China Jianxin Credit Services Ltd v. Ir Resources Ltd

HCA 888/2019

[2021] HKCFI 575

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 888 OF 2019

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Before: Deputy High Court Judge MK Liu (Paper Disposal)

Date of Plaintiff’s Written Submissions: 24 February 2021

Dates of Defendant’s Written Submissions: 17 February and 3 March 2021

Date of Decision: 5 March 2021

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DECISION

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1.There are two matters before the court:

(1)  the appeal lodged by the defendant (“D”) on 6 October 2020 against the decision of Master Cruden dated 27 May 2020 (“the appeal”), by which the Master has granted summary judgment to the plaintiff for the sum of HK$8,025,331.25 together with interests (“the summary judgment”); and

(2)  D’s application by a summons dated 15 January 2021 (“the amendment summons”) for leave to amend its defence, seeking to introduce a counterclaim against P and/or Mr Jason Lam (“Jason Lam”).

2.I have directed that these matters be determined on paper without an oral hearing.  The parties have provided me written submissions, and I have considered the same.

THE APPEAL

3.The dispute between P and D in fact falls within a narrow compass.

4.It is common ground that P has advanced a loan of about HK$8m to D (“the IRR Loan”) pursuant to a written loan agreement between P and D dated 4 May 2017 (“the IRR Loan Agreement”).

5.P’s case is that as per the IRR Loan Agreement, the said agreement expired on 4 May 2019, but D failed to repay P the loan together with interest on that date.

6.D’s case is that the IRR Loan Agreement did not represent the totality of the parties’ agreement at the time.  There was a collateral agreement between the parties (“the Collateral Agreement”), evidenced by their course of dealings, that P would extend or renew the tenor of the IRR Loan for at least one year upon the expiry of the tenor stated in the IRR Loan Agreement.  Accordingly, P’s commencement of this action on 21 May 2019 is premature, as the time for repayment of the IRR Loan has not yet accrued then. D has continuously serviced interest payments for the IRR Loan and has not committed any breach of the IRR Loan Agreement.

7.In the Defence filed by D and in the Affirmation of Chan Ka Chung (“Kenneth Chan”) filed in opposition to P’s application for a summary judgment, it is mentioned that D is also relying upon some alleged non-compliances with the provisions of the Money Lenders Ordinance (“MLO”) as a defence to P’s claim.  However, the MLO is not mentioned in D’s written submissions submitted to this court.  In these circumstances, my understanding is that D is solely relying upon the Collateral Agreement to resist P’s application for a summary judgment.

8.Accordingly, the core issues in the appeal are as follows:

(1)  whether the existence of the Collateral Agreement is believable; and

(2)  if yes, whether D may raise any arguable defence to P’s claim based upon the Collateral Agreement. 

Background facts

9.P is a money lender licensed under the Money Lenders Ordinance and a wholly-owned subsidiary of Universe Entertainment and Culture Group Limited (formerly known as Universe International Financial Holdings Ltd) (“Universe”), a company listed on the Main Board of the Hong Kong Stock Exchange (“the HKEx”).  Jason Lam is a director of P.

10.D is a company listed on the GEM Board of the HKEx.  At the material times, Kenneth Chan was D’s President.  He was also the Chairman of another listed company, China Wah Yan Healthcare Ltd (stock code: 0648) (“China Wah Yan”), which was then the single largest shareholder of D. Kenneth Chan was also the Chairman of another listed company, Rui Kang Pharmaceutical Group Investment Ltd (stock code: 0837) between 1 October 2016 and 28 August 2017.

11.Since 2015, there had been a course of dealings between P (acting by Jason Lam) on the one hand and Kenneth Chan and his companies on the other hand whereby Kenneth Chan’s companies borrowed funds from P:

(1)  First, there was a HK$23m loan obtained by Megacom Investment Incorporated (“Megacom”), a company wholly-owned by Kenneth Chan, from P (“1^st Megacom Loan”).  With regard to the 1^st Megacom Loan, D’s case is as follows:

(a)  Kenneth Chan and Jason Lam had in fact agreed on a term of 2 years.

(b)  Upon Jason Lam’s request, the written loan agreement for the 1^st Megacom Loan dated 29 July 2015 set out a term of 6 months, at interest rate of 8.5% p.a.

(c)  Jason Lam assured Kenneth Chan that the agreed tenor of 2 years would be effected by P extending or renewing the 1^st Megacom Loan upon the expiry of the tenor stipulated in the written agreement (“the 2015 Megacom Collateral Agreement”):

(d)  The 2015 Megacom Collateral Agreement was performed, in that upon expiry of the 6-month term in the written agreement, on 28 January 2016, P extended the 1^st Megacom Loan for 12 months on exactly the same terms.  The 1^st Megacom Loan had since been repaid in full at Megacom’s option.

(2)  Second, there was a further HK$21m loan obtained by Megacom from P (“2^nd Megacom Loan”).  With regard to the 2^nd Megacom Loan, D’s case is that:

(a)  The parties’ agreement was for a term of 2 years, and the written loan agreement dated 1 February 2017, which stipulated a term of 12 months and interest rate of 8.5% p.a., was executed at Jason Lam’s request.

(b)  Kenneth Chan executed the written agreement on the promise or representation of Jason Lam that the 2^nd Megacom Loan would be extended or renewed upon expiry of the written term to achieve the 2-year term agreed (“2017 Megacom Collateral Agreement”).

12.In early 2017 (shortly after the grant of the 2^nd Megacom Loan), Kenneth Chan and Jason Lam had discussions over the grant of further loans to China Wah Yan and D respectively.  It is D’s case that:

(1)  Kenneth Chan expressly requested the loans to China Wah Yan and D (both listed companies) should be for longer terms of 3-5 years, as revolving credit lines for their respective business development.

(2)  Jason Lam agreed to grant loans of HK$21m each to China Wah Yan and D, on the long-term basis requested by Kenneth Chan.

(3)  However, Jason Lam raised the point that given the close association between Kenneth Chan, China Wah Yan and D (which might cause them to be regarded as connected parties), the Listing Rules (which P would need to have regard to, as a main operating subsidiary of Universe which was listed) might require the proposed 2 loans to be aggregated with the 2^ndMegacom Loan.  If the result of the aggregation exceeded the Listing Rules value metric, that might result in a need for shareholders’ approval, or at least inquiry with the Hong Kong Stock Exchange on whether such approval would be required, which Jason Lam wanted to avoid.

(4)  To avoid the need for regulatory approval, Jason Lam requested Kenneth Chan to fully settle the 2^nd Megacom Loan first (at that time it was only granted for just over one month), before loans to D and China Wah Yan would be granted.

13.D says that during these discussions, Jason Lam made, inter alia, the following representations to KC (“Lam’s Representations”):

(1)  P was cash-rich and could grant loans of high amount and long tenures to China Wah Yan and D because Universe had just raised over HK$360m through a number of fund-raising exercises.

(2)  P’s internal credit policies required that the standard initial term for the loans be for 2 years only, which had to be complied with.

(3)  Notwithstanding that, P could grant revolving loans on “friendly and favourable terms” to D and China Wah Yan to effectively achieve long term loans of 3-5 years, by causing the loans to be extended beyond expiry of the stipulated initial period of 2 years to the timeframe requested by D and China Wah Yan, so long as the interest payments were made on time and there was no event of default.

14.D contends that, following and in reliance of Lam’s Representations:

(1)  Megacom did proceed to redeem the 2^nd Megacom Loan (granted on 1 February 2017) in full on 13 March 2017, a mere 6 weeks after it was taken out.

(2)  Three days thereafter, on 16 March 2017, P entered into a written loan agreement with China Wah Yan (“the CWY Loan Agreement”) to grant a HK$21m revolving loan (“the CWY Loan”), at the same interest rate of 8.5% p.a. as for previous loans to KC’s company (ie Megacom).  The stated term of the CWY Loan was 2 years.

(3)  After a break of about 6 weeks, on 4 May 2017, P entered into the IRR Loan Agreement with D for a HK$21m revolving loan, also at interest rate of 8.5% p.a., and also with stated term of 2 years.

15.As to the CWY Loan, P says that on 30 April 2019, P and China Wan Yan entered into another loan agreement.   This was not a simple extension of the CWY Loan but part of a broader exercise to refinance part of outstanding amount thereof.

16.D says that there was a collateral agreement to the IRR Loan Agreement (ie the Collateral Agreement), for which it had given consideration and had performed, alternatively it had relied upon Lam’s Representations to its detriment.

17.The IRR Loan Agreement contains the following terms:

“1.1 In this Agreement, unless the context otherwise requires:

……

“Availability Period” means the period of two (2) years commencing on the date hereof and ending on 4^th May 2019 or, if earlier, the date on which the entire Available Facility is cancelled in accordance with the terms hereof; ……

“Repayment Date” means, in relation to all Advances, shall mean the last day of the Availability Period ……

……

5.1 Repayment: Subject as otherwise provided herein, the Borrower shall repay all Advanced and the outstanding interest accrued thereon the Repayment Date, or as the case may be, prepay such amount on the prepayment date in accordance with Clause 5.3. The Facility will be subject to review at any time during the Availability Period at the Lender’s absolute discretion and the Lender shall have the overriding or absolute right at any time to demand immediate repayment of the Advanced and the outstanding interest accrued thereon.

……

19.2 Negotiation: No act or negotiation by or on behalf of the Lender in any way precludes it from exercising any right or constitutes a suspension or variation of any right.

19.3 Consent and waiver: Any consent or waiver may be given subject to such conditions as the Lender may specify. Any waiver or consent is effective only in the instance and for the purpose for which it is given, and only if it is given in writing.

……

19.5 Amendment: Any provision of the Loan Documents may be amended only if the relevant parties thereunder so agree in writing ……

19.6 Entire agreement: The Loan Documents contain the entire agreement among all parties thereunder relating to the subject matter thereof, and supersede all previous agreements, warranties and undertakings relating to the same.

……

24. Independent Legal Advice

……

24.2 The Borrower hereby acknowledges that it has been requested to seek independent legal advice with regard to the contents of this Agreement, its legal effects and consequences and any other matter incidental thereto.  The Borrower also acknowledges that it has read and understood this Agreement and is fully aware of its rights and obligations hereunder.”

18.There is no dispute that:

(1)  By a notice of drawing dated 4 May 2017, D drew HK$8m under the IRR Loan Agreement.

(2)  There is no default on interest payment of the IRR Loan.

19.It is D’s case that in early 2019, P began to display signs of reneging from the Collateral Agreement.

(1)  When the CWY Loan’s stated term was approaching expiry, China Wah Yan’s Gaston Lam reached out to Jason Lam for the agreed extension, but was met by requests for repayment.  In the end, the CWY Loan was extended on 30 April 2019 on revised terms under China Wah Yan’s protest.

(2)  Interest payment for the IRR Loan fell on 3 May 2019 which D had discharged, following which there were discussions with P’s team.

(3)  However, on 7 May 2019, P caused its solicitors to issue a demand letter to D on the IRR Loan, threatening to commence legal proceedings against D.

(4)  On 14 May 2019, D wrote back to propose a meeting to further the previous discussions with a view to achieving an extension of the IRR Loan (“D’s Reply Letter”).

(5)  D’s Reply Letter was ignored, and P commenced this action on 21 May 2019.

The principles

20.An appeal hearing under Order 58 is a de novo hearing.  Subject to the restriction in Order 58 rule 1(5), the hearing before me is an actual rehearing as if the application came before me for the first time[1].

21.In assessing whether an arguable defence has been raised by the defendant in an Order 14 application, the reminder given by the Court of Appeal in Paul Y Management Ltd v. Eternal Unity Development Ltd & Others[2] has to be borne in mind.  In that case, the Court of Appeal said at [19]:

“In deciding whether a plaintiff is entitled to summary judgment the relevant test is whether the defendant has raised credible triable issues. If there are, the matter should go to trial. If not, judgment should be entered against the defendant. In considering whether there are triable issues the Court will, of course, not take the alleged defence on its face value but test it against the evidence disclosed in the affidavit including matters such as contemporaneous documents, whether the alleged defence is inconsistent with the defence previously put forward or whether the defence is only recently raised despite opportunity being given to the defendant to respond earlier. The Court will also consider the inherent probability of the defence. But what the Court should not do is to conduct a mini-trial on complicated factual issues.”

22.In Menfond Electronic Art & Computer Design Co Ltd v Wong Wang Tat Victor[3], DHCJ Lisa Wong SC (as she then was) referred to, inter alia, Paul Y and said at [61]:

“The principles governing the grant or refusal of summary judgment under Order 14 are well established. It is for the defendant to show that there is an arguable defence or triable issue. In doing so, the defendant must condescend to particulars. The mere assertion in an affidavit of a given situation by the defendant does not, ipso facto, ground leave to defend. The defendant must satisfy the court that his evidence is capable of being believed and that on the basis of such evidence, there is a fair or reasonable probability of the defendant having a real or bona fide defence. In deciding whether there is a fair or reasonable probability of the defendant having a real or bona fide defence, the court does not isolate each factual issue and consider whether it is possible that the defendant’s story on that issue is credible. Rather, the court must look at the whole situation. In assessing the credibility of the defendant’s factual case, while the court will not embark on a mini-trial on affidavit evidence, the court is not obliged to suspend its critical faculties and assume that the defendant’s evidence is accurate. If having regard to inherent plausibility, inconsistency with contemporaneous documents and other compelling evidence, the defence is not credible, the court must say so. If the defendant’s defence is incredible in any material respect, it cannot be said that there is a fair or reasonable probability that the defendant has a real or bona fide defence…”

23.With respect to a collateral agreement, the sole effect of which is to vary or add to terms of written documents, the court would always view the same with some suspicion.  In Huang Mucai v Cheng Zhen Shu[4], DHCJ Lok (as he then was) said:

“19. The defendant here is actually trying to establish a collateral contract the sole effect of which is to vary or add to the terms of the written documents, ie the Loan Agreement and the Repayment Agreement. The courts will always view such kind of collateral contracts with some suspicion, as any laxity would enable parties to escape from the full performance of the obligations of contracts unquestionable entered into by them. More especially, it would have the effect of lessening the authority of written contracts by making it possible to vary them by suggesting the existence of verbal collateral agreements relating to the same subject matter (see: Universal Dockyard Ltd v Trinity General Insurance Co Ltd [1989] 2 HKLR 160 (PC), per Lord Goff at 164H-165A)

20. If the defence in a summary judgment application rests upon a collateral oral agreement, the sole effect of which is to vary the terms of a written existing document, the threshold onus on the defendant is compounded by the onus to strictly prove such an agreement (see: Bank of India v Surtani Murlidhar Parmanand [1994] 1 HKC 7 (CA), per Nazareth JA at 11I-12C). Although the modern approach is that the courts are more willing to accept pre-contractual assurance giving rise to a collateral contract, the burden remains on the party alleging such a collateral contract to adduce credible evidence to prove its existence (see: Bank of China (Hong Kong) Ltd v Fung Chin Kan (2002) 5 HKCFAR 515, per Litton NPJ at §§57).

21. Further, in a summary judgment application, the court is entitled to find that the terms of the alleged collateral contract are too vague and uncertain so as to render it (even if such exists) to be enforceable. The court can also find that the alleged collateral contract does not exist with reference to documentary evidence and conduct of the parties (see: Wing Siu Co Ltd v Goldquest International Ltd (No 2) [2002] 4 HKC 420, per Ma J (as he then was) at §19).”

Existence of the Collateral Agreement

24.Ms Eva Sit SC (leading Mr Thomas Wong) for D submits that that the Collateral Agreement alleged by D is believable.  Ms Sit SC submits:

(1)  Kenneth Chan was introduced by Cho Kwai Chee (“Cho”) to P for the purpose of obtaining loans.  All along Kenneth Chan only dealt with Jason Lam on negotiations and terms of the loans.  There were oral discussions between Jason Lam and Kenneth Chan in relation to the 1^st and the 2^nd Megacom Loans, the CWY Loan, and the IRR Loan. The content of those discussions, including whether Lam’s Representations had been made therein, would depend on the oral testimony of Kenneth Chan, Henry Chan of D, Cho and Jason Lam, and is clearly a matter for trial.

(2)  There are objective and undisputed contemporaneous facts that support the existence of Lam’s Representations and the Collateral Agreement:

(a)  While the written agreement for the 1^st Megacom Loan was only for 6 months, it was extended upon expiry for one year (twice the length of the original term) on exactly the same terms.  P’s conduct is wholly consistent with D’s case that the extension was granted pursuant to the assurance or promise from Jason Lam, in substantially similar terms as Lam’s Representations.

(b)  The public announcements made by Universe with respect to the 1^st Megacom Loan and its extension showed that there was no change in circumstance and the same reason was given for granting the 1^st Megacom Loan in the first place and to extend it on the same terms – namely additional interest income to P.

(c)  Given Kenneth Chan has had ongoing loan dealings with P – the 1^st Megacom Loan (2015) and its extension (2016); the 2^nd Megacom Loan (Feb 2017); the CWY Loan (Mar 2017) and the IRR Loan (May 2017) – it is only reasonable that all these transactions would be conducted on similar terms.  That was in fact the case on interest rate, which remained 8.5% p.a. throughout and whatever the stated tenor of the loans.  This further bolsters D’s case that the representation and arrangement made with respect to the earlier loans (written agreement for shorter term; collateral agreement to extend to effectively create a longer term) had also been made with respect to the IRR Loan.

(d)  Megacom’s redemption of the 2^nd Megacom Loan (granted on 1 February 2017) in full on 13 March 2017 could only have been done upon Kenneth Chan’s reliance on Lam’s Representations.  Otherwise it would have made no sense for Megacom to take out a term loan of 12 months only to repay it in full within 6 weeks.

(e)  At the time when the IRR Loan Agreement was executed, D was not in need of short-term cash but was looking for long-term credit lines to facilitate its long-term business development.  This is evidenced by the fact that (i) D had already raised about HK$277m in 2016 through rights issue and placing; (ii) D entered into a placing agreement in February 2017 to raise approximately HK$26.3m; and (iii) D only made one drawdown on the IRR Loan of only HK$8m (38% of the total facility of HK$21m). Indeed, D being financially sound was expressly acknowledged by P in Universe’s written board resolution with respect to the IRR Loan.

(f)  Further, D’s case that the IRR Loan and the CWY Loan are effectively a “packaged deal”, and everything concerning the 2 loans (including their terms and documentation) is identical.  The CWY Loan was in fact extended upon the stipulated expiry.

(3)  P’s testimony in fact raises more questions than it purports to answer, and little weight can be put on P’s assertion that there was no Collateral Agreement:

(a)  Jason Lam is not forthcoming in his affirmation evidence – in his first affirmation, he claimed that Kenneth Chan “first approached” him for loans in 2017, which he then changed in his second affirmation to 2014/2015 (after D has disclosed evidence relating to the earlier loans).  This is not a case of merely being economical about the truth; it was a positive statement of the facts which were plainly known to be wrong.

(b)  Significantly, what Jason Lam claimed to have been considered by P in granting the IRR Loan and the CWY Loan were in fact not recorded in Universe / P’s board minutes or public announcements.  In other words, despite P’s assertion that what were agreed between the parties were fully reflected in the written documents including the board minutes and announcements, on its own evidence this was in fact not the case.  This is wholly consistent with and bolsters D’s case that the documents (including the IRR Loan Agreement) were corporate formalities and did not truly reflect the bargain between the parties.

(4)  There was nothing “surprising” about Kenneth Chan / D relying on Lam’s Representations, given:

(a)  All the publicly available information of loans granted by P shows that in 2015/2016, P had only granted loans for 6 months to one year, and that since late 2016, the longest term of loans disclosed by P was 2 years.  This is consistent with Lam’s Representation that P had “standard terms” for loans which were relatively short, and longer term loans would have to be achieved through a combination of written agreement and promise to extend the same.  That was also in fact what happened in the case of the 1^st Megacom Loan.

(b)  On P’s own case, what Jason Lam had been telling Kenneth Chan was merely that board-approved announcements must be made since the loans constituted disclosable transactions.  There is, notably, nothing in P’s internal credit policy concerning the level of authority required to grant loans or extension thereof, which are in any event matters internal to P and not in the public domain and which Jason Lam has confirmed he had never shown Kenneth Chan.

(5)  None of the documents relied upon by P can cast doubt on, least to say conclusively disprove, the Collateral Agreement.

(a)  The audit confirmations dated 25 July 2018 and 16 January 2019 go nowhere towards supporting P’s contention that there was no Collateral Agreement.  Their purpose is to seek the confirmation of the counterparty to a contract the amount outstanding for the purpose of verifying the amount in the audit exercise.  Whether or not there was the Collateral Agreement (which provides for extension of the loan when its current stated term expires) has nothing to do with what, at a given point in time, was the amount of the IRR Loan.

(b)  As regards the IRR Loan being treated as a “current liability” in D’s financial statements, this is wholly consistent with D’s case:

(i)  Paragraph 73 of the Hong Kong Accounting Standard 1 – Presentation of Financial Statements (“the Accounting Standard”) provides that:

“If an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the reporting period under an existing loan facility, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period. However, when refinancing or rolling over the obligation is not at the discretion of the entity (for example, there is no arrangement for refinancing), the entity does not consider the potential to refinance the obligation and classifies the obligation as current.”

(ii)  D did not have a “discretion” to roll over the IRR Loan because renewal or extension of the same was conditional upon interest being kept current and there being no event of default.  Under the circumstances, D had to classify the IRR Loan as a “current liability” as required by Hong Kong Accounting Standards.

(iii)  In relation to D’s Reply Letter dated 14 May 2019[5], the letter has to be read in proper context and with reference to its actual terms, which referred to previous discussions between P and D with respect to the extension of the IRR Loan.  The contents of those discussions is plainly a matter for trial and in no way provides conclusive proof against the Collateral Agreement.

25.With respect, notwithstanding the eloquent submissions of Ms Sit SC, I am not persuaded that the Collateral Agreement is a believable allegation.  As submitted by Mr Anson Wong SC (leading Mr Ken TC Lee) for P, it is plain that the Collateral Agreement is unbelievable.

(1)  Kenneth Chan is a seasoned and sophisticated businessman with substantial commercial experience.  This has to be borne in mind in assessing the overall picture.

(2)  There is not even a single contemporaneous document produced by D in support of its allegation.  Not only that the alleged Lam’s Representations / Collateral Agreement were never mentioned in any of the documents exchanged between P and D, there is also no internal document produced by D making any reference to the same.  It is unbelievable that Kenneth Chan, who is and was a seasoned and experienced businessman, and D, which is and was a company listed on GEM Board, had not recorded the alleged Lam’s Representations / Collateral Agreement in any of its written communications with P or in any of its internal documents.

(3)  D’s allegations are contradicted by contemporaneous documents:

(a)   The alleged Collateral Agreement is contradicted by the clear terms of the Loan Agreement.  The Loan Agreement clearly provided that the Repayment Date was 4 May 2019 and that P would have “the overriding or absolute right at any time to demand immediate payment”[6].  Given that P has an “absolute right” to demand repayment at any time before 4 May 2019, there is plainly no room to suggest that there was a commitment on the part of P that the IRR Loan would invariably be renewed after 4 May 2019.

(b)   Clause 5.1 of the IRR Loan Agreement was referred to in Note 27 to D’s Consolidated Financial Statements (“CFS”) for the years ended on 31 December 2017 published in its Annual Reports 2017 and for the year ended on 31 December 2018 published in its Annual Reports 2018.  D thereby represented to its shareholders that the IRR Loan could be called at any time.  This also contradicts D’s case that there was a commitment on the part of P to renew the IRR Loan after 4 May 2019, and/or that D intended to obtain the funds for long term of 3 to 5 years for business development purpose.

(c)   In its CFS for the years ending on 31 December 2017 and 31 December 2018 published in its Annual Reports 2017 and 2018, D treated the IRR Revolving Loan as “current liabilities”.  In particular, Note 27 to the CFS for the year ending on 31 December 2018 stated that the IRR Revolving Loan of HK$8m was repayable within one year.  Should D expect the loan to be renewed or extended for at least one more year beyond 4 May 2019, D should have made complete disclosure by mentioning the same to its shareholders in the CFS and the Annual Reports in accordance with the Accounting Standard.

(d)   D seeks to explain why the IRR Loan was booked as “current liabilities”.  The purported explanation is that D did not have a “discretion” to roll over since this would be conditional upon interest being kept current and there being no event of default. Such purported explanation must be rejected since D’s has not adduced any evidence suggesting that it decided to book the IRR Loan as “current liabilities” because of its concern that interest might not be kept current or that there might be an event of default. 

(e)   Further, given the importance of the alleged Collateral Agreement to the business of D, it would have been implausible for D / Kenneth Chan not to make disclosure of the same to the shareholders and, at the same time, presented a misleading picture in the CFS that the IRR Loan had to be repaid in 2019.

(f)   In addition to the CFS, D had also consistently acknowledged in writing the IRR Loan as being repayable on 4 May 2019, without mentioning any alleged commitment by P that the same would be renewed after that:

(i)   D signed and returned without qualification a letter issued by P’s independent auditors, Crowe (HK) CPA Limited, dated 25 July 2018.  The said letter clearly stated the loan to be repayable on 4 May 2019 and requested a signed confirmation “[i]f the balance and transaction details shown above” were correct.

(ii)  In another letter issued by D dated 16 January 2019 seeking P’s confirmation of the balance and transaction details, it was also stated that “[the] availability period [of the IRR loan] is 4 May 2017 to 4 May 2019”.

(g)   D seeks to downplay the significance of these letters by claiming that these confirmations only sought to verify and confirm the amount outstanding.  This is an unduly narrow reading of the letters which set out various details of the loan besides the balance, eg interest rate, interests paid by D.  The absence of any reference to the alleged right of renewal in these confirmations shows that the alleged Collateral Agreement never existed.

(h)   After receiving P’s demand letter dated 7 May 2019, D responded by D’s Reply Letter on 14 May 2019, in which D said that “[D] would sincerely like to further negotiate with you to arrive at a mutually agreed arrangement to extend the Loan”.  It is simply inconceivable why D did not mention the alleged Collateral Agreement in this response, should P act in breach of the same and demand full repayment without offering any extension.  Plainly, the alleged Collateral Agreement simply did not exist.

(4)   D’s own conduct is also inconsistent with the existence of the alleged Collateral Agreement:

(a)  According to D, there should be negotiations before the expiry of the term of the IRR Loan Agreement on the length of the extension.  Thus, had the alleged Collateral Agreement existed, Kenneth Chan / D should have approached P to negotiate for the renewal or extension of the IRR Loan before 4 May 2019.

(b)  The complete absence of any negotiation between P and D on the renewal or extension of the Loan Agreement before 4 May 2019 is all the more inexplicable when it is D’s case that P had acted in breach of the alleged Collateral Agreement by demanding for full repayment of the CWY Loan by email dated 12 March 2019 and by letter dated 29 March 2019.  Had D considered that P had failed to honour the alleged Collateral Agreement in relation to the CWY Loan, D should have taken step to ensure that the renewal or extension of the IRR Loan Agreement should be sorted out before its expiry on 4 May 2019.

(c)  Even after P demanded for full repayment of the IRR Loan after 4 May 2019, D still did not make any reference to the alleged Collateral Agreement in the D’s Reply Letter.  Had the alleged Collateral Agreement existed, it would have been inconceivable for D to make no reference to it whatsoever despite P having failed to honour the same firstly in relation to the CWY Loan and again in relation to the IRR Loan, and it would have been impossible for D to express its request for extension in such “conciliatory” tone.

(d)  After sending out D’s Reply Letter, neither D nor Kenneth Chan wrote further to P.  The complete inaction on the part of D and Chan is extremely telling since Chan said in his affirmation that he was “surprised” to receive P’s demand letter dated 7 May 2019, he “did not expect” that the request to negotiate would be turned down, and P’s early repayment demand “would jeopardize [D’s] corporate and funding plan”.  D’s own conduct clearly shows that the alleged Collateral Agreement simply did not exist.

26.I am also of the view that there is no merit in the point made by D that the considerations for granting the IRR Loan and CWY Loan were not recorded in board resolutions and HKEx announcements, and hence, not everything was reflected in written documents.  In my view, there is nothing unusual for board resolutions and/or HKEx announcements not recording all the detailed reasons for commercial transactions.  A crucial question remained unanswered is, if there is any truth in D’s case, why the alleged Lam’s Representations and the Collateral Agreement, despite their importance to D’s business, were never recorded by D / Kenneth Chan in writing.

27.Further, neither the extension of the 1^st Megacom Loan nor the extension of the CWY Loan assists D’s case:

(1)  Regarding the 1^st Megacom Loan, there is no evidence that the same was extended because of any prior agreement for extension.  Rather, the relevant HKEx announcement stated that the extension was arrived at after arm’s length negotiation done “[a]t the request of the Borrower”.

(2)  Regarding the extension of the CWY Loan, there is no evidence that the same was extended by reason of prior agreement.  In fact, the terms of the agreement make it clear that it was not a simple extension of a loan pursuant to any collateral agreement, but was part of a broader re-financing exercise.  Details of the re-financing exercise are set out in [36] of P’s written submissions dated 24 February 2021, and I am not going to repeat the same here. 

28.The above would be sufficient to conclude that Lam’s Representations and the Collateral Agreement as alleged by D are unbelievable.  I further observe:

(1)  P’s case is that Kenneth Chan and Henry Chan only approached Jason Lam for a loan to D after the CWY Loan Agreement was entered into. The negotiation of the IRR Loan was carried out by Jason Lam for P and Henry Chan for D, and Kenneth Chan was not involved in that negotiation. The IRR Loan and the CWY Loan are two separate matters and not a packaged deal.

(2)  In [20] of his first affirmation, Jason Lam said “In about January/February 2017, [Kenneth Chan] first approached me to ask for a loan to be provided to [China Wah Yah], of which [Kenneth Chan] was the chairman.”  That is not inconsistent with what was said by Jason Lam in [9] of his second affirmation, ie Kenneth Chan was introduced to him by Cho in 2014/2015.

Any arguable defence based upon the Collateral Agreement

29.Even if I were wrong and the existence of the Collateral Agreement should be regarded as a believable factual allegation, I would still uphold the summary judgment.  In my view, D may not rely upon the Collateral Agreement to raise any arguable defence to P’s claim.

30.Firstly, the Collateral Agreement as alleged by D is an agreement to agree.  Hence, it is not an agreement which can be enforced against P.

(1)  According to D’s case, the Collateral Agreement was formed on the basis of Lam’s Representations.  D alleges that by Lam’s Representations, P represented to D that the loans under the CWY Loan Agreement and the IRR Loan Agreement “would be extended to effectively achieve a long term loan of 3 to 5 year by way of renewal from time to time.”[7]

(2)  As submitted by Mr Wong SC, according to D’s case, there has not been any representation or agreement as to:

(a)  whether P or D would have the right to decide how long would the loan be extended or renewed beyond the initial term of 2 years;

(b)  in what manner and on what terms would the loan be extended or renewed beyond the initial term of 2 years.

(3)  Ms Sit SC submits that by the Collateral Agreement, P and D have agreed that P would extend the IRR Loan upon the expiry of the term stipulated in the IRR Loan Agreement to achieve the longer term sought by D. Whether that extension is by way of 1 year or more are matters of logistics.  Further, as pleaded in [5.3] of the Defence, under the Collateral Agreement, the IRR Loan would be renewed “on the same terms”[8].

(4)  With respect, I am unable to accept Ms Sit SC’s arguments.

(a)  Defence [5.3] is as follows:

“it should not be a problem for [P] to grant revolving loan facilities to [CWY] and [D] on friendly and favourable terms which would be extended to effectively achieve a long term of 3 to 5 years by way of renewal from time to time. Mr Jason Lam, as a director of [P], could authorize and approve a loan of up to HK$21 million to each of [CWY] and [D] on the same terms and on revolving basis without security.” (Emphasis added)

(b)  Reading the phrase “on the same terms” in context, D’s pleaded case is that Jason Lam told Kenneth Chan that P would provide a loan of HK$21 million to CWY and a loan of HK$21 million to D, and both loans would be provided on the same terms and on revolving basis without security.  It is not D’s pleaded case that upon the expiry of the term as stipulated in the IRR Loan Agreement, the IRR Loan would be extended on the same terms for at least 1 year.

(c)  When D has to repay the IRR Loan to P is an essential matter.  That D would repay the loan after 3 years or after 5 years would have an impact on P’s interest.  As to how long would the loan be extended or renewed beyond the initial term of 2 years and by what mechanism the length of the extended period is determined, these cannot be matters of logistics but must be essential matters.

(5)  I agree with Mr Wong SC that the matters highlighted in his submissions are essential terms, without which the alleged Collateral Agreement would lack the necessary certainty and cannot be regarded as a binding agreement.

(6)  In my judgment, the Collateral Agreement at best is only an agreement to agree.  It is trite law that an agreement to agree is unenforceable for it lacks the necessary certainty[9].

31.Secondly, the Collateral Agreement must be taken as having been superseded by Clause 19.6 of the IRR Loan Agreement (“the Entire Agreement Clause”) and is of no effect.

(1)  Both P and D have referred me to the authorities concerning the effect of an entire agreement clause on a collateral agreement. It is not in dispute that an entire agreement clause would nullify oral collateral agreement which seeks to modify the contents of the written contract, and that those authorities upholding oral collateral agreements did so because they were independent contracts which did not modify the written contracts containing the entire agreement clause[10].  In my view, this is the correct legal position.  The authority on the point is MWB Business Exchange Centres Ltd v. Rock Advertising Ltd[11].

(2)  The Collateral Agreement has modified the IRR Loan Agreement in two fundamental aspects:

(a)  The Collateral Agreement has the effect of postponing the repayment to a date beyond the Repayment Date as defined in the IRR Loan Agreement, ie 4 May 2019.

(b)  Further, the Collateral Agreement has the effect of taking away “the absolute discretion” and “the overriding or absolute right” conferred upon P by Clause 5.1 of the IRR Loan Agreement to demand immediate payment at any time.

(3)  Accordingly, in view of the Entire Agreement Clause contained in the IRR Loan Agreement, no legal effect should be given to the Collateral Agreement.

(4)  Ms Sit SC submits that the Collateral Agreement does not contradict Clause 5.1 of the IRR Loan Agreement, and all the Collateral Agreement does is to prevent P from relying on Clause 5.1 before the agreed extended term[12]. With respect, I am unable to accept this submission.  In my view, there is a clear contradiction between Clause 5.1 and the Collateral Agreement.  To say that the Collateral Agreement is preventing P from relying upon Clause 5.1 in fact is expressing the contradiction in another way.

(5)  Ms Sit SC also submits that the Collateral Agreement does not modify, but simply adds to, Clause 5.1 of the IRR Loan Agreement: the effect of the Collateral Agreement is that the IRR Loan was indeed repayable on 4 May 2019, and P indeed had the right to demand immediate repayment, unless D has duly serviced all interest payment and fulfilled all other obligations under the written contract[13]. With respect, I am unable to agree.  In my view, the Collateral Agreement as alleged by D clearly has the effect of taking away “the absolute discretion” and “the overriding or absolute right” conferred on P to demand immediate payment as set out in Clause 5.1.  In other words, the Collateral Agreement has the effect of modifying Clause 5.1 in substance.

32.Both Ms Sit SC and Mr Wong SC have made submissions on whether Jason Lam has actual implied authority or apparent authority to represent P to make the Collateral Agreement with D.  Since I have ruled against D on the existence of the Collateral Agreement and on the issues as set out in the above, it would not be necessary for me to express any view on the authority issue.

Conclusion

33.For the reasons above, in my view, the existence of Collateral Agreement is unbelievable.  Further, even if the allegation is believable, D may not rely upon the Collateral Agreement to raise any arguable defence to P’s claim.  For these reasons, the appeal must be dismissed.

THE AMENDMENT SUMMONS

34.According to D, the main purpose of the proposed amendments is:

(1)  to include into the pleading the relevant background facts which were all mentioned in D’s affidavit evidence; and

(2)  to add a counterclaim, on the basis of Lam’s Representations, against P and/or Jason Lam in the tort of deceit, the tort of negligence and s.3 of the Misrepresentation Ordinance.

35.As rightly submitted by P, these proposed amendments are premised on the alleged Lam’s Representations and the alleged Collateral Agreement being in existence and also being capable of giving rise to a defence to P’s claim.  I have ruled against D on these contentions and upheld the summary judgment.  Accordingly, there is no basis to allow the amendments proposed by D.  In fact, D does not dispute that if the summary judgment stands, its application as per the amendment summons would not succeed.

36.I would dismiss the amendment summons.

DISPOSAL

37.I dismiss the appeal and the amendment summons.

38.The summary judgment stands.

39.Costs should follow the event.  There be a costs order nisi that costs of the appeal and costs of the amendment summons be paid by D to P forthwith on an indemnity basis[14] with a certificate for 2 counsel, and those costs be summarily assessed on paper.  There be leave to P to file and serve a bill of costs for summary assessment within 7 days after the costs order nisi becoming absolute, and leave to D to file and serve a written reply to the said bill within 7 days thereafter.

40.I thank all counsel for the helpful assistance rendered to the court.

Written submissions of Mr Anson Wong SC leading Mr Ken TC Lee, instructed by Tung, Ng, Tse & Lam for the plaintiff

Written submissions of Ms Eva Sit SC leading Mr Thomas Wong, instructed by Iu, Lai & Li, for the defendant