold that on the true construction of the contractual provisions,

“Sunway created a contractual structure which enables third party investors such as the plaintiff to confidently invest in convertible notes issued by the listed company. It impresses confidence upon investors because, amongst others, there are express contractual terms which stipulate that the convertible notes are transferrable and not subject to any prior equities. The recognition of this right of the outside investors is reinforced by the listed company’s own bye-laws.”[7]

The issues on appeal

8.  At the outset of the hearing, we refused to give leave to Ms Frances Lok, who appeared for Sunway throughout, to rely on new arguments premised on the requirement of reasonableness under section 4(b) of the Misrepresentation Ordinance, Cap 284 and section 3 of the Control of Exemption Clauses Ordinance, Cap 71.  The new arguments were raised for the first time in a draft amended supplementary notice of appeal Sunway sought to file.  We refused leave on the ground of lateness and the lack of opportunity to the plaintiff to properly explore and consider whether she should adduce evidence in response.

9.  The scope of this appeal is limited to these two issues formulated by Ms Lok on behalf of Sunway:

(1)  Can an assignor agree with an obligor that the assignor can assign the chose in action, free of the obligor’s equity to rescind for fraudulent misrepresentation, to an assignee who has notice of the fraud and did not provide consideration for the chose in action?

(2)  On the proper construction of the contract between the obligor [Sunway] and the assignor [Xiao], has the obligor in clear and unmistakable terms agreed with the assignor that the Convertible Notes can be assigned by the assignor, free of the obligor’s equity to rescind for fraudulent misrepresentation, to an assignee [the plaintiff] who has notice of the fraud and did not provide consideration for the Notes?  If yes, has the assignor so assigned the Notes to the assignee free of all equities?

10.  Ms Lok submitted that it is not plain and obvious that the answers to both issues must be yes, and the judge is in error in giving summary judgment.

Issue (1): if the equity to rescind for fraudulent misrepresentation may be excluded by contract for an assignee who is not a BFPV

11.  We were referred by both counsel to quite a number of cases, for the opposite positions adopted on each side.

12.  As pointed out by Ms Lok, some of the cases were clearly not concerned with the equity to rescind for fraudulent misrepresentation (Re Agra and Masterman’s Bank (1867) LR 2 Ch App 391; Re Northern Assam Tea Company (1870) LR 10 Eq 458; Re Goy & Co Ltd [1900] 2 Ch 149).  In other cases, it was unclear if the equity asserted by the obligor wasto rescind for fraudulent misrepresentation (Re Blakely Ordnance Co (1867) LR 3 Ch App 154; Hilger Analytical Ltd).

13.  Mr Chain cited three cases in which the equity asserted by the obligor wasto rescind for fraudulent misrepresentation (The Southern British National Trust Ltd v Pither (1937) 57 CLR 89; Banco Santander SA v Bayfern Ltd [2000] Lloyd’s Rep Bank 165; Standard Bank London Ltd v Canara Bank [2002] EWHC 1032 (Comm)).  However, the assignees in these cases were innocent third parties who were BFPVs or at least had given value. That was also the position of the assignees in the cases mentioned in the preceding paragraph.

14.  We should mention that the assignee in Johnson Electric International Limited v Bel Global Resources Holdings Limited, HCA 1240/2012 was found by To J to be a BFPV in his reasons for decision on 17 April 2013, in which he gave summary judgment to the assignee on 30 January 2013 (“Johnson Electric 2013”).  On appeal by the obligor, the Court of Appeal permitted new evidence to be adduced and held that a sufficiently credible foundation was raised on which knowledge of the assignee might be inferred at trial ([2014] 5 HKC 504; “Johnson Electric CA”).  At §6, the Court of Appeal stated it did not find it necessary to decide the appeal by reference to the arguments relating to the subject to equities principle and the contractual exclusion rule, which found favour with To J in Johnson Electric 2014.  The judge declined to read too much into Johnson Electric CA in respect of something it did not find necessary to decide[8], and we do not think she could be fairly criticised about that.

15.  Ms Lok also referred the court to decision of the Saskatchewan Court of Appeal in Hamilton v Railton [1925] 3 DLR 1090 at 1092 to 1094, 1099 to 1100 in support of the proposition that the contractual exclusion rule may be not invoked where the chose in action is voidable for fraud, unless the assignee can show he took the assignment on the strength of the contractual exclusion stipulation.

16.  The upshot of all this is that Mr Chain was driven to attacking Ms Lok’s argument in stating that she was contending that the judge was wrong in law just because there is no previous case exactly on all fours with the facts of the present case, where the contractual exclusion rule was applied to exclude an equity to rescind for fraudulent misrepresentation and where the assignee is not a BFPV.  He criticised that approach as nit‑picking on the facts of the authorities rather than addressing the underlying principles.  He submitted that Hamilton v Railton is the only case which bucks the trend and was wrongly decided.

17.  In the context of an application for summary judgment, we do not agree with Mr Chain that Sunway’s argument could be brushed aside as nit-picking on the facts.  We do not think Sunway’s argument is clearly unarguable such that it is appropriate to determine the point of law summarily.

18.  Ms Lok made two additional points.

19.  First, she prayed in aid HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003] 1 CLC 358 at §16 in support of the proposition that on public policy grounds, the law does not permit a contracting party to exclude liability for his own fraud in inducing the making of the contract.  She submitted that the same policy should apply to the assignee who has notice of the fraud and/or did not give valuable consideration, otherwise the fraudster can take advantage of his fraud by assigning the chose in action to a nominee or trustee.

20.  Second, Ms Lok pointed out that on the particular facts of this case, the judge’s ruling produced an unjust result in that the plaintiff is entitled to take the benefit under the Convertible Notes free of all equities, even when the plaintiff has admitted she held such benefit in part (to the extent of $5 million) for the benefit of Xiao, who was alleged to have induced the making of the contract with Sunway by fraudulent misrepresentation.  So by the summary judgment, the person who made the fraudulent misrepresentation is able to take advantage of his fraud through the assignee.

21.  Mr Chain countered with these arguments.  HIH gave effect to the maxim that a party cannot be allowed to benefit from his own fraud by refusing to enforce an offending provision where it is invoked by the fraudster.  If it is an assignee who is invoking the provision, the maxim should not apply.  The House of Lords in HIH specifically left open the issue whether a party can validly contract out of an agent’s fraud.  He submitted that an assignee is further removed from the original contracting party than an agent.  He reiterated there is no reason in principle why the contractual exclusion rule should not apply in this instance, given the powerful rationale of freedom, sanctity and certainty of contract that underpins the rule.  And if in granting judgment to the plaintiff results in losses to Sunway, Sunway can claim the resultant losses from Xiao and Wang, who had induced Sunway to enter into the contract by fraud.

22.  We note that the public policy angle was not addressed in any of the cases cited by Mr Chain in which the court had considered the contractual provision to exclude an equity to rescind for fraud as against an assignee (Pither, Banco Santander, Canara Bank). We do not think it appropriate to determine summarily the arguments of public policy raised by Sunway.  This is all the more so in light of our views that it is clearly arguable the contractual terms may not be sufficiently clear to exclude the rule of taking subject to all equities, including the equity to rescind for fraud, as against an assignee who is not a BFPV.

Issue (2): the construction of contractual terms

23.  It does not appear to be in dispute that if the contractual intention is to exclude the rule of taking subject to all equities, such intention must be expressed in clear and unmistakable terms on the face of the contract and general language would not suffice, see the statements of Lord Bingham in HIH at §16 in the context of a contractual provision to exclude the consequences of fraudulent misrepresentation or deceit.

24.  We have mentioned earlier the provision in the bye-law of Sunway that debentures and other securities “may be assignable free from any equities between the Company and the person to whom the same may be issued.”  But, as Ms Lok has submitted, this provision is permissive and it empowers the company to issue securities that may be assigned free from equities.  It only takes away an argument on ultra vires.  It does not follow from this permissive provision that any issue of securities by the company would be regarded as assignable free from any equities.

25.  The other contractual provisions relied on by Mr Chain do not track the wording in the bye-law of “assignable free from any equities”.  He advocates a holistic approach, contending that the substance and effect of the totality of the terms should be considered.  The provision he relies on in particular is Condition 2.2 of the Terms and Conditions, which reads as follows:

“Subject to Condition 2.1, any transfer of the Notes shall be in respect of the whole or any part of the outstanding principal amount of the Notes. Title to the Notes passes only upon the entry on the Register of the relevant transfer. The Noteholder shall (except as otherwise required by law) be treated as the absolute owner of the relevant Notes for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest in it or any writing on, or the theft or loss of, the certificate issued in respect of it) and no person will be liable for so treating the Noteholder.”

26.  Mr Chain submitted that this clause essentially provides that the registered holder of the Notes is the “absolute owner for all purposes”, regardless of any notice of prior interest.  The act of registration is the key and the register is within the control of Sunway.  So the regime is designed in a manner that investors wishing to purchase the Convertible Notes can confidently invest in these securities.

27.  But as pointed out by Ms Lok, the provision that the Noteholder shall be treated as the absolute owner regardless of any notice of interest is qualified by the words in parenthesis “except as otherwise required by law”.  We think it clearly arguable that the contractual provisions may not have been expressed in such clear and unmistakable terms to exclude the subject to equities rule in this particular instance.

28.  Given our views above, we do not find it necessary to address the argument of Ms Lok that the judge was in error in declining to consider the terms of the Share Sale Agreement (in particular clauses 12.1 and 12.4), to which the plaintiff was not a party.

Conclusion and orders

29.  For the above reasons, we allow Sunway’s appeal. We set aside the summary judgment and substitute this with an order giving Sunway unconditional leave to defend.

30.  At the request of Mr Chain, we will make our costs order an order nisi, even though we have given indications of what the costs order should be in light of the outcome.

31.  We set aside the costs order below.  As we are giving unconditional leave to defend, the usual order is for the costs to be in the cause of the action. So this will be our order.

32.  For the costs of the appeal, costs should follow the event.  We order the plaintiff to pay Sunway’s costs of the appeal.

33.  Any party seeking to vary the costs order nisi should apply within 14 days of the handing down of this judgment.