Shun Hong Ltd (Formerly Known As Bruckner Ltd) v. Chiu Yu Kang
Read the full judgment text of HCA 681/2022 on BabelCite. This High Court CFI judgment was delivered on 8 May 2024.
1. This is the defendant’s appeal against the decision of Master Kent Yee made on 28 April 2023. Master dismissed his summons dated 8 November 2022 to strike out the statement of claim or, alternatively, to stay the action pending the determination of two preliminary issues.
Cites 11 cases
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HCA 681/2022 [2024] HKCFI 1272 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 681 OF 2022 _________________ BETWEEN
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_______________ DECISION _______________ INTRODUCTION 1.This is the defendant’s appeal against the decision of Master Kent Yee made on 28 April 2023. Master dismissed his summons dated 8 November 2022 to strike out the statement of claim or, alternatively, to stay the action pending the determination of two preliminary issues. 2.Mr Jonathan Chang, SC, appearing with Mr Tom Ng for the defendant, confirmed at the appeal hearing that if the striking out application fails, the defendant would not pursue the preliminary issues application. 3.An appeal from a master to a judge under Order 58, rule 1 of the Rules of the High Court is by way of re-hearing. I should treat the defendant’s summons as though it came before me for the first time: Hong Kong Civil Procedure 2024 at 58/1/2. 4.The defendant says that the statement of claim should be struck out because the plaintiff’s claim, as pleaded, is bound to fail. In this appeal, I shall assume the facts as pleaded in the statement of claim and the reply to be true. THE PLAINTIFF’S PLEADED CASE 5.The plaintiff is a Hong Kong incorporated company. The defendant was one of its two directors at the material time. 6.This action arises out of a loan owed by an indirect parent company of the plaintiff and the security given by the plaintiff in support of the loan. The loan 7.The borrower of the loan is called RZ3262019 Ltd (“the Borrower”). It wholly owns Happy Magic Enterprises Inc (“Happy Magic”). Happy Magic in turn wholly owns the plaintiff. The plaintiff owns 50% of a PRC company called 舜鸿地产 (成都) 有限公司 (“Shun Hong (Chengdu)”). Shun Hong (Chengdu) carries out the business of real estate development and property management. 8.The loan was made to the Borrower by Happy Lion Ventures Ltd (“Happy Lion”) and another company (together, “the Lenders”) under an agreement dated 29 August 2019 (“the Loan”). The loan facility was for the US dollar equivalent of RMB 2.4 billion. (In fact, the Lenders were previous owners of Happy Magic and the other 50% shares in Shun Hong (Chengdu) and were thus indirect owners of Shun Hong (Chengdu). The Borrower purchased these companies with financing provided by the Lenders.) The loan agreement was amended and restated on 17 July 2020 and further amended on 23 July 2020 (“the Loan Agreement”). 9.The Loan is secured by, among other things:
The Equity Pledge 10.The Equity Pledge is the key document in this action. At the heart of the striking out application is the precise scope of the plaintiff’s liability vis-à-vis Happy Lion under this pledge document. 11.Clauses 10.1(14), 13.1 and 13.2 are material. 12.Clause 10.1(14) contains a negative pledge clause. The plaintiff agrees, among other things, to procure and ensure that Shun Hong (Chengdu) shall not provide any third party guarantee in the absence of any prior written consent from Happy Lion. The original text reads:
13.Clause 13.1 stipulates the events of default under the Equity Pledge. The two events of default which are presently relevant are set out in sub-clauses (5) and (6). It is an event of default if the plaintiff is in breach of any of its obligations under the Equity Pledge: clause 13.1(5). It is an event of default if the Borrower is in breach of any of its obligations under the Loan Agreement: clause 13.1(6). 14.The original text reads:
15.Clause 13.2 sets out the remedies of Happy Lion upon the occurrence of an event of default. Among other things, it may require the plaintiff to pay damages up to 10% of the USD equivalent of RMB 1.2 billion, ie the principal amount of the Loan owed by the Borrower to the Lenders: clause 13.2(2). Happy Lion may require the plaintiff to compensate it for any direct or indirect loss suffered as a result of the event of default: clause 13.2(3). 16.The original text reads:
Events of default under the Loan Agreement 17.Following certain events of default under the Loan Agreement, by letters dated 14 and 15 July 2021 to the Borrower, the Lenders exercised their rights under the Loan Agreement and declared that all of the Loan together with interest to be immediately due and payable. I shall refer to the default by the Borrower as “the Borrower’s default” below. 18.No repayment was made. On 8 March 2022, pursuant to the Share Charge, the Lenders appointed receivers to be the joint and several receivers of Happy Magic. Following that, the receivers took control of the board of, among others, Happy Magic and the plaintiff. 19.I should pause here to point out that the Borrower’s default under the Loan Agreement amounts to an event of default under clause 13.1(6) of the Equity Pledge. This would in turn entitle Happy Lion to seek remedies against the plaintiff under clause 13.2. However, as pleaded, Happy Lion has not done so. Guarantee signed by Shun Hong (Chengdu) 20.It transpired that on 19 July 2021, that is just a few days after the Lenders accelerated the Loan, the Borrower entered into a facility agreement for up to US$350 million with卓颖投资集团有限公司 (“Zhou Ying”). An aggregate sum of US$310 million was advanced to the Borrower. Since around July 2021, the Borrower had allegedly failed to make repayment to Zhou Ying. 21.What took place next is significant. 22.Around four months later, on 24 November 2021, the defendant purportedly signed a shareholders’ resolution of Shun Hong (Chengdu) on behalf of the plaintiff and the other 50% shareholder resolving that Shun Hong (Chengdu) do provide a guarantee in favour of Zhou Ying for the obligations of the Borrower under the loan advanced by Zhou Ying (“the Purported Resolution”). 23.The plaintiff says that he had no authority to sign the Purported Resolution on its behalf. 24.Pursuant to the Purported Resolution, Shun Hong (Chengdu) purportedly executed a guarantee in favour of Zhou Ying (“the Purported Guarantee”). 25.After that, Zhou Ying swiftly took steps to enforce the Purported Guarantee against Shun Hong (Chengdu). It commenced a legal action in the Intermediate People’s Court of Chengdu Municipality to enforce the guarantee claiming just over RMB 2 billion from Shun Hong (Chengdu) (“the Zhou Ying proceedings”). Happy Lion invoked clause 13.2 against the plaintiff in respect of the Purported Guarantee 26.On 23 March 2022, Happy Lion issued a letter to the plaintiff declaring that the latter was in breach of clause 10.1(14) of the Equity Pledge and that amounted to an event of default, stating that it was entitled to seek remedies stipulated in clause 13.2, and demanding that the plaintiff to pay US$17,147,266.45, which represented 10% of the principal of the Loan, and compensation for all losses caused by the event of default. I shall refer to the breach as “the clause 10.1(14) default” below. 27.I should again pause here to highlight that while Happy Lion did not invoke clause 13.2 in respect of the Borrower’s default in 2021 (and has so far not done so), this time it did proceed to invoke the clause in respect of the clause 10.1(14) default. The claim against the defendant 28.On the above factual premise, the plaintiff contends that the defendant acted in breach of his fiduciary duties as director. It is unnecessary to set out the particulars here as the striking out application proceeds on the basis that the defendant was indeed in breach as alleged. 29.What presently matters is the loss which the plaintiff has suffered by reason of such breach. The plea is as follows:
30.The plaintiff claims the following reliefs:
GROUNDS FOR STRIKING OUT 31.The defendant seeks to strike out the statement of claim arguing that the claim, as disclosed, is bound to fail. He puts forward two supporting grounds. The first ground – no additional loss by reason of the defendant’s breach 32.The first ground relates to paras (1) and (3) of the prayer for relief. It runs as follows. 33.On the plaintiff’s own pleaded case, by virtue of the Borrower’s default which had taken place prior to the defendant’s breach, the plaintiff had already been exposed to Happy Lion’s potential claim under clause 13.2 of the Equity Pledge. That being so, clause 13.2 has been triggered in any event, regardless of whether there was any breach of duties by the defendant. In the circumstances, the defendant’s breach caused no additional loss and did not expose the plaintiff to any additional liability owed to Happy Lion under the clause. 34.As a matter of law, the plaintiff has no viable claim against him. This is because no compensatory relief can be ordered if the breach does not cause the alleged loss. Mr Chang relies on Zhang Hong Li v DBS Bank (Hong Kong) Ltd (2019) 22 HKCFAR 392, [2019] HKCFA 45 at para 118:
35.Mr Chang also cites Libertarian Investment Ltd v Hall (2013) 16 HKCFAR 681 at paras 75 to 78. 36.He submits that the plaintiff’s claim for compensation must be dismissed if the court is not satisfied that absent a breach of duty, the outcome would have been any different. The court is entitled and indeed obliged to consider whether the plaintiff would have suffered the same loss had there been no alleged breach committed by the defendant. 37.On its pleaded case, the plaintiff has no legal basis to claim compensation. Prayer paras (1) and (3) should be struck out. The second ground – the declaratory relief should be struck out for want of a proper contradictor and for want of utility 38.The second ground concerns para (2) of the prayer for relief. 39.The defendant argues that as a matter of law, the plaintiff is not entitled to the declaration as the proper contradictors have not been joined and the declaration would not serve any practical purpose. 40.If the court upholds both grounds, the result is that the entire statement of claim should be struck out as none of the reliefs are viable. LEGAL PRINCIPLES ON STRIKING OUT 41.The defendant contends that the plaintiff’s claim is bound to fail. The applicable legal principles are well-known. 42.Striking out is a draconian remedy. A party should not lightly be denied his day in court. Accordingly, pleadings should be struck out only in clear and obvious cases. Disputed facts are to be taken in favour of the party sought to be struck out. The court should not decide difficult points of law in striking out proceedings. The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out. The mere fact that the case is weak and not likely to succeed is no ground for striking it out. See, eg, recently, Koo Ming Kown v Rev Mr Mok Kong Ting [2022] HKCFI 642 at para 11. DISCUSSION 43.I shall proceed on the facts as pleaded and assume that the defendant was in breach of his fiduciary duties as alleged when he signed the Purported Resolution. The first ground 44.The burden is on the defendant to make good his contention that the plaintiff has suffered no loss by reason of the clause 10.1(14) default, which is in addition to what it has already suffered by reason of the Borrower’s default. 45.Ms Rachel Lam, SC, appearing with Ms Sharon Yuen for the plaintiff, submits that the defendant’s contention is unmeritorious and misplaced. She points out that the present claim is based on the clause 10.1(14) default, which constitutes an event of default under clause 13.1(5). It is not based on the Borrower’s earlier default, which constitutes an event of default under clause 13.1(6). 46.On the facts, Happy Lion has not invoked its rights under clause 13.2 to seek remedies in respect of the Borrower’s default. As such, any liability of the plaintiff in that respect remains purely contingent. It is a mere possibility that such liability will materialise and the liability is contingent upon Happy Lion invoking its rights based on this event of default. 47.Ms Lam submits that as a matter of law, such contingent liability is not to be regarded as damage or loss suffered by the plaintiff and that it will only become damage when the contingency occurs. She relies on two authorities. And I quote the relevant passages below. 48.In Kensland Realty Ltd v Tai, Tang & Chong (2008) 11 HKCFAR 237, McHugh NPJ said, at para 157:
49.In Law Society v Sephton & Co [2006] 2 AC 543, Lord Hoffmann quoted, at para 17, the judgment of the High Court of Australia in Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 at 532:
50.Lord Hoffmann continued to state at para 30:
51.This is to be contrasted with, Ms Lam submits, the damage suffered by the plaintiff by reason of the clause 10.1(14) default. This is because Happy Lion has actually invoked clause 13.2 based on such default and made a demand to the plaintiff. Hence the damage suffered by the plaintiff in this regard is actual, not contingent upon any further event. 52.I agree with Ms Lam’s submission on the fundamental difference in the nature of the damage suffered by the plaintiff by reason of the two events of default. I accept that as a matter of legal analysis, the damage suffered by reason of the Borrower’s default is contingent upon Happy Lion exercising its rights under clause 13.2 and that since Happy Lion has not exercised those rights, the damage is not actual damage. 53.The passages quoted from Kensland Realty and Sephton were made in a different context. Kensland Realty dealt with the issue of when the limitation period started to run for a claim against a solicitor for giving negligent advice in a conveyancing transaction. Sephton similarly concerned the issue of limitation period for a negligence claim but against an accountant. The determination of when damage was suffered was important because a cause of action in tort accrues when damage is suffered. 54.Notwithstanding the different contexts, I agree that the discussion of the general nature of contingent liability in the two authorities applies to the present case. Mr Chang has not taken any issue with those passages or their applicability here. 55.It follows that as a matter of legal analysis and on the face of the pleadings, the defendant’s “no additional loss” contention should fail. The plaintiff has not yet suffered any actual damage by reason of the Borrower’s default. It may never suffer any actual damage if Happy Lion chooses not to exercise its rights. By contrast, it has suffered actual damage by reason of the clause 10.1(14) default as it is now liable to pay compensation to Happy Lion because of that latter default. In the circumstances, how can one possibly conclude that the plaintiff has suffered “no additional loss”? 56.As I see it, the only way for the defendant to make good the “no additional loss” argument is for him to convince me (subject to the discussion of “same loss” below) that I can come to a factual conclusion at this stage that Happy Lion would definitely exercise its rights under clause 13.2 based on the Borrower’s default. Where that is the case, it may be said that the damage suffered by the plaintiff is bound to be actual. (The burden is not on the plaintiff to show that Happy Lion will waive its rights, as Mr Chang seems to be suggesting in his written submissions.) 57.In his oral submissions, Mr Chang invites the court to consider the commercial reality. What is involved is a substantial loan. The Lenders have in fact accelerated the Loan. There is, he says, no countervailing reason why Happy Lion would waive its rights in respect of the Borrower’s default. 58.What Mr Chang says makes sense. If Happy Lion exercises its rights any time now, it should not come as a surprise to anyone. However, it is simply not possible for me to conclude factually at this interlocutory stage that it will exercise the rights. After all, it has not taken that course of action, even though it could have done so as early as in July 2021. Whether to do so or not is up to Happy Lion and it may have its own considerations when determining what remedies it wishes to pursue. At this stage, there is nothing before me which enables me to take any view on this issue. 59.The conclusion is therefore that the defendant fails in his “no additional loss” contention. 60.Ms Lam makes a further submission in respect of the first ground as follows. 61.The defendant has failed to show that it is plain and obvious that even if Happy Lion were taken to have also invoked its rights based on the Borrower’s default, the loss and damage suffered by the plaintiff would be exactly the same in respect of both events of default. Clause 13.2 provides for a range of options. There is no evidence that the exact same loss claimed by Happy Lion based on the clause 10.1(14) default was also suffered by reason of the other breach. 62.I accept this submission. The burden is for the defendant to show that even if he had not been in breach, the plaintiff would have suffered the same loss: see para 36 above. On the face of it, the nature of default is different – one concerns the Borrower’s default under the Loan Agreement and the other concerns the security provider’s default in observing the negative pledge provision. In this striking out application, save for making a general assertion, the defendant has not even discussed in any detail, or embark on any analysis as to, how the loss would have been same. 63.To make good her point, Ms Lam seeks to rely on a letter dated 21 June 2023 issued by Happy Lion to the plaintiff claiming a sum of about RMB 48,000 under clause 13.2(3) as costs of enforcement of the Equity Pledge in relation to the clause 10.1(14) default. This is not a sum which Happy Lion could have claimed relying on the Borrower’s default. 64.This letter was issued after the hearing before the master. The defendant does not agree to the inclusion of this letter in the hearing bundles before me. 65.There is no proper application taken out by the plaintiff before me to adduce further evidence pursuant to Order 58, rule 1(5). I therefore decline to take into account the contents of the letter in this appeal. I should make it clear that my conclusion against the “no additional loss” argument is not in any way based on the letter. 66.I reject the first ground of striking out. The second ground 67.In para (2) of the prayer for relief, the plaintiff seeks a declaration that the defendant’s signature to the Purported Resolution on behalf of the plaintiff is invalid and does not bind the plaintiff. 68.The defendant’s contention under the second ground is twofold. First, the proper contradictors have not been joined. Second, the declaration serves no practical purpose. Hence, I should strike out the relief now. 69.The general principles on declaratory reliefs are not in any serious dispute between the parties.
70.The defendant submits that it is clear that the plaintiff’s true intention in seeking the declaration is to use it to protect its rights vis-à-vis third parties in the Zhou Ying proceedings in the mainland. He raises two objections. 71.First, in light of the intended use of the declaration, the proper contradictors, namely the third parties, have not been joined. He further points out that the plaintiff has not explained why a declaration in a judgment between the plaintiff and the defendant could bind or prejudice third parties. 72.Second, it is argued that the plaintiff has failed to show that the declaration sought would be of use in the mainland proceedings. 73.In this regard, the plaintiff has exhibited a legal memorandum issued by Jincheng Tongda & Neal, the legal advisers to the receivers, to its opposing affirmation. In the memorandum, the mainland lawyers opine that if a Hong Kong court renders a judgment on the issue of the validity of the Purported Resolution, such judgment including the declaration can be adduced as documentary evidence in the Zhou Ying proceedings. 74.The defendant takes issue with the admissibility of the legal memorandum. He says that it fails to comply with Order 38 in a number of respects. It is not supported by an expert declaration. It is not supported by a statement of truth. It is not in an affidavit form. It is not prepared by an independent expert. Mr Chang relies on the ruling at para 123(4) in Re Zioncom Holdings Ltd [2022] HKCFI 3328. The absence of statement of truth and expert declaration was cited as one of the reasons for disallowing the party to rely on an expert report. 75.It must be borne in mind at the outset that this is not the trial of the action. In this striking out application, the burden is on the defendant to make good the point that the court will not exercise its discretion to grant the declaration at the conclusion of the trial even if it finds in favour of the plaintiff on its cause of action. It is a high threshold. In my view, he has failed to overcome that threshold. 76.As regards the first objection, Ms Lam submits that the plaintiff has a real interest in obtaining the declaration against the defendant. This is because there is a live dispute between the parties as to whether the defendant was properly authorised to sign the Purported Resolution on behalf of the plaintiff. The authorisation issue is relevant and material to the validity of the Purported Guarantee. The invalidity issue may in turn impact on whether the plaintiff had breached clause 10.1(14) of the Equity Pledge. In such a case, it cannot be said that the plaintiff’s interest is merely academic or hypothetical. 77.Furthermore, Ms Lam submits that the defendant is a proper contradictor. He was a director of the plaintiff. He signed on the Purported Resolution. He would have an interest in opposing the declaration, which concerns the validity of his signature and his authority to sign. By the present action, the plaintiff seeks to ventilate its position as against the defendant, including in relation to his alleged breach of fiduciary duties. The declaration concerns the position of the two parties. 78.Ms Lam’s submissions are plainly sound and correct. I accept them in full. 79.As regards the second objection, I am of the view that, first, the plaintiff’s legal memorandum is admissible expert evidence for the purpose of the present interlocutory application and, second, based on the contents of that memorandum, it is arguable that the declaration would have practical utility. 80.On the issue of admissibility, I follow the guidance laid down by the Court of Appeal in Re Kyko Companies and the United States District Court [2020] 5 HKLRD 30, [2020] HKCA 766.
81.On the issue of utility, it is plainly arguable that the declaration would be of use to the plaintiff in the Zhou Ying proceedings in the mainland, according to the legal memorandum. 82.The case authorities relied on by Mr Chang do not say that a declaration sought in Hong Kong solely for use in foreign proceedings will never be justified. The court needs to take a careful approach in each case where this issue arises: see para 69(3) above. This is an issue which should properly be left to be resolved at the trial. 83.Earlier, I have said that the defendant has a high threshold to overcome under this ground. Declaration is a discretionary relief. When exercising the discretion, the court would take into account all relevant matters, including the specific factual findings which it makes after hearing the evidence. Even in cases where the declaration would not serve any useful purpose, there is no absolute bar against granting it although this would be a heavy factor against it in the weighing scales: see para 69(2) above. It is clear to me that the weighing exercise should not be carried out now at this interlocutory stage when all the facts are yet to be found. 84.For the above reasons, I reject the second ground of striking out. CONCLUSION 85.The defendant has failed to show that the plaintiff’s pleaded claim is bound to fail. I therefore dismiss his appeal. 86.I make an order nisi that the plaintiff do have costs of the appeal, to be taxed if not agreed, with certificate for two counsel.
Ms Rachel Lam, SC and Ms Sharon Yuen, instructed by Allen & Overy, for the plaintiff Mr Jonathan Chang, SC and Mr Tom Ng, instructed by Stevenson, Wong & Co., for the defendant | |||||||||||||||||||
Cases cited in this judgment