Re Qin Jun

CACV 109/2017

[2018] HKCA 527

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 109 OF 2017

(ON APPEAL FROM HCB NO 3231 OF 2016)

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REASONS FOR JUDGMENT AND
DECISION ON COSTS

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The Court:

1.On 10 April 2017, Chung J dismissed the application of a bankrupt, Qin Jun (“the debtor”), to annul his bankruptcy order pursuant to section 33(1)(a) of the Bankruptcy Ordinance, Cap 6, namely, that the court may annul a bankruptcy order if at any time it appears to the court that on any grounds existing at the time the order was made, the order ought not to have been made.  The judge handed down the reasons for his judgment on 18 May 2017 (“the Judgment”).

2.The debtor appealed against the dismissal of his application.  By his leading counsel, Mr Douglas Lam, SC[1], he has abandoned all the grounds of appeal except one.  It is therefore unnecessary to deal with his summons issued on 2 May 2018 to adduce further evidence on appeal, which we dismissed at the outset with costs to the petitioner in any event.

3.The only ground of appeal, which is a completely new point not raised in the court below, relates to the contention that the petitioning debt was unenforceable for breach of section 18(1) of the Money Lenders Ordinance, Cap 163 (“the MLO”) and that the court would not have exercised its discretion under section 18(3) to enforce the loan summarily in this instance without investigation in a full trial.

4.We dismissed the debtor’s appeal at the conclusion of the hearing.  These are the reasons of the court.

Background

5.The petitioning creditor, formerly known as Enerchine Resources Limited, was a licensed money lender.

6.With effect from 19 January 2011, the debtor was appointed as an executive director and the chief executive officer of Up Energy Development Group Limited (“UEGL”), which is a company listed on the Main Board of the Hong Kong Stock Exchange.  His appointment was not for a specific term but was subject to retirement by rotation and re‑election at the annual general meeting of UEGL.  He was removed as an executive director on 6 August 2016 when he tendered his resignation to the board on account of the bankruptcy order made against him.  He also vacated the office of chairman and chief executive officer.

7.A loan agreement dated 29 September 2014 (“the Loan Agreement”) was entered into between the petitioner as the lender and the debtor as the borrower for a loan of $45 million.  The loan was repayable on or before 28 March 2015, six months from the date of the Loan Agreement, with simple interest at the rate of 24% per annum.

8.Clause 3.1(b) provided that “the drawing shall be made upon signing of this Agreement”.  Clause 7.1 provided as follows:

“The Loan shall be made available not later than 4:00 p.m. (Hong Kong time) upon the signing of this Agreement. The Borrower hereby authorizes and directs the Lender to issue a cheque in the sum of HK$45,000,000, being the entire Loan Facility in favour of HEC Finance 92 Limited, the receipt of such cheque the Borrower hereby acknowledges.”

9.A memorandum dated 29 September 2014 (“the Memorandum”) was signed by the petitioner as the lender and the debtor as the borrower, to comply with the requirements of section 18(1)(a) of the MLO.

10.A cheque dated 26 September 2014 was drawn on the petitioner’s account in favour of HEC Finance 92 Limited (“HEC Finance”) in the sum of $45 million.  It was cleared on 26 September 2014.

11.The debtor entered into a supplemental agreement with the petitioner dated 29 March 2015 (“the Supplemental Agreement”).  The recitals stated that the Loan Agreement was entered into under which the petitioner agreed to grant a loan facility of $45 million to the debtor upon the terms and conditions thereunder and that the petitioner, at the request of the debtor, agreed to extend the repayment date.  By clause 3 of the Supplemental Agreement, the debtor “hereby expressly confirms that as at the date hereof, an aggregate sum of HK$45,000,000 has been drawn under the Loan Facility pursuant to the Loan Agreement and the outstanding principal amount of the Loan owed by him to the Lender is HK$45,000,000”.  Clause 4 provided that at the request of the debtor, the petitioner agreed to extend the repayment date to 28 September 2015.

12.The debtor also signed a letter in Chinese to the petitioner dated 9 April 2015 (“the April 2015 Letter”), in which he acknowledged that as at 28 March 2015, he owed the petitioner $50.4 million for the loan and interest under the Loan Agreement, and that he understood he was liable to pay interest on the outstanding sum at the default interest rate of 24% per annum.  By the April 2015 Letter, he undertook to pay the petitioner $20 million before 30 April 2015 in partial repayment of his indebtedness and would provide a practicable repayment proposal in respect of the balance as soon as possible.

13.No repayment of the indebtedness was made.  On 2 March 2016, the petitioner issued a statutory demand to the debtor in the sum of $54,989,100.  The bankruptcy petition was presented on 6 May 2016 and the bankruptcy order was made in the absence of the debtor on 27 July 2016.  He issued the summons to annul the order on 22 September 2016.

The debtor’s evidence in the court below

14.One of the grounds for setting aside the bankruptcy order was that the debt was disputed.

15.In the debtor’s 1^st affirmation made on 13 September 2016, he deposed that there was a total failure of consideration of the Loan Agreement and/or the Supplemental Agreement in that the sum of $45 million was never transferred to him.  He stated as follows:

“23. On 29 September 2014, I signed a loan agreement with the Alleged Creditor (“the Loan Agreement”) for a loan facility of HK$45,000,000. At the material time, UEGL had problems over its financial liquidity and I signed the Loan Agreement in hopes of helping UEGL solve its problems. Eventually, UEGL did not need the sum and I did not draw any money from the loan facility pursuant to the Loan Agreement and the Alleged Creditor never transferred to me the requisite sum of HK$45,000,000.

24. On 29 March 2015, UEGL was in need of money again. I sought assistance from the Alleged Creditor and the Alleged Creditor asked me to sign a supplemental agreement (“the Supplemental Agreement”). However, the Alleged Creditor never transferred to me any sum after I signed the Supplemental Agreement.”

16.He made a second affirmation filed on 13 March 2017 to “elaborate on the background [he] signed the Loan Agreement and the Supplemental Agreement”.  The relevant paragraphs read:

“7. … At the material time, I requested a loan of HK$45 million from the Alleged Creditor to help UEGL. Since the Alleged Creditor was of the view that the amount was too large and that I did not have any loan record, creditor report, securities or guarantee, it was impossible for the Alleged Creditor to lend me the amount directly because that would be in contravention of its internal control.

8. Instead, the Alleged Creditor told me that it would be more appropriate for HEC Securities or its related companies to lend the amount to me because UEGL has had business relationships with HEC Securities Limited and therefore the Alleged Creditor would accept the negotiable securities or cash balance as securities or guarantee for the loan. The Alleged Creditor further told me that it has transferred HK$45 million to HEC Finance 92 Limited a few days before and that amount could be treated as a loan to me. From the documents exhibited in Chow’s Affirmation, the cheque (“the Cheque”) as shown in CCWV‑7 was payable to HEC Finance 92 Limited. It was issued on 26 September 2014 which was prior to the date of the Loan Agreement, i.e. 29 September 2014. As shown on the extract of the bank statement of the Alleged Creditor as shown in Exhibit CCWV‑8, the Cheque was cleared and HK$45 million was withdrawn on 26 September 2014. Since the Cheque was a crossed cheque, I verily believe that the HK$45 million was deposited to a bank account of HEC Finance 92 Limited.

9. On 29 September 2014, I was told by the Alleged Creditor to go to an office (“the HEC Office”) of HEC Securities Limited in North Point. In addition, I was advised to go alone without any legal representative or assistant in order to shorten the negotiation process. When I arrived at the HEC office, I was arranged to attend a meeting with an officer of HEC Securities Limited and the representative of the Alleged Creditor. The Alleged Creditor then immediately passed the Loan Agreement, between the Alleged Creditor as lender and me as the borrower to me and asked me to sign and promised that HEC Finance 92 Limited would then arrange a fund to me after I have signed the Loan Agreement. As the financial situation of UEGL was deteriorating during the time, I therefore signed the Loan Agreement. I was then asked to leave their office and the meeting has ended shortly.

10. However, after signing the Loan Agreement, HEC Finance 92 Limited refused to transfer HK$45 million to me allegedly because the balance of UEGL in HEC Securities Limited was insufficient. In addition, the Alleged Creditor viewed that the amount of HK$45 million was too large and that the risk was too high. HEC Finance 92 Limited did not release the HK$45 million to me and the matter has been dragged on until the end of March 2015 that the Alleged Creditor requested me to sign a Supplemental Agreement in order to secure the loan and to set out the loan repayment schedule.

11. On early April 2015, I was asked to go to the HEC office alone again to sign the Supplemental Agreement and an additional letter (“the Letter”) as shown in Exhibit CCWV-10. The Alleged Creditor said he will instruct HEC Finance 92 Limited to release HK$45 million to me but I have to promise, by way of signing the Letter, that I would return HK$20 million on or before 30 April 2015 as early repayment.

12. I felt reluctant to sign the Supplemental Agreement and the Letter as the loan has not been transferred to UEGL or myself yet, the Alleged Creditor told me that the loan in the amount of HK$45 million has already been transferred to UEGL. I was also told that if I did not sign the Supplemental Agreement and the Letter, I would not be granted with the loan within short time and the procedure of making a new application would be lengthy and complicated. Therefore, in order to facilitate and simplify the drawdown procedure, I decided to sign the Supplemental Agreement and the Letter. Nevertheless, HEC Finance 92 Limited has never transferred any money to UEGL as claimed.

13. Having said the above, I have never received any substantial loan amount from neither the Alleged Creditor nor HEC Finance 92 Limited.”

17.On 7 April 2017, three days before the hearing, the debtor’s solicitor Khoo Wun Fat William made an affirmation in response to the evidence of the petitioner’s director referred to below that the petitioner “has no control or involvement in the shareholding or business of HEC [Finance]”.  He exhibited documents to show that the petitioner is a wholly but indirectly owned subsidiary of Enerchina Holdings Limited (“Enerchina”), a company listed in Hong Kong. As of 30 June 2015, Enerchina owned 9.062% of the issued share capital of HEC Capital Limited and 7.99% as of 31 December 2015.  HEC Capital Limited was the intermediate holding company of HEC Finance.  HEC Finance was dissolved on 4 November 2016.

The petitioner’s evidence in the court below

18.In reply to the debtor’s 2^nd affirmation, the petitioner filed the 2^nd affirmation of its director Chow Chi Wah Vincent on 30 March 2017, the relevant parts of which read as follows:

“7. The Debtor approached the Creditor a few days prior to 26 September 2014 for a loan of HK$45 million. At that time, the Creditor assessed the Debtor as highly creditworthy having regarding to his personal and business background, particularly his holding of substantial beneficial interests in the listed company of UEGL. The Creditor therefore approved the Debtor’s loan request quickly and the loan facility granted to the Debtor was on a clean loan basis, i.e. no security was required from the Debtor. This is evident from the Memorandum annexed to the Loan agreement signed by both the Creditor and the Debtor.

8. A meeting was originally scheduled on 26 September 2014 for the Debtor to attend our office to sign the Loan Agreement and other relevant documents and to collect the Cheque which was prepared and drawn in favour of HEC Finance 92 Limited (“HEC”) pursuant to the prior instructions given by the Debtor. This is confirmed under Clause 7.1 of the Loan Agreement which stated that the Debtor authorizes and directs the Creditor to issue the Cheque to HEC. However, on 26 September 2014, the Debtor called Ms Margaret Wong, a representative of the Creditor saying that he wanted to obtain the loan that day and requested us to deliver the Cheque to HEC but he could only come on the following Monday (29 September 2014) to sign the documents. The Creditor acceded to his request by reason of his then creditworthiness in the Creditor’s eyes. The Debtor did show up and sign the Loan Agreement and other necessary documents on 29 September 2014.

9. The Creditor could not have delivered the Cheque to HEC for no reason but for the payment instructions from the Debtor. What the Debtor alleged at paragraphs 8 and 9 of his 2^nd Affirmation did not make any sense at all: if the Creditor really considered it too risky to lend money to the Debtor as the Debtor alleged, the Creditor could simply require satisfactory security from the Debtor, or reject the deal, or ask HEC to be the lender. There is no logic or commercial sense for the Creditor to enter into the Loan Agreement as the lender and yet refer the Debtor to another financial institution (either HEC or otherwise), transfer the requested loan to such financial institution, and then treat such transferred payment as a loan by the Creditor to the Debtor.

10. If HEC refused to release the fund to the Debtor as alleged, it was solely a matter between them and had nothing to do with the Creditor. The Creditor has no control or involvement in the shareholding or business of HEC. …

11. … The Creditor did not even receive a single complaint or demand letter from [the debtor].”

The findings of Chung J

19.The central issue disputed before the judge was whether the debtor had received the $45 million[2].

20.The judge found the debtor’s case “inherently implausible to the extent of being unbelievable” and was “not satisfied that there is a substantial dispute to the subject loan”[3].  He regarded it as “highly relevant to the credibility of the debtor’s story” that the debtor had failed to explain a number of pertinent matters, hence his story is “nothing more than assertions which should be given no weight”[4].  Examples of pertinent matters which the debtor failed to explain are:

“(1) why the need for money in September 2014 was not attended to before March 2015 (for example, whether it was because the need for money has disappeared, or that it was resolved through other means);

(2) (in view that the creditor has not honoured its contractual obligation under the 2014 loan agreement) why he still considered it appropriate to approach the creditor for a loan;

(3) (in view that the creditor has not honoured its contractual obligation under the 2014 loan agreement) why he still trusted the creditor and signed the [Supplemental Agreement] and the [April 2015 Letter];

(4) why the [Supplemental Agreement] and the [April 2015 Letter] were drafted on the basis of a pre‑existing loan which has already been drawn down (that is, the subject loan);

(5) why he admitted in the [Supplemental Agreement] and the [April 2015 Letter] to the effect he owed the creditor the subject loan;

(6) why the need for money was not attended to after April 2015.”[5]

21.The above findings of the judge relating to the central issue whether the debtor had received the $45 million are not impugned on appeal.

The new issue raised on appeal

22.The debtor contended that the Loan Agreement was in breach of section 18(1) of the MLO and is therefore unenforceable.  His arguments ran along these lines:

(1)   Section 18(1) of the MLO provides as follows:

“No agreement for the repayment of money lent by a money lender or for the payment of interest on money so lent, and no security given to any money lender in respect of any such agreement or loan, shall be so lent unless –

(a) within 7 days after the making of the agreement, a note or memorandum in writing of the agreement is made in accordance with subsection (2) and signed personally by the borrower …

and no such agreement or security shall be enforceable if it is proved that the note or memorandum was not signed by the borrower before the money was lent or the security was given.”

(2)   It is undisputed that the Loan Agreement was signed on 29 September 2014 and on the same day the Memorandum was signed by the petitioner as the lender and the debtor as the borrower to comply with the requirements of section 18(1)(a).  It is also undisputed that a cheque dated 26 September 2014 in the sum of $45 million was drawn on the petitioner’s account in favour of HEC Finance and was cleared on the same day.

(3)   Under section 2(1) of the MLO, “loan” includes “advance, … money paid for or on account of or on behalf of or at the request of any person, … and every agreement (whatever its terms or form may be) which is in substance or effect a loan of money, and also an agreement to secure the repayment of any such loan, and lend and lender shall be construed accordingly.”

(4)   On the petitioner’s own evidence, the petitioner approved the debtor’s loan request and a meeting was originally scheduled on 26 September 2014 for the debtor to sign the relevant documents and to collect the cheque “which was prepared and drawn in favour of [HEC Finance] pursuant to the prior instructions given by the Debtor”, and his instructions were confirmed in clause 7.1 of the Loan Agreement.  However, the debtor called the petitioner that day and informed the latter that he wanted to obtain the loan on 26 September and requested the petitioner to deliver the cheque to HEC Finance and he would sign the relevant documents on 29 September.  The petitioner acceded to the debtor’s request, delivered the cheque to HEC Finance on 26 September and it was cleared on the same day.  The Loan Agreement and the Memorandum were signed on 29 September.

(5)   Hence, the loan was made to the debtor when money was paid to HEC Finance at his request on 26 September, before the note or memorandum of the agreement was signed on 29 September.  This was in breach of section 18(1), which renders the Loan Agreement unenforceable.

23.The court has discretion under section 18(3) to enforce an agreement made in breach of section 18(1).  Section 18(3) provides as follows:

“Notwithstanding subsection (1), if the court before which the enforceability of any agreement or security comes in question is satisfied that in all the circumstances it would be inequitable that any such agreement or security which does not comply with this section should be held not to be enforceable, the court may order that such agreement or security is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable.”

24.The debtor accepted that the discretion under section 18(3) may be exercised summarily without a full trial, if the equities are clearly in favour of the lender that a non‑compliant loan agreement should be enforced (Orix Asia Limited v Grant Forward Industrial Ltd & Ors, HCCL 79/1999, 15 June 2000, p 5 to 6; Celestial (International) Securities & Investment Ltd v William Henry Woo, HCA 9659/2000, 4 December 2001, §§30 to 37; Re William Henry Woo, HCB 276/2002, 27 May 2002, §§15 to 16; Ontone Finance Company Limited v Leung Lai Ching Margaret & Anr, HCA 372/2011, 13 August 2012, §§27, 30 to 33, 42).  It was contended that an overly pro‑creditor approach to the exercise of this discretion would defeat the purpose of the legislation, citing Cheung Chow v Cheung Ng Sheung Steven, CACV 119/1993, 24 November 1993, §20.  It was pointed out that strict compliance with section 18(1) is required, on pain of criminal prosecution (see section 29(4)), so a breach of section 18(1) is a significant matter in the exercise of the discretion.

25.Mr Lam submitted for the debtor that the present situation is not a clear‑cut case and the court should be slow to summarily enforce a loan which was made in breach of section 18(1).  He argued that this is not a run‑of‑the‑mill money lender case and there are features that cry out for a full investigation at trial, including the following:

(1)   There was the lack of any documentation recording the early payment of the loan amount via the cheque.  The terms in the Loan Agreement (clauses 3.1(b) and 7.1), the Memorandum (clause 5) and the Supplemental Agreement (recitals, clause (A)) gave the contrary impression that the loan was extended only on or after 29 September 2014.

(2)   The petitioner’s sole justification for its willingness to issue the cheque to the debtor without first securing proper loan documentation is a reference to the debtor’s “then creditworthiness in the Creditor’s eyes”.  This is inherently improbable and cannot explain the uncommercial and risky approach of the petitioner.  The lending practice of the money lender may be a relevant consideration which merits full investigation at trial (Cheung Chow v Cheung Ng Sheung Steven, §20).

(3)   There is no suggestion that the debtor had any control over HEC Finance, or that the loan was to discharge some pre‑existing liability owed by the debtor to HEC Finance.  In contrast, it is supported by public records and announcements that the petitioner and HEC Finance are associated companies.  The assertion in the 2^nd affirmation of Chow Chi Wah Vincent that the petitioner “has no control or involvement in the shareholding or business of [HEC Finance]” is disingenuous, if not misleading.

(4)   Significantly, this was not the first occasion that HEC Finance had been the recipient of purported loan proceeds from a company associated with it but with the borrower being a third party, see Re Chu Chi Ho Ian (a Bankrupt), HCB 4344/2012, 21 January 2016, referred to in the affirmation of the debtor’s solicitor placed before the judge.  In Re Chu Chi Ho Ian,Ng J dismissed an application to remove the trustees in bankruptcy who had carried out investigation into apparently suspicious transactions arising from the relationship of the bankrupt with HEC Finance and three creditor companies associated with it, where substantial loans were borrowed by the bankrupt from those creditors for reasons unexplained and the majority of the loan proceeds was paid not to the bankrupt but directly to HEC Finance.

26.Mr Lam further contended that in light of the existing materials before the court, there was nothing of significance the petitioner could have raised below, whether by way of further evidence or submission, that would have made it clear it was inequitable not to enforce the loan.  At the very least, he submitted that things are not what they appeared to be, and the court should feel a strong sense of unease in concluding, in summary bankruptcy proceedings, that pursuant to section 18(3) “in all the circumstances it would be inequitable” not to enforce the Loan Agreement.

27.Counsel argued it followed from the above that the bankruptcy order ought not to have been made and the jurisdiction to annul the order is engaged.  And as the petitioning debt is disputed by genuine and cogent reasons, the court should exercise its discretion to annul the order (Kam Hung Cheung v Bank of China (Hong Kong) Ltd [2009] 3 HKLRD 597 at §11).

If the new issue should be entertained on appeal

28.Relevant matters that would be considered in deciding whether to allow a new point to be raised on appeal are stated in Cathay Pacific Airways Flight Attendants Union v Director-General of Civil Aviation [2007] 2 HKLRD 668 at §45:

“(1) Where new points are sought to be raised on appeal (not having been raised in the Court below), it is for the Court of Appeal to decide in its discretion whether or not to allow this.

(2) Where pure points of law are involved, the Court of Appeal may be more inclined to allow these to be raised than if factual questions or mixed law/fact issues are involved.

(3) Where in particular any factual questions are sought to be raised, the Court of Appeal will be anxious to ensure that no prejudice to the other side will be caused. This is equally applicable to pure points of law but is more acute when factual issues are involved.

(4) If the court does allow new factual points to be raised, the other side must be given sufficient opportunity to meet them. It does not follow from this, however, that just because the other side may be given an opportunity to deal with new factual issues that leave will be given to raise them. The time for going into the facts is before the trial court. It is not for the appeal courts to try and determine disputed facts.

(5) The Court of Appeal will almost invariably expect an explanation to be given as to why new points raised on appeal (whether of fact or law) were not raised in the Court below. This is an important facet of the court’s discretion. …”

29.It is most pertinent to bear in mind the “state of the evidence” bar as stated in Flywin Co Ltd v Strong & Associates Ltd (2002) 5 HKCFAR 356 at §§38 and 39: Where a party has omitted to take a point at the trial and then seeks to raise that point on appeal, he will be barred from doing so unless there is no reasonable possibility that the state of the evidence relevant to the point would have been materially more favourable to the other side if the point had been taken at the trial.  The foundational imperative of this “state of the evidence” bar is fairness.

30.This concept of fairness in assessing whether a new point should be permitted to be taken on appeal was further explained in Lehmanbrown Ltd v Union Trade Holdings Inc & Ors, HCMP 977/2015, 17 June 2015 at §10:

“Whilst the Court of Appeal obviously has power to entertain new points in an appeal, it is also clearly and firmly established that new points which are fact sensitive or otherwise affect the course of evidence or conduct of the case at the hearing below should not be allowed. Though this principle is usually applied in situations where the new points necessitate further evidence to be adduced, it is not confined to such scenarios. Very often, the raising of new point by one party may lead to the other party raising counter arguments and the consideration of such counter arguments may involve factual assessment in a different light from that undertaken by the court below. Sometimes, it may involve a different weighing of factors in the exercise of discretion. Alternatively, the other party may embark on a different course of forensic conduct if the new point were taken earlier. The appellate court, in considering whether the new point would be entertained, is entitled to take these matters into account in order to avoid unfairness to the other party.”

31.These well-established principles have been applied recently in United Muslim Association of Hong Kong & Ors v Yusuf Yu & Ors [2018] HKCA 451 for the reasons explained in §§40 and 41.

32.Mr Toby Brown submitted on behalf of the petitioner that this court should exercise its discretion in not allowing the new issue to be raised on appeal.  He mentioned three reasons.  Firstly, there is no valid explanation why this issue was not raised in the court below.  Secondly, the debtor is not entitled to raise on appeal a new case inconsistent with that which he originally raised in the primary court, even though the evidence taken in that court supports the new case, see Re Walton, ex p Reddish (1877) LR 5 Ch D 882; Capital Rich Development Ltd & Anr v Town Planning Board [2007] 2 HKLRD 155 at §39.  Thirdly, the principle in Flywin is engaged.

33.The new issue was not raised before the judge by the previous legal team of the debtor.  It was not even a ground of appeal when the notice of appeal was filed on 5 May 2017.  On 4 April 2018, a notice of change of solicitors was filed on behalf of the debtor and the notice of appeal was substantially amended by new counsel and re-filed on 3 May 2018.  The issue concerning the MLO was then raised for the first time in the amended notice of appeal.  Other than the change of the whole legal team of the debtor, there is no apparent reason why the new issue was not raised in the court below.  This is not a valid excuse for not raising the new issue before the judge, and weighs against the exercise of discretion in allowing it to be run on appeal.

34.In support of his second reason, Mr Brown pointed out the debtor’s position in the court below was that no money from the loan was received by him at all, and hence he did not receive any funds from the petitioner before the Loan Agreement and Memorandum were signed.  Mr Brown submitted that the debtor ought to be precluded from raising the MLO issue on appeal, as that would be premised on the contrary position that the money was lent to the debtor before the parties had signed the relevant documentation.

35.The present situation should be distinguished from the cases cited by Mr Brown where the appellant sought to raise a new case inconsistent with that which he originally raised in the primary court, even though the new case was supported by the evidence adduced in the court below.  Here, the debtor is seeking to rely on the petitioner’s own evidence to contend that even if the petitioner’s factual case is accepted, the petitioner would fall foul of section 18(1) of the MLO.  Although one component of the new case he is seeking to raise on appeal (that the loan was made before the signing of the relevant documents) is inconsistent with that which he advanced before the judge, this aspect was raised by the other party and was considered by the judge.

36.However, that is not the only consideration.  If the debtor had raised in the court below that the loan had contravened section 18(1) because it was made before relevant documentation was signed, this is bound to trigger a response from the petitioner in invoking the court’s discretion under section 18(3) to enforce a non-compliant agreement.  New facts may be introduced as a result and the existing facts would need to be considered in a different angle.  That is precisely the kind of situation envisaged in the passage quoted in Lehmanbrown Ltd v Union Trade Holdings Inc, “where the raising of new point by one party may lead to the other party raising counter arguments and the consideration of such counter arguments may involve factual assessment in a different light from that undertaken by the court below”, and “the other party may embark on a different course of forensic conduct if the new point were taken earlier”.

37.In deciding whether discretion should be exercised to allow the debtor to raise the MLO argument on appeal, it is pertinent to consider both components of the new case together, namely that the loan was unenforceable for breach of section 18(1) and that the court would not have exercised its discretion summarily under section 18(3), to avoid unfairness to the other party.

38.Germane to the debtor’s argument under section 18(3) is his reliance on matters which were said to cry out for explanation and consequently the lack of explanation from the petitioner would cause the court to have a strong sense of unease in concluding summarily that the discretion should be exercised in favour of enforcing the Loan Agreement.

39.Mr Lam cannot argue on the one hand there are matters which cry out for explanation and maintain on the other hand that “in light of the existing materials”, there was nothing of significance the petitioner could have raised, whether by way of further evidence or submission, that would have made it clear it was inequitable not to enforce the agreement.  If there are indeed matters that cry out for full investigation at trial, as contended by Mr Lam, the Flywin principle must be engaged.  The late introduction of the arguments on the exercise of discretion under section 18(3) would have denied the petitioner of the opportunity of adducing such evidence as might be necessary to satisfy the court that the equities are clearly in its favour for such discretion to be exercised.

40.It cannot be said there is no real prejudice to the petitioner in these circumstances, as argued by Mr Lam.  As stated in Flywin, the foundational imperative of the “state of the evidence” bar is fairness.  Mr Brown is correct in submitting that the unfairness is compounded in this instance as the debtor relies on the lack of explanation of the petitioner to argue against the exercise of the discretion in section 18(3).

41.It would not be appropriate in these circumstances to exercise the discretion in favour of the debtor and allow him to run the new arguments on appeal as they are fact sensitive and would have affected the course of evidence and the conduct of the case below.  The appeal court should adopt a course to ensure that no prejudice would be caused to the other party.  On this basis alone, the debtor’s appeal should be dismissed.

42.Mr Brown took a fall‑back position and submitted that if this court should allow the MLO issue to be raised, the discretion under section 18(3) should be exercised summarily in favour of enforcing the Loan Agreement.  As this is unnecessary for the disposal of the appeal, we decline to express any views on this.

Decision on costs

43.There is no dispute that costs of the appeal should follow the event.  The petitioner seeks costs on an indemnity basis.  Mr Brown submitted this is an unusual situation and the unsatisfactory conduct of the appeal should merit the award of costs on a higher basis.  No proper ground of appeal was advanced when the former solicitors filed the notice of appeal.  This persisted for nearly a year until the debtor changed the whole legal team.  The notice of appeal was then amended to raise three grounds. The first two challenged the service of the statutory demand and the petition and a summons was issued to adduce further evidence in that regard.  It was only when leading counsel was brought in, after skeleton submissions were lodged on both sides, that the first two grounds of appeal were abandoned.

44.The responsible decision taken on the advice of leading counsel to abandon bad points has saved the court’s time to some extent.  But this was done too late in the day when the petitioner had already put in a full skeleton argument dealing with all the grounds of appeal and the summons to adduce new evidence.  The past litigation conduct of the debtor is sufficiently unsatisfactory to justify an award of costs on a higher basis.  We order the debtor to pay the petitioner’s costs of the appeal and the summons to adduce new evidence on an indemnity basis.

Mr Toby Brown, instructed by Shum & Co, for the Creditor (Respondent)

Mr Douglas Lam SC, Mr Kevin Lau and Mr Anson Tso, instructed by Chiu & Co, for the Debtor (Appellant)