Hec Finance 03 Ltd v. Chen Jiarong and Another

HCA 779/2019

[2019] HKCFI 2840

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 779 OF 2019

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DECISION

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Introduction

1.By a summons filed on 4 July 2019 (“the Summons”), the Plaintiff (“P”) sought to enter summary judgment against the Defendants (“Ds”).  The application was opposed. 

2.I heard the Summons substantively.  My decision vis-à-vis the Summons is to (1) grant unconditional leave to defend to Ds; and (2) order costs to be in the cause of this action, with Certificate for 2 Counsel (“the Decision”). 

3.My reasons for the Decision are as follows. 

Background Facts

4.P was a Hong Kong corporation and a licensed money lender.  In 2018, P as lender and Zhang Yongdong as borrower (“the Borrower”) entered into a loan agreement (“the Loan Agreement”) by which P agreed to make available to the Borrower a loan facility of up to HKD 300 million (“the Facility”).  On 20 April 2018, pursuant to the Loan Agreement and on the Borrower’s instructions, 1.3 billion shares (“the Secured Shares”) of Freeman FinTech Corporation Limited (Stock Code 279) (“Freeman”) were deposited into a securities account and charged in favour of P as P’s security for the Facility.

5.The shares of Freeman were trading at HKD 1.25 per share on 20 April 2018.  If valuation of the Secured Shares was to be done by the simple method of multiplying the number of shares with the trading price per share, the value of the Secured Shares on 20 April 2018 would be HKD 1.625 billion, ie over 5 times the value of the Facility discounting interests and other valuation factors. 

6.Against this background, the 1^st Defendant (“D1”) executed a guarantee in favour of P (“D1’s Guarantee”) on 20 April 2018, as did the 2^nd Defendant (“D2”) (“D2’s Guarantee”) on the same date (collectively, “the Guarantees”). 

7.P’s case was that the Guarantees were valid and enforceable. 

8.Relying on the Guarantees, P started this action against Ds on 3 May 2019, claiming HKD 337,380,821.92 plus contractual interests and costs on full indemnity basis. 

9.D1 was the sole director, and one of the shareholders, of D2. 

10.D2 was a BVI corporation. 

11.According to the 1^st and 2^nd Affirmations of Chen Jiarong filed on 2 October 2019 and 15 November 2019 respectively (collectively, “Ds’ Affirmations”), Ds’ defence was that (1) the debts allegedly owed to P had already been extinguished so the Guarantees had also been discharged; and (2) the Guarantees were liable to be rescinded for misrepresentation and/or non-disclosure. 

12.According to the 2^nd Affirmation of Lau King Hang, a director of P, filed on 30 October 2019 (“Lau’s Affirmation”), the debts owed to P had not been extinguished at all, and Ds had simply “misunderstood the situation”. 

13.By paragraphs 19.9 to 19.12 of Lau’s Affirmation, P alleged it had allowed some of the Secured Shares to be taken out “free of payment” because prior to the Loan Agreement, it was “contemplated” by all parties that the Secured Shares might have to be taken out and used to repay debts owed to entities other than P.  P did not exhibit any document proving this “contemplation” existed or was known to Ds as alleged.  P explained that this was not mentioned previously as P considered that this would have no effect on the subject matter of these proceedings. 

P’s Submissions

14.Mr Jin Pao SC, appearing with Mr Vincent Chen, Counsel for P, submits, inter alia, that neither of Ds’ purported defences is arguable so that I should enter summary judgment against Ds.  Mr Pao SC emphasizes the following: -

(1)     P’s arrangements vis-à-vis the Secured Shares are irrelevant in this action because “there is no rule that the creditor must avail himself of other securities… before looking to the surety for payment… the creditor has a completely unfettered choice as to how, and against whom, he should proceed to recover a debt…” – see Andrews & Millet, Law of Guarantees (7^th Ed) at paragraph 7-009. 

(2)     Ds’ contention that the debts owed to P had been extinguished is “the result of their misapprehension of the relevant facts” – on a true understanding of the facts it is crystal clear that the debts had not been extinguished at all. 

(3)     The Guarantees contain standard conclusive evidence clauses which are effective, and which prevent Ds from running their current arguments – see Heraeus Limited v Chan Yun Mui & Another [2018] HKCFI 2721 paragraph 77 per DHCJ Marlene Ng (as she then was).

Ds’ Submissions

15.Mr William Wong SC, appearing with Mr Martin Kok and Mr Michael Ng, Counsel for Ds, submits, inter alia, that both of Ds’ arguments are credible, so I should dismiss the Summons or grant unconditional leave to defend to Ds.  Mr Wong SC emphasizes the following: -

(1)     As Ribeiro J (as Ribeiro PJ then was) had observed in Billion Silver Development Ltd v All Wide Investment Ltd [2000] 2 HKC 262 at 268-D, if “possibly genuine weaknesses” in P’s case is exposed, I should grant unconditional leave to defend, and a proper analysis of the parties’ evidence exposed genuine weaknesses in P’s case.  In particular, P’s new allegation that there was as an undocumented agreement between the parties that the Secured Shares could be released was “self-evidently absurd”. 

(2)     On the authority of Bank of China (Hong Kong) Ltd v Wong King Sing [2002] 1 HKLRD 358 at paragraph 28 per Recorder Ma SC (as Ma CJ then was), where there is an arrangement between a creditor and a principal debtor of which the surety is unaware, but which materially affects his potential liability, there is a legal duty upon the creditor to disclose such facts to the surety, and a failure to disclose would result in the creditor being unable to enforce the contract signed by the surety.  On the facts of our present case, there is a real possibility that Ds can rely on this as a defence and have the Guarantees declared unenforceable. 

My View

16.In my view, whilst the arguments raised by the parties on the facts and on the law are complicated, the answer to the Summons is in fact a simple one.  It is P’s case that Ds were in fact aware of the arrangement between P and the Borrower to the effect that the Secured Shares were not true securities and could be taken out without payment.  It is Ds’ case that they only knew about that alleged arrangement for the first time on reading Lau’s Affirmation dated 30 October 2019.  Neither version of events can be said to be inherently incredible, and I therefore cannot attempt to resolve this factual dispute without cross-examination.  If Ds’ version of events is ultimately accepted as true, on the authority of Wong King Sing (above) it is entirely possible that Ds can succeed in getting the Guarantees declared unenforceable.  This being the situation, Ds must be given unconditional leave to defend, and the matter should go to trial. 

Costs

17.In my view, since the Guarantees contain standard conclusive evidence clauses, and the arguments now being run by Ds did not feature in pre-litigation correspondence, it was in fact “not unreasonable” for P to have attempted summary judgment application, even though this Court end up refusing to accede to P’s request.  This being the case, ordering costs of the Summons to be in the cause of this action is the most appropriate. 

18.P engaged 2 Counsel.  Ds engaged 3 Counsel but accepted I should only certify 2 of them in inter partes assessment. Given the sheer quantum of P’s claim, the potential consequence of an order being made in terms of the Summons, and the complexity of the parties’ arguments on the facts and on the law, I certify the engagement of 2 Counsel (for each side) as necessary. 

Final Remarks

19.I do thank all 5 Counsel for their most able assistance. 

Mr Jin Pao SC leading Mr Vincent Chen, instructed by Lam & Co, for the Plaintiff

Mr William Wong SC leading Mr Martin Kok & Mr Michael Ng, instructed by Tung, Ng, Tse & Lam, for the Defendants