Ing Bank N.V. v. Mr Tsui Tsin Tong
Read the full judgment text of CACV 354/1999 on BabelCite. This Court of Appeal judgment was delivered on 28 March 2000.
1. This is an appeal from the summary judgment entered by Stone J for the plaintiff pursuant to its application under Order 14 and 14A of the Rules of the High Court.
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CACV000354/1999 CACV 354/99 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 354 OF 1999 (ON APPEAL FROM HCCL 305/1998) ________________________________
___________________ Coram: Hon Godfrey VP, Mayo VP and Keith JA in Court Date of Hearing: 8 - 9 March 2000 Date of Judgment: 28 March 2000 ______________ J U D G M E N T ______________ Hon Mayo VP: 1. This is an appeal from the summary judgment entered by Stone J for the plaintiff pursuant to its application under Order 14 and 14A of the Rules of the High Court. 2. According to the summons which lay before the Judge one of the issues which he was required to determine was "whether the transactions in question which arose under the ISDA Master Agreement and/or the Put Option Confirmation and/or the New Trade Confirmation constituted a dealing or dealings under s. 76 of the Securities Ordinance, Cap. 333". 3. The Judge has very helpfully analysed the background to this fairly complex litigation. 4. From this it can be seen that Wilfred Lam a client of the New China Hong Kong Capital Ltd. ("NCHK Capital") purchased warrants over shares in Pearl Oriental Holdings Ltd. ("Pearl Oriental"). These were purchased from NCHK Capital who in turn subscribed for the warrants through ING Baring Financial Products ("ING BFP"). Mr Lam had the right to require ING BFP to sell a specified number of shares in Pearl Oriental at a particular price at the given date. 5. ING BFP protected itself from the risk of Pearl Oriental shares increasing in price by hedging the warrant contracts. They protected themselves from a fall in the price of the shares by requiring NCHK Capital to sell it a put option over the shares under which NCHK Capital would be required to purchase the shares at the specified date at the pre-agreed strike price. NCHK Capital required Mr Lam to purchase a similar put option which thereby reduced their risk as against him. 6. In June 1997 the shares fell sharply. As a consequence of this an agreement was concluded between ING BFP and NCHK Capital that the shares the subject of the put option should be sold so as to minimise losses. When ING BFP exercised the put option on 4 September 1997 383,586,000 out of the 400,000,000 shares remained unsold and NCHK Capital had to purchase these in accordance with the terms of the put option. No payment was made and this resulted in further sales being effected in September and October 1997. 7. The two agreements which are central to the claim being made by the plaintiff in the Statement of Claim were entered into on 28 November 1997. The first agreement which is referred to as the New Trade Confirmation provided for ING BFP to sell 165,586,000 shares which had remained unsold under the put option for $0.40 each making a total amount of $66,234,400. The second was a Debt Rescheduling Deed which contained in Clause 13 the guarantee which is sued on.
8. The defendant was a party to this guarantee. He guaranteed and indemnified the obligations of NCHK Capital. According to the supporting affidavit of Peter Berg an employee in the plaintiff's group of companies he guaranteed: 9. First, the sum which NCHK Capital owed to ING BFP in respect of accrued losses on the sales of part of the total parcel of shares in Pearl Oriental over which NCHK Capital had sold to ING BFP a put option and which ING BFP had permitted NCHK Capital to sell in the market before the option expiration date to alleviate the effect of the falling Pearl Oriental share price; and 10. Second, the crystallised obligation and loss on the sale of the balance of the Shares which NCHK Capital bought from ING BFP at the fixed price of HK$0.40 per share - thus fixing (a) the price of the balance of the Shares and (b) the loss on the sale of the balance of the Shares by reference to that price as compared to the strike price under the put option. 11. There is no claim in the action to enforce any agreement other than the guarantee in the Debt Rescheduling Deed. 12. The rights of ING BFP under both agreements were assigned to the plaintiff by a Supplemental Deed dated 19 August 1998. 13. It is the plaintiff's claim under the guarantee that is the subject of the Order 14 application. 14. The defendant ran a number of different defences before the Judge. Needless to say he did not consider that any of these defences met the required criteria under Order 14 to enable him to grant leave to the defendant to defend the proceedings. It is convenient to deal separately with each of the defences advanced. 15. Mr Neoh SC for the defendant submitted that the Judge had been in error when he considered the Debt Rescheduling Deed separately and independently from the other documentation which formed an integral part of transactions which had been entered into by the various parties. What the Judge had failed to appreciate was that the main purpose of the Debt Rescheduling Deed was to seek to enforce the obligations of NCHK Capital under their agreement with the plaintiff's subsidiary company ING BFP in relation to the put option transaction which had been guaranteed by the defendant. This necessitated a consideration of the whole of the scheme which had been transacted and more particularly the question as to whether the defendant had an arguable case that the put option transaction was illegal, void or unenforceable. 16. This omission on the part of the Judge was said to be unfortunate as it was not possible to consider the enforceability of a guarantee without having regard to the validity of the primary obligation which was the subject of the guarantee. 17. The put option in this case was an Over the Counter Option ("OTC Option"). Dealings in such options are subject to the controls laid down in the Securities Ordinance, Cap. 333. Mr Neoh contended the OTC Option clearly contravened the provisions contained in s. 76.
18. Mr Neoh argued that it was evident from the affirmation of Mr William Kwong a former employee of NCHK Capital that the company came within the definition of a dealer in the Ordinance. A dealer should not sell put options as they had to be sold in the open market. The consequence of contravening s. 76 was to render any contract entered into unenforceable. 19. Mr Fok SC for the plaintiff accepted the proposition that if a primary obligation is unenforceable a guarantor who undertakes merely a secondary obligation is not liable. 20. Mr Neoh then went on to consider whether it was possible to "contract out" of illegality or unenforceability. This was in the context of Clause 13(1)(c) of the Debt Rescheduling Deed and Clause 13.4 which dealt with waiver of defences.
21. He referred to the line of cases leading up to Spector v Ageda [1973] 1 Ch 30 and the passage at p. 45 from the judgment of Megarry J (as he then was):
22. Mr Neoh submitted that it was clear from these cases and from the passage cited that if the primary obligation was tainted with illegality this was fatal to any subsequent related agreement. 23. It will be appreciated that if the defendant is to succeed in establishing that there is an arguable defence on this issue he will have to demonstrate both that it is arguable that the agreement between ING BFP and NCHK Capital relating to the put option contravened the provisions contained in the Securities Ordinance and that it is arguable that the guarantee and indemnity are tainted by this illegality. Closely associated with this he will have to demonstrate that it is arguable that the waiver provisions in the Deed have no application. 24. Mr Neoh also submitted that even though reference was made to an indemnity in the Deed it was necessary to determine the true nature of the provision. It was evident that the indemnity covered the same commitment as the guarantee and that it should be treated in the same way regardless of the label attached to it. 25. Mr Fok's answer to these submissions was to argue that the Judge had been correct in his analysis of the position and that the New Trade Confirmation and the Debt Rescheduling Deed were separate and distinct from the earlier dealings between all the relevant parties. 26. What was necessary was to determine the true nature of the obligations which the defendant was guaranteeing. What was clear was that NCHK Capital was acknowledging its indebtedness and was making a series of promises to repay the moneys they owed. It was evident from the claims which were being made in the Statement of Claim that the plaintiff was suing on the guarantee and indemnity in Clause 13 and there was no question of the guarantee or indemnity being in any way tainted with illegality. 27. In this connection he called in aid Clause 25 of the Deed which was in these terms:
28. The Deed came within the definition of a "Finance Document". 29. Mr Fok went on to submit that even if these contentions could not be maintained he did not accept that the said put option did contravene s. 76 of the Ordinance. 30. He referred to the fact that it was clear on the evidence ING BFP was also a dealer as defined in the Ordinance. It was accordingly open to ING BFP to place reliance upon the savings provisions in s. 3(1) of the Ordinance which exempt dealings between dealers from the operation of s. 76. 31. S. 3(1) is in these terms:
32. In this context it is necessary to also consider the definition of "dealer" and "dealing in securities" in s. 2(1) of the Ordinance.
33. Mr Neoh's reply to this was that it was apparent from Mr Kwong's affirmation that NCHK Capital had on a number of occasions undertaken transactions relating to OTC Options with parties who were not dealers and that this was sufficient to trigger a contravention of the section. This is not a satisfactory answer to the problem. What we are concerned with is the present series of transactions. Clearly the savings provisions in s. 3(1) do apply in the present case and accordingly the put option did not contravene s. 76. 34. As indicated earlier in this judgment it is necessary for the defendant to surmount both the s. 76 hurdle and demonstrate that the guarantee was not tainted with illegality and that the waiver provisions have no application. 35. I am satisfied that Mr Neoh has not been able to demonstrate that there has been any contravention of s. 76. This being the case it is neither necessary nor desirable for me to express a view on whether or not the guarantee and indemnity are in any way flawed or whether the waiver provisions can be invoked. This ground of appeal must fail. 36. The next ground argued by Mr Neoh was that the put option was a "contract for differences" and thus contravened the Gambling Ordinance, Cap. 148. This ground can be disposed of in fairly short order. As was pointed out by Mr Fok the put option was the opposite of a gaming contract. It was a commercial arrangement which enabled the party entering into it to hedge a risk. Over and above this s. 8.1 of the 1994 ISDA Equity Option definitions provides for "settlement of share transactions" by delivery. 37. It is in this form:
38. It is clear that a put option does not come within the ambit of the Gambling Ordinance. This is not arguable. 39. The next ground argued was uncertainty. In the grounds of appeal it was framed in this way:
40. The collateral provisions are set out on pages 178 to 180 of the exhibits bundle which was before us. It is quite a lengthy document and it is not convenient to embody the terms in this judgment. However it is evident from a perusal of the provision that there is no uncertainty. As was pointed out by the Judge at p. 12 of his judgment "the calculation amount" can readily be extrapolated. I think that the Judge was right to express the view that there was no merit in this point. 41. The next ground which related to economic duress was formulated in this way:
42. The test as to what constitutes economic duress was referred to at p. 635 of the speech of Lord Scarman in Pao On v Lau Yiu-long [1980] AC 614:
43. I do not believe that the defendant can make out an arguable case that he can meet this test. 44. Perhaps the most significant point is that if he thought that the demands which were being made were excessive there was a channel for redress laid down in Clause 5 of the ISDA Master Agreement. It is noteworthy that the defendant did not through NCHK Capital avail himself of the procedure which is laid down in the clause. 45. It is also noteworthy that Clauses 14.10 and 14.11 of the Debt Rescheduling Deed are inconsistent with a claim of this nature being made.
46. Having regard to the fact that this complaint was made at a very late stage it is not surprising that the Judge viewed it with a certain degree of scepticism. 47. I do not think that there is any merit in this ground. 48. The next ground of appeal related to the alleged failure of ING BFP to mitigate losses. It was made out in this way:
49. The Judge dealt with these matters at pages 14 to 16 of his judgment. I agree with his summary of the position and the conclusion he reaches. However there is an even more important reason why this ground must fail. It does not appear to be contested that ING BFP had a legitimate commercial interest in keeping this contract alive. This of itself would have fully justified them in not unwinding the options and is a complete answer to the allegations which are made against them in this connection. This ground is clearly unarguable. 50. The next ground was that ING BFP were guilty of "misrepresentation". It was framed in this way:
51. At the hearing before us we had some difficulty in defining the exact nature of the misrepresentation complained of and the contractual nexus out of which it allegedly arose. Mr Neoh informed us that it arose out of an informal agreement to unwind the options as far as this was possible. Professor Chiang had expressed the opinion that they could have done more than they actually did. As pointed out by Mr Fok it was by no means clear how an inference could possibly have been drawn that Mr Kwong was authorised to act for and on behalf of ING BFP. 52. Over and above this the claim is inconsistent with Clauses 14.10 and 14.11 of the Debt Rescheduling Deed. 53. That deals with all of the defences which the defendant has attempted to run. For the reasons given I have no doubt that none of them are arguable and that the Judge was right to enter judgment for the plaintiff in the sum claimed. In my view this appeal should be dismissed. Hon Keith JA: 54. I agree that this appeal should be dismissed, but I wish to add a few words of my own out of deference to the excellence of the arguments. The approach of Stone J 55. The principal argument deployed on behalf of the Defendant is that the put option granted by New China Hong Kong Capital Ltd. ("NCHK Capital") to ING Baring Financial Products ("ING BFP") is unenforceable. It is said to have been rendered unenforceable by two statutory provisions:
However, it is not the put option on which the Plaintiff is suing the Defendant. The Plaintiff is suing the Defendant on the guarantee contained in cl. 13 of the agreement known as the Debt Rescheduling Deed. It is, of course, well settled that a guarantee is unenforceable if the primary obligation whose performance it guarantees is unenforceable. But even if the put option is unenforceable, its unenforceability will only relieve the Defendant from liability under the guarantee if it was the put option whose performance the guarantee was guaranteeing, rather than some other contractual obligation assumed by NCHK Capital. 56. The judge was "inclined to think" that the put option was not unenforceable. However, he did not reach a concluded view on the arguability of its enforceability because he concluded that it was not arguable that its unenforceability made the obligations assumed by the Defendant in cl. 13 of the Debt Rescheduling Deed unenforceable. He regarded the obligations assumed by the Defendant as "a separate and distinct contractual obligation" which served to crystallise and cap the loss which NCHK Capital incurred under the put option. In order to evaluate this conclusion, an understanding of the relevant agreements is essential. The relevant agreements 57. The put option was granted to ING BFP by NCHK Capital on 14 October 1996. It related to ordinary shares in Pearl Oriental Holdings Ltd. ("Pearl Oriental"). Pearl Oriental was a public company whose shares were listed on the Stock Exchange. By that option, ING BFP had the right up to 4 September 1997 to require NCHK Capital to purchase up to 200m. ordinary shares in Pearl Oriental from it at a price of $3.08 per share. Subsequently, Pearl Oriental split its existing share stock on a two-for-one basis, following which the put option related to 400m. ordinary shares in Pearl Oriental at a reduced price of $1.54 per share. However, in June 1997, the price of shares in Pearl Oriental began to fall. In order to reduce NCHK Capital's ultimate liability under the put option if the put option was exercised by ING BFP, ING BFP and NCHK Capital agreed that as many of the shares as possible should be sold before the share price dropped even further. A number of the shares were sold pursuant to this agreement. 58. On 4 September 1997, ING BFP exercised its rights under the put option and required NCHK Capital to buy those of the shares in Pearl Oriental which remained unsold. No payments were made by NCHK Capital to ING BFP, but it was nevertheless agreed to continue to sell as many as possible of the shares in Pearl Oriental on a piece-meal basis. The shares which were sold pursuant to these arrangements, whether before or after 4 September 1997, had been sold by ING BFP to NCHK Capital who had then sold them to the ultimate purchasers. 59. By 28 November 1997, 234,414,000 of the 400m. shares in Pearl Oriental had been sold. 165,586,000 of them remained unsold. Accordingly, on that date ING BFP and NCHK Capital entered into two agreements. The first agreement ("the New Trade Confirmation") dealt with the remaining unsold shares. By that agreement, ING BFP agreed to sell the remaining unsold shares to NCHK Capital at $0.40 each. The total sum payable by NCHK Capital was $66,234,400.00. 60. The second agreement made between ING BFP and NCHK Capital on 28 November 1997 was the Debt Rescheduling Deed. It related to NCHK Capital's other indebtedness to ING BFP. That indebtedness consisted primarily of
A sum was added to that indebtedness to reflect what has been described as the "Estimated Funding Costs of ING BFP", but credit had to be given to NCHK Capital for the dividends paid on the shares and for the collateral placed with ING BFP by NCHK Capital. The result was that NCHK Capital's indebtedness to ING BFP - in addition to the $66,234,400.00 payable under the New Trade Confirmation - was agreed at $140,317,658.29. That was the sum which the Debt Rescheduling Deed required NCHK Capital to pay to ING BFP. The obligations which the Defendant was guaranteeing 61. Against that background, it is important to remember what the Defendant was guaranteeing under cl. 13 of the Debt Rescheduling Deed. He was guaranteeing NCHK Capital's performance of "its obligations under the Finance Documents (other than the Existing Guarantee)". The relevant Finance Documents are the New Trade Confirmation and the Debt Rescheduling Deed itself. The critical question, therefore, is whether, by guaranteeing NCHK Capital's obligations under the New Trade Confirmation and the Debt Rescheduling Deed, the Defendant was guaranteeing its obligations under the put option. 62. I do not think that it is arguable that the Defendant was doing that. NCHK Capital's obligations under the put option involved purchasing the 400m. shares in Pearl Oriental from ING BFP at $1.54 per share when required to do so. NCHK Capital did not do so, although it had by then purchased some of the shares, and continued to do so after that. But what the New Trade Confirmation and the Debt Rescheduling Deed did was to impose different obligations on NCHK Capital in substitution for the obligations assumed under the put option. It is true that those obligations were designed to put ING BFP into the position in which it would have been if the put option had been complied with. But the fact remains that wholly different obligations were being assumed by NCHK Capital, and it was the performance of those obligations, not the obligations under the put option, which the Defendant was guaranteeing. 63. One other point arises. Even if, by guaranteeing NCHK Capital's obligations under the New Trade Confirmation and the Debt Rescheduling Deed, the Defendant was not guaranteeing NCHK Capital's obligations under the put option, is it arguable that the New Trade Confirmation and the Debt Rescheduling Deed were unenforceable against NCHK Capital? If they were unenforceable, their unenforceability could taint the Defendant's guarantee in the Debt Rescheduling Deed. Mr Anthony Neoh SC for the Defendant did not suggest that the New Trade Confirmation and the Debt Rescheduling Deed were unenforceable against NCHK Capital. In my view, he was right to take that stance. It had been open to NCHK Capital to refuse to agree to the New Trade Confirmation and the Debt Rescheduling Deed, on the basis that they sought to enforce the put option which was arguably unenforceable. NCHK Capital could have left ING BFP to sue it for breach of the put option, leaving it to the court to decide whether the put option was enforceable against it. However, NCHK Capital decided in effect to compromise the claim which ING BFP had against it under the put option by agreeing to the terms of the New Trade Confirmation and the Debt Rescheduling Deed. There is no suggestion that they were anything other than genuinely entered into without the concealment of essential information or the taking of an undue advantage. Accordingly, it would not then have been open to NCHK Capital to dispute the enforceability of the New Trade Confirmation and the Debt Rescheduling Deed. In this connection, I have found the case of Binder v. Alachouzos [1972] 2 QB 151, which Godfrey V-P drew to the parties' attention, of assistance. The enforceability of the put option 64. In the light of my complete agreement with Stone J's conclusion on the issue which he regarded as decisive, it is unnecessary for me to address three other contentions which had to be regarded as arguable if the unenforceability of the put option was to render the guarantee given by the Defendant unenforceable. They were that
It is equally unnecessary for me to express a view as to the enforceability of the put option, but I should add a few words of my own on that topic since that question has been regarded as decisive of part of the appeal. 65. The put option undoubtedly constituted a dealing of the kind to which section 76(1) of the Securities Ordinance potentially applies: it was a dealing in which NCHK Capital conferred on ING BFP an option to sell to NCHK Capital shares listed on the Unified Exchange. The critical question is whether it is arguable that NCHK Capital was a "dealer" within section 76(1). The term "dealer" is defined in section 2(1) of the Securities Ordinance. That definition, coupled with the definition of the phrase "dealing in securities" also in section 2(1), requires attention to be focused on the nature of NCHK Capital's business in general, rather than the nature of any particular transaction. If the put option which NCHK Capital granted to ING BFP had been the only transaction in which NCHK Capital had dealt in securities, it may be that "the professional exemption" in the concluding words of section 3(1) applied to prevent NCHK Capital being regarded as a "dealer" within the meaning of section 76(1) in relation to that transaction. But the unchallenged evidence of William Kwong, the former Managing Director of NCHK Capital, shows that NCHK Capital had dealt in securities with various persons and companies whose business did not involve the acquisition and disposal, or the holding, of securities (whether as principal or agent): see para. 36 of, and exhibit "WKWT-10" to, his affirmation. Accordingly, for my part, I would have regarded it as arguable that the put option was rendered unenforceable by section 76(1). In the light of that conclusion, it is unnecessary for me to express a view as to whether it is arguable that it would also have been rendered unenforceable by the Gambling Ordinance. The other defences 66. The Defendant is said to have a number of other defences to the Plaintiff's claim. In my opinion, the judge was right not to regard those defences as arguable for the reasons which he gave and for the additional reasons set out by Mr Joseph Fok SC for the Plaintiff in his skeleton argument. Hon Godfrey VP: 67. I agree that we should dismiss this appeal. The facts sufficiently appear from the judgments of Mayo VP and Keith JA, which I have had the advantage of reading in draft. Since those judgments, although they arrive at the same conclusion, reach it by routes which are not identical, I will state shortly my own reasons for coming to that same conclusion. In doing so, I wish to make it clear that I express no opinion on any matter which, on the view of the case I have taken, does not arise for decision. 68. For my part, I take precisely the same view of the case as I understand Stone J to have taken in the court below. 69. Mr Joseph Fok, SC, for the plaintiff, had submitted to the judge, as he submitted to us, that the subject-matter of the plaintiff's action was the enforcement of the defendant's guarantee in the Debt Rescheduling Deed; a guarantee of a simple debt formally acknowledged by NCHK Capital. The judge accepted this submission. The judge regarded the put option as no more than "part of the historical background". He treated the Debt Rescheduling Deed as creating "a separate and distinct contractual obligation". He rejected the argument of Mr Anthony Neoh, SC to the effect that, on the contrary, the Debt Rescheduling Deed served, indirectly, to enforce the original obligation under the put option. The judge held that this "separate and distinct contractual obligation" was not one to which either section 76 of the Securities Ordinance or section 3 of the Gambling Ordinance could possibly apply. 70. I agree and can detect no flaw in the judge's reasoning or his conclusions. 71. Mr Neoh, SC sought to revive before us a number of other suggested defences summarily dismissed by the judge, who labelled them "uncertainty"; "economic duress'; "failure to mitigate"; and "misrepresentation". Like the judge, I can discover no substance or merit in any of these suggested defences. All of them savour of the last ditch. The defendant has not satisfied me that there is any question or issue here which ought to be sent for trial. He has no real answer to the plaintiff's claim and the judge was quite right to give judgment against him. 72. The appeal will be dismissed and (subject to the provisions of Order 42 rule 5B(6) of the Rules of the High Court) we will order that the costs of the plaintiff of the appeal be taxed (if not agreed) and paid by the defendant to the plaintiff.
Representation: Mr Joseph Fok SC, instructed by Messrs Allen & Overy for the plaintiff Mr Anthony F Neoh SC and Mr Lawrence Ng, instructed by Messrs Charles Chu, Kenneth Sit & Wu for the defendant |
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