China Citic Bank International Ltd (Formerly Known As Citic Bank International Limited) v. Upway Investment Ltd and Others

HCMP 2733/2016

[2019] HKCFI 2779

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2733 OF 2016

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BETWEEN

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REASONS FOR JUDGMENT

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1.The trial of the plaintiff’s originating summons herein took place on 28 October 2019.  All seven defendants were absent at the trial.

2.Upon hearing counsel for the plaintiff, and the evidence called by the plaintiff, I gave judgment in favour of the plaintiff on 28 October 2019 in terms of the amended draft order submitted to me.  The following are my reasons for so doing.

3.The plaintiff is a bank. The 2^nd defendant has been a customer of the plaintiff since mid-2012.  The 1^st, 3^rd to 5^th defendants are companies in the same group.  The 6^th and 7^th defendants are husband and wife.  The 6^th defendant represented and was in control of the 1^st to 5^th defendants at all material times.

4.The plaintiff and the 2^nd defendant executed an ISDA Master Agreement (“the Master Agreement”) dated 24 May 2012, which was amended on 29 April 2013.  The Master Agreement was also acknowledged and countersigned by the other defendants.

5.The material terms of the Master Agreement include the following:

(1) If at any time an Event of Default (which included non-payment when a sum is due) occurred and was then continuing, the “Non-defaulting Party” could, by not more than 20 days’ notice to the “Defaulting Party” designate a day not earlier than the date such notice is effective as an Early Termination Date in respect of all outstanding transactions governed by the Master Agreement—clause 6(a).

(2) If the Early Termination Date resulted from an Event of Default, the “Defaulting Party” would have to pay the “Non-defaulting Party” an Early Termination Amount—clause 6(e)(i).

(3) If the “Defaulting Party” failed to make any payment in respect of the Early Termination Amount on the due date, interest would accrue on the Early Termination Amount from, and including, the Early Termination Date to, but excluding, the date of payment—clause 9(h)(ii)(2).

6.On 24 May 2012, the 1^st, 3^rd to 7^th defendants executed a total of five guarantees (“the Guarantees”) in favour of the plaintiff, to guarantee all outstanding indebtedness of the 2^nd defendant.

7.Under a facility letter dated 25 April 2013, subsequently varied by a supplemental facility letter dated 14 April 2014, a second supplemental facility letter dated 12 June 2014 and a third supplemental facility letter dated 24 June 2015 (collectively “the Facility Letter”), the plaintiff agreed to grant general banking facilities to the 2nd defendant including:

(1) trade finance facility of HK$22 million (“the Trade Finance Facility”);

(2) FX Accumulator facilities; and

(3) hedging products under Derivatives Facilities.

8.The bank also has an overriding right to demand the payment of such facilities under the terms of the Facility Letter.

9.The 1^st defendant executed a Tripartite Legal Charge/Mortgage (“the Mortgage”) in favour of the plaintiff dated 5 June 2013.  The 1^st defendant executed the Mortgage as the Mortgagor, with the 2^nd defendant as the Borrower.  Under the Mortgage, the 1^st and 2^nd defendants jointly covenanted to pay all sums plus interest which were then or might at any time thereafter be due and owing by the 2^nd defendant.  The 1^st defendant also, as beneficial owner of a property known as No 5 Napa Avenue (House Type M2) Royal Palms Phase A, Wo Shang Wai, Yuen Long, New Territories (“the Property”), charged the Property in favour of the plaintiff to secure the indebtedness of the 2^nd defendant.  The Mortgage also contains a provision that if there is any default in repayment, the plaintiff shall have power to take possession of the Property.

10.On 24 January 2014 and 18 February 2014, the plaintiff and the 2^nd defendant entered into two USD/CNY EKI Par Forward with Target Redemption transactions (Ref Nos RPF1401124991 and RPF1402181039) (“the FXA Contracts”).  At that time, the defendants’ main contact within the plaintiff was Ms Jackie Lee (“Ms Lee”).

11.In very broad terms, the FXA Contracts take the form of a usual accumulator contract whereunder the 2^nd defendant committed itself to purchase a fixed amount of RMB at a fixed price over a course of 24 months, with settlement taking place monthly.  However, if RMB appreciates beyond a certain margin within a particular time, the FXA Contract would be “knocked out” (in that it would terminate early).  Accordingly, if RMB appreciates and if the relevant FXA Contract is not knocked out, the 2^nd defendant will be able to purchase RMB at a price cheaper than market for a fixed period.

12.Ms Lee’s evidence, which I accept, was that the 6^th defendant told her these contracts were entered into for hedging purposes, because the business of the defendants involved considerable amounts of RMB payables and USD receivables.  Also, the FXA Contracts were preceded by similar contracts entered in 2013 (which resulted in profits for the 2^nd defendant), in which Ms Lee had no involvement because she was not employed by the plaintiff at the time.

13.The plaintiff also sues upon 13 “FXO Contracts”.  They were variously entered into between 15 April 2014 and 18 August 2015.  These FXO Contracts involve the 2^nd defendant selling “CNY Put/USD Call” options to be plaintiff.

14.The FXO Contracts differ from the FXA Contracts in the sense that the FXO Contracts involved only one settlement date.  Since the 2^nd defendant sold an option to the plaintiff, the 2^nd defendant received an option premium immediately upon the execution of the relevant FXO Contract.  The plaintiff, on the other hand, has an option to put RMB to the 2^nd defendant at the pre-agreed price on the option maturity date.

15.Hence, if RMB depreciates, then the 2^nd defendant would suffer a loss; conversely, if RMB appreciates, then the expectation would be that the plaintiff would not exercise the option, such that the 2^nd defendant will make a gain from this transaction by way of the option premium paid to it when the relevant FXO Contract was entered into.

16.In that sense, by way of these FXO Contacts, the 2^nd defendant has also hedged against the risk of RMB appreciating.

17.RMB depreciated significantly within the relevant period. This resulted in significant losses for the 2^nd defendant.

18.The final due date for repayment under the Trade Finance Facility was 24 November 2015.  However, the 2^nd defendant failed to make repayment of the principal amount of US$990,151.40 on that date.  Significant sums were also due under the FXA Contracts.

19.On 5 February 2016, the plaintiff sent a letter to the 2^nd defendant demanding repayment of or outstanding principal and interest under the Trade Finance Facility and the FXA Contracts.

20.The sums demanded were not paid.  The plaintiff issued a Notice of Early Termination on 16 February 2016 to the 2^nd defendant, designating 19 February 2016 as the Early Termination Date in respect of all outstanding transactions, namely the 13 FXO Contracts.

21.On 18 February 2016, the 2^nd defendant sent a letter to the plaintiff stating that it was in the process of selling its tangible assets in order to provide cash to settle their losses under the FXA Contracts.  In light of the long-standing relationship, the plaintiff agreed to withdraw the Early Termination Notice of 19 February 2016.

22.However, the outstanding sums remained unpaid.  Another Notice of Early Termination dated 3 March 2016 was therefore issued by the plaintiff, designating 8 March 2016 as the Early Termination Date.

23.On 24 June 2016, the plaintiff exercised its right to set off by uplifting the 2^nd defendant’s pledge deposit, using it to partially settle the outstanding indebtedness under the Trade Finance Facility.

24.The remaining sums however remained unpaid.

25.A number of the purported defences are mentioned in the pleading and witness statement filed on behalf of the defendants.  However, given that the defendants were all absent, no evidence was given to support any of them.

26.I am satisfied that the plaintiff has made out its case for the sums claimed against all defendants under the Master Agreement, Facility Letter, the Mortgage and the Guarantees.  In particular, I am satisfied that the plaintiff is entitled to costs on an indemnity basis pursuant to clauses in the Master Agreement and the Mortgage.

27.I am likewise satisfied that the defendants had due notice of this trial.  I understand from the plaintiff’s counsel that when solicitors for the defendants ceased to act for them, addresses for the defendants were provided, and documents notifying the defendants of the subsequent hearings, including this trial, had been duly served on the defendants at such addresses.

28.For these reasons, as noted above, I gave judgment in favour of the plaintiff in terms of the amended draft order submitted to me.

Ms Verna Lui, instructed by V Hau & Chow, for the plaintiff

The 1^st to 7^th defendants were not represented and did not appear