Praise Fortune Ltd v. Alegana Enterprises Ltd

HCA 858/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 858 OF 2017

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REASONS FOR DECISION

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Introduction

1.The plaintiff (“Pledgor”) pledged shares in Pan Asia Environmental Protection Group Limited (“Pan Asia”) with the defendant (“Pledgee”). The Pledged Shares were deposited into the Pledgor’s account with collateral agents, China Times Securities Ltd　(“China Times”) and Resources Securities Ltd, as the depository broker.  The Pledgee was given “exclusive control over the account”.

2.Within a few days, the Pledgor discovered that the Pledged Shares had apparently moved out of the collateral agents’ accounts. The Pledgor was very concerned.  It decided to repay the loan and get back the Pledged Shares. 

3.The Pledgor has paid the full sum of capital, interest and fees allegedly due to the Pledgee into court.  The Pledgor made this application under Order 29, rule 6 of the Rules of the High Court.

4.Having heard the submission, I made an order in favour of the Pledgor.  These are my reasons.

The facts

5.The Pledgor was the largest shareholder (42.45%) of Pan Asia, a company listed in Hong Kong.  The Pledgee was a Cyprus company with a Canadian address.  It had no presence in Hong Kong.

6.On 1 November 2016, the Pledgor and Pledgee entered into (a) the Loan Agreement; and (b) the Springing Pledge Agreement whereby the shares would be pledged in favour of the Pledgee as collateral to secure the loan; the loan would be paid over 5 tranches. 

7.The Loan Agreement provided for:

(a)  Delivery of the Pledged Shares to custodial brokerage firms designated by the lender Pledgee (clause 2.4).

(b)  No prepayment during the first 12 months from the date of the Non-recourse Promissory Note (clause 2.8).

(c)  The lender’s right to the Pledged Shares included a right to pledge, encumber, hypothecate or sell all or a portion of the collateral (clause 3.1).

(d)  Upon an event of default, the lender has rights including rights, benefits and remedies under the Loan Documents with respect to the collateral and may take, use or otherwise encumber or dispose of the collateral as if it were the lender’s own property (clause 8.2).

(e)  The Pledged Shares were to be returned to the Pledgor, where there was no event of default, within 3 business days after the lender’s receipt of payment in full of the loan and all other obligations (clause 9.1).

8.On 28 February 2017, the first tranche of the loan for HK$53 million was advanced to the Pledgor, maturing in 3 years. 

9.As at 28 February 2017, China Times held 230,000,000 Pan Asia shares and Resources Securities held 75,000,000 shares as Pledged Shares, representing a holding of about 36.31% of Pan Asia.  As at close of the market on 24 April 2017, the shares were worth more than HK$305 million. 

10.Subsequent to the pledge, the Pledgor noticed large and abnormal movements of the Pledged Shares.

11.By an email dated 6 March 2017, the Pledgor expressed grave concern over the transfers of the Pledged Shares and informed the Pledgee of its decision to terminate the Loan Agreement.  The Pledgor asked to be advised of the procedure and all relevant costs.

12.By an email dated 7 March 2017, the Pledgee replied, stating that it had stopped the funding for the 2^nd tranche of the loan and would advise and provide the Pledgor “the closing loan statement”.

13.By an email dated 8 March 2017, Mr Zorbas of the Pledgee stated, “As per your request below we have terminated your loan with us.”  He asked the Pledgor to arrange for repayment of the principal amount and have it transferred to the China Times account; the Pledgee would initiate the process of the transferring of the collateral.

14.On 16 March 2017, trading of shares of Pan Asia was suspended.  Despite that, there were still abnormal movements of the shares with various securities accounts.

15.After the Pledgor’s repeated demands for figures, by an email dated 27 March 2017, the Pledgee gave the Pledgor a “closing statement” setting out the amount of capital, interest and fees, being HK$66,335,000 in total (“the Sum”) allegedly due under the Loan Agreement.  The Pledgor agreed to this figure on the same day.

16.Accordingly, despite clause 2.8 of the Loan Agreement, the parties have reached an agreement for the Pledgor to repay the loan.

17.Notwithstanding the agreement to terminate, the Pledgee has refused to return the Pledged Shares to the Pledgor.

18.Meanwhile, during March, the shares have continued to change hands, giving rise to the Pledgor’s concerns that steps were taken to facilitate dumping of the shares on and off the market.  The share price was falling.

19.On 7 April 2017, the Pledgor obtained (i) an ex parte injunction restraining the Pledgee from disposing of the Pledged Shares; and (ii) an order for the Pledgee to disclose all the dealings of the Shares.  The injunction was continued until trial or further order on 21 April, in the absence of the Pledgee.  The Pledgee has failed to make disclosure as ordered.

20.On 10 April 2017, the Pledgee was served with the writ and all documents in relation to the ex parte and inter parte applications for injunction.  On the same day, the Pledgor paid the Sum into court.

21.On 25 April 2017, the Pledgor took out the present summons asking that, upon the Sum remaining in court pending final determination of this action or further order, the Pledgee do forthwith transfer and deliver the Pledged Shares to the Pledgor and execute the necessary documents for the purpose of effecting the transfer and delivery.

Legal principles

22.Order 29, rule 6 provides as follows:

“ Where the plaintiff, or the defendant by way of counterclaim, claims the recovery of specific property (other than land) and the party from whom recovery is sought does not dispute the title of the party making the claim but claims to be entitled to retain the property by virtue of a lien or otherwise as security for any sum of money, the Court, at any time after the claim to be so entitled appears from the pleadings (if any) or by affidavit or otherwise to its satisfaction, may order that the party seeking to recover the property be at liberty to pay into court, to abide the event of the action, the amount of money in respect of which the security is claimed and such further sum (if any) for interest and costs as the Court may direct and that, upon such payment being made, the property claimed be given to the party claiming it.”

23.An example of the application of Order 29, rule 6 was in Hin Fai Lt trading as Sun Food Seafood v Longrace Development Ltd and anor, HCA 1788/2003, 18 July 2003, at §§50, 51, 61 and 77(1), per Deputy Judge Wong Yan Lung SC.  In that case, the court granted an interlocutory mandatory injunction, ordering the defendant to deliver goods back to the plaintiff on the ground that the defendant did not assert any ownership over the goods and that there was a payment into court.

Application of the legal principles

24.The Pledged Shares represented more than 36% of the shareholding of Pan Asia.  It would be difficult for the Pledgor to get back such volume of shares and, if it did, it might trigger the requirement of making a mandatory general offer.

25.Without getting back the shares, the Pledgor’s voting rights might be diluted, and this loss was irreparable: Wongs Investment Development Holdings Group Ltd (in liquidation) v China Kingstone Mining Holdings Ltd and anor, HCMP 1472/2015, 8 July 2015, §24, G Lam J.

26.The Pledgor had legitimate concerns that the movements of the Pledged Shares might mean that the Pledgee was positioning to sell them and might be driving the price down.  It would spark off a run on the shares so that the Pledgee could get back the shares at the bottom of the market.  If there was to be massive sell-off, there might be damage to the confidence of investors in Pan Asia.  There might be systematic transfers to create an untraceable web of persons acting in concert, each holding less than 5%.  The attempt would be to gain control of the Shares and yet prevent triggering the disclosure requirements of the Securities and Futures Commission.

27.The Pledgor has paid the Sum into court, which was based on the figures put forth by the Pledgee. 

28.The writ, injunction order and skeleton submission of the Pledgor had been served on the Pledgee.  Continuation of the injunction was not opposed.  Nothing had been filed in relation to the summons under Order 29, rule 6 before this hearing. 

29.The Pledgee gave a short submission at this hearing.  I accept that in view of clause 3 of the Loan Agreement, any movement of shares was not in breach of the Pledgee’s obligations.  However, the Pledgee denied the existence of an agreement to terminate.  Its defence was broadly as follows:

(a)  the Pledgor gave notice to the Pledgee of an anticipatory breach of the Loan Agreement;

(b)  there was no agreement for the immediate return of the shares; and

(c)  until such time the Pledgor shall pay all its financial obligations under the loan documents, the Pledgee was entitled to retain the Pledged Shares.

30.With regard to defence (a), Mr Man acting for the Pledgee was not even able to tell the court whether the Pledgee had accepted the anticipatory breach.  He referred to various whatsapp messages in which Mr Zorbas of the Pledgee stated that the process of returning the Pledged Shares was in “black and white”; and that the Pledgor acknowledged that the Pledgee was granting the Pledgor an indulgence in trying to reach an agreement for immediate prepayment of the loan amount, something precluded by clause 2.8 of the Loan Agreement.

31.However, those Whatsapp messages could not override the Pledgee’s clear acceptance of any anticipatory breach and agreement to terminate set out in the emails referred to in paragraphs 11 – 13 above.  The closing statement stated the amount which the Pledgor had to repay without any other conditions imposed, specifically in relation to the right to retain the Pledged Shares.  The Pledgor even sent over a draft Prepayment Agreement to the Pledgor for its consideration of the terms.

32.With regard to defence (b), I could discern no basis for the Pledgee to impose a clog on the Pledgor’s equity of redemption, contractual or otherwise. 

33.With regard to defence (c), I repeat paragraph 31 above.  The entire redemption sum has been paid into court giving the Pledgee full security.  It represented a profit of about HK$13.4 million for making a loan for 3 weeks, effectively at an interest rate of over 300%. 

34.Mr Man relied on Clause 10.2 of the Springing Pledge Agreement, which provided that in the event of default, the Pledgee shall be entitled to retain as its sole property and/or to dispose of the collateral to the extent the Pledgee had not already exercised its rights under clause 3 of the Loan Agreement.

35.Clause 19 of the Springing Pledge Agreement provided that that Agreement shall terminate when all obligations were paid in full, upon which the lender shall redeliver the shares.  Until that time, the lender was entitled to hold the Pledged Shares.

36.In my view, clause 10.2 was not applicable as there was no event of default.  The Pledgee did not rely on this clause in the emails set out in paragraphs 11 – 13 above.  Clause 19 showed that the Pledgee was not denying the title of the Pledgor over the Pledged Shares but only claimed to be entitled to retain the Pledged Shares as security for the loan.  In any case, the Sum represented security for payment of all obligations in full.  Defence (c) was unsustainable.

37.The conditions in Order 29, rule 6 having been complied with, the Pledgor was plainly entitled to the return of the Pledged Shares.  There was nothing from the Pledgee’s side which would have persuaded the court to exercise the discretion in another way.  I therefore made the order as sought.

38.Costs should follow the event.  I therefore granted costs to the plaintiff with certificates for 2 counsel. 

Mr Warren Chan SC, leading Mr Law Man Chung, instructed by Chiu & Partners, for the plaintiff

Mr Lewis Man, of Munros, for the defendant