China Jianxin Credit Services Ltd v. China Wah Yan Healthcare Ltd

HCA 274/2020

[2024] HKCFI 1461

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 274 OF 2020

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BETWEEN

AND BETWEEN

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DECISION

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A. INTRODUCTION

1.This is an appeal against the decision of Master Kent Yee of 15 February 2023, (1) granting summary judgment in the original action (“Original Action”) in favour of China Jianxin Credit Services Limited (“CJCS”) against SoftMedx Healthcare Ltd (“SoftMedx”);[1] and (2) striking out the counterclaim (“Counterclaim”) of SoftMedx and Sky Clear Bright Group Ltd (“SCB”) against CJCS, Precise Reach Group Ltd (“PRG”) and Lam Shiu Ming Daniel (“LSM”).

2.For convenience, I will refer to SoftMedx and SCB as “the Appellants” and CJCS, PRG and LSM as “the Respondents”. It is undisputed that the appeal proceeds by way of an actual rehearing and that my determination is not fettered by the learned Master’s earlier assessment.

3.At the oral hearing, counsel for the Appellants candidly described their existing pleaded case as “a bit obscure”. That provides at least part of the context for the Appellants’ application to re-amend their Amended Defence and Counterclaim (“the Amendment Application”).

4.In what follows, I will first consider the substantive appeal and where relevant will have regard to the Appellants’ case as set out in their proposed Re-Amended Defence and Counterclaim (“RADCC”) on a de bene esse basis. I will then formally decide on the Amendment Application.

B. BACKGROUND

5.The following matters are largely undisputed, and clear from the documents before me.

6.CJSC is a licensed money lender. It is the subsidiary of Universe Entertainment and Culture Group Co Ltd, a listed company of which LSM is Chairman and director, and Lam Kit Sun is also a director.

7.SoftMedx is also a listed company, though trading of its shares has been suspended since late 2017. Chan Ka Chung (“Chan”) and Gaston Lam are respectively SoftMedx’s Chairman / executive director and Company Secretary.

8.By a loan agreement dated 16 March 2017 (“the 1^st Loan Agreement”), CJCS agreed to extend to SoftMedx a revolving loan facility from which SoftMedx drew a total of HK$21m.

9.Following SoftMedx’s failure to repay its debt under the 1^st Loan Agreement, CJSC and SoftMedx agreed that SoftMedx would repay HK$2m with the balance to be refinanced by a further loan agreement (“the 2^nd Loan Agreement”). Under the 2^nd Loan Agreement, dated 30 April 2019, CJSC agreed to loan HK$19m to SoftMedx at 8.5% per annum.

10.As at 31 December 2019, SoftMedx had not paid interest in the sum of HK$114,063.01 due under the 2^nd Loan Agreement.

11.CJSC’s position is that SoftMedx’s non-payment of interest amounts to an Event of Default under Clause 9.1 of the 2^nd Loan Agreement. SoftMedx’s pleaded response to this is a non-admission “by reason of the matters pleaded in the Re-Amended Counterclaim”.[2]

12.The Counterclaim involves two other companies, Hong Kong Optical Company Ltd (“HKO”) and Fine Ocean Ltd (“FO”). Counsel for the Respondents has highlighted the following background matters in relation to these companies, which the Appellants have not seriously contested:

(1) As regards HKO, this was wound up on 12 July 2021 on the basis of its inability to pay its debts after SoftMedx procured the company to present a petition for its own winding up (HCCW 131/2021) on 25 March 2021. At the time of its winding-up, HKO had three shareholders, SCB (55%), PRG (34.5%) and Hops Optical Holding Ltd (“Hops”) (10%). LSM was a director of HKO between 18 January 2018 until he resigned on 19 August 2020. By a Sale and Purchase Agreement dated 30 April 2019 (“the HKO SPA”), SCB had sold 6.5% HKO shares to PRG for HK$1.2m.

(2) As regards FO, before PRG became a shareholder of FO in May 2015, HKO and FO entered into a Management Agreement dated 15 November 2014 under which, in return for a fee, HKO would provide, among other things, management services to FO with regard to the management and operations of the wholesale and retail of optical products at two specified shops. Clause 2.2(a) provided that this included “recruitment of the necessary manpower and staff and maintaining the wholesale and retail of optical products”. The 2014 Management Agreement was extended by several agreements, including three Supplemental Agreements covering new shops operated by FO.

13.The Counterclaim as pleaded in the RADCC is that:

(1) The HKO SPA and the 2^nd Loan Agreement were part and parcel of a “composite transaction” (§42).

(2) The Appellants were induced to enter into these agreements by LSM’s representations to Chan and/or Gaston Lam that: (a) it would be in HKO’s interest to close down HKO’s shops at Mongkok, Lai Chi Kok and Tsuen Wan as they were underperforming (together “the Alleged Underperforming Shops”); and (b) HK$1.2m was a fair and accurate valuation of a 6.5% interest in HKO (§§46-47). (These alleged representations will be respectively referred to as “the Alleged Underperforming Shops Representation” and “the Alleged Valuation Representation”, and together as “the Alleged Representations”).

(3) The Alleged Representations were false because: (a) At least two of the Alleged Underperforming Shops were closed to enable FO to take over their business; and (b) LSM together with Poon Chun Yin (who controlled Hops) or Tsang Hing Keung as signatories of HKO’s account wrongfully approved and allowed about HK$8.1m of HKO’s funds to be misappropriated to FO (§§46-47).

C. APPEAL AGAINST STRIKING OUT OF THE COUNTERCLAIM

14.I will deal first with the appeal against the striking out of the Counterclaim since the appeal on summary judgment rests substantially on its outcome.

15.While each side has understandably cited authorities on the Court’s power to strike out a pleading with slightly different points of emphasis, which I have borne in mind, it suffices here to emphasise the undisputed core requirement for striking out: the applicant must show that the case is a plain and obvious one in which the claim is bound to fail. There should be no trial upon affidavit for the purposes of deciding whether to strike out. So long as the pleaded case discloses some cause of action, or raises some question fit to be decided by the court at trial, the mere fact that the case is weak, and not likely to succeed, is no ground for striking it out.

16.The Counterclaim primarily raises serious allegations of fraudulent misrepresentation.

17.The law here is not disputed. An actionable misrepresentation requires a false statement of fact, as distinct from a statement of opinion or future intention, unless the maker of the statement of opinion or future intention does not in fact hold the opinion or intention: see Chitty on Contracts (34^th edn), vol.1 at §§9-008–9-010, 9-016; Yang Dandan v Hong Kong Resort Company Ltd (unrep., CACV 247/2015, 9 August 2016) at §§63-65.

18.If the statement is ambiguous, the representee must prove that he understood the statement in a sense in which it is in fact false. To hold a person guilty of fraud, it must be shown that he intended, or at least was willing, that the representation should be understood in a sense which is false: see Chitty on Contracts (above) at §9-060.

19.In considering whether an alleged misrepresentation is actionable, the circumstances of the agreement and the parties’ dealings have to be considered as a whole. The core question is whether the representee was entitled to take the statement seriously and rely on it in deciding wither to enter into the contract. That question has often been considered from the vantagepoint of the totemic “reasonable man”. The qualities and particular vantagepoint of the “reasonable man” in a given case depend on its circumstances and context. As Lam VP (as he then was) put it in Yang Dandan v Hong Kong Resort Company Ltd (above) at §67, the court considers “what a reasonable person would have understood from the words used by looking at the nature and content of the statement, the context in which it was made, the characteristics of the maker and the person to whom it was made, and the relationship between them”.

20.The test of reasonableness focuses on matters of substance, not form. An apparent statement of fact may, in substance, be no more than an unactionable expression of opinion. On the other hand, a person who states as his opinion something which he does not actually believe may be taken to have made a false statement of fact, the falsity here being in the indication that the person truly held the opinion in question.

21.While what counts as a non-actionable statement of opinion must depend on the overall circumstances, as a matter of general principle it is trite that the more vague and less objectively verifiable a statement, the more likely it is to be a mere matter of opinion that cannot be reasonably relied upon in deciding whether to enter into a disputed contract.

22.Further, to be actionable the representation must have played a “real and significant part” in inducing the representee to act upon it, though the representee does not have to prove that the representation was the sole reason why he acted upon it. The representee must prove that the representation did more than merely encourage him to act upon it or to confirm that he was right to act upon it. If the representee makes his own inquiries about whether the representation is true, he may be held to have relied on his inquiries in deciding to enter the contract rather than on the representation: see China Alarm Holdings Acquisition LLC v ING Alexander Yim Leung (unrep., HCA 503/2012, 24 March 2016) at §§134 and 137.

23.Considering the pleadings and submissions before me in the round, I agree with the Respondents that the Appellants’ pleaded case discloses no reasonable cause of action. In particular, having regard to the principles outlined above I find that, while pleaded and portrayed as statements of fact, the Alleged Representations are in reality non-actionable statements of opinion:

(1) A key part of the Alleged Underperforming Shops Representation is the alleged statement that the 3 HKO shops were “underperforming” such that it would be “in HKO’s interests to close them down”. In my view, these statements are in the circumstances of the case no more than broad statements of opinion, and in particular, commercial judgment, rather than fact.

(2) More generally as regards the Alleged Underperforming Shops Representation, a remarkable array of “should” statements were allegedly made, in particular that the relevant leases “should not be renewed”, and that the refunded rental deposits “should be distributed to HKO’s shareholders” who “should partly repay the 2^nd Loan Agreement owing by the Defendant to the Plaintiff”, such that the consideration under the HKO SPA “should accordingly reflect such reduction in HKO’s business” (RADCC, §44.1). To my mind, these are significant indicators that what was stated were essentially matters of opinion rather than fact.

(3) Similarly, with respect to the Alleged Valuation Representation, whether the consideration of HK$1,200,000 was a “fair and accurate valuation of a 6.5% interest in HKO” was, in the circumstances of the case, a clear matter of non-actionable opinion and commercial judgment.

24.The Appellants have not specifically pleaded or otherwise contended that, even if the Alleged Representations were mere statements of opinion, they were not in fact held by the representors. In any event, I see no sustainable basis on the pleaded facts for any such conclusion.

25.The above points themselves suffice for the conclusion that the fraudulent misrepresentation claim is bound to fail. Mr Lee for the Respondents raised numerous additional reasons for striking out the Appellants’ case for being incurably bad. These include submissions to the effect that:

(1) It is unbelievable that the Alleged Representations were made seeing as (i) they are wholly unparticularised (i.e., when, where and how they were allegedly made); (ii) there are no contemporaneous records supporting the Appellants’ case in this regard; and (iii) there is an array of inconsistencies and / or contradictions between the Appellants’ current pleaded case on the Alleged Representations and their own affirmation evidence in the present action as well as positions taken in earlier proceedings.

(2) It is unsustainable to say that the Alleged Representations were false in the light of the various factual and evidential matters set out in the Appendix to the Respondents’ Skeleton Submissions.

(3) Even if made, the Alleged Representations cannot be shown to have played any real or significant part in inducing SCB to enter into the HKO SPA. It is inherently incredible that seasoned businessmen like Chan and Gaston Lam would be deceived by such statements, particularly when SCB had the information and wherewithal to verify and decide for itself the commercial reality and the best way forward.

26.While I can readily see the force in these and other points made by Mr Lee for the Respondents on the weakness of the Appellants’ case on fraudulent misrepresentation, I am less sure that these would suffice in and of themselves to meet the high threshold for striking out the Appellants’ claim without trial.

27.However, on the foundation of my primary finding that the Alleged Representations are non-actionable statements of opinion, the foregoing points can be taken to – and in my judgment do – reinforce the overall conclusion that the Appellants’ claim of fraudulent misrepresentation discloses no reasonable cause of action, and that it is appropriate to strike it out without the matter having to go to a full trial.

28.As to the Appellants’ claim based on conspiracy to injure, counsel for the Appellants did not dispute that this relies critically on their allegations of fraudulent misrepresentation and therefore stands or falls with them.

29.It follows that, for the above reasons, the conspiracy to injure claim also cannot stand and likewise falls to be struck out.

D. APPEAL AGAINST SUMMARY JUDGMENT

30.The Appellants fairly accepted at the hearing that their appeal against the learned Master’s decision to grant summary judgment would stand or fall with their appeal on striking out. That is because, if the Counterclaim is struck out, SoftMedx would have no substantive defence remaining against the Original Action.

31.Given my conclusions on the striking out appeal, the summary judgment appeal must also fail.

E. AMENDMENT APPLICATION

32.The re-amendments sought by the Appellants under the Amendment Application go primarily to their pleaded Counterclaim. The Appellants have not suggested that the proposed re-amendments, if allowed, would make any significant difference to the outcome of their appeal against the striking out of the Counterclaim. In particular, there is and can be no serious suggestion that the proposed re-amendments would change the Alleged Representations as addressed above from being (at best) representations of opinion into actionable misrepresentations of fact.

33.There is accordingly no basis upon which the Amendment Application can now be properly maintained following the striking out of the Counterclaim.

34.In any event, there has been inordinate and inexcusable delay by the Appellants in bringing the Amendment Application, which was brought some three years after the original Defence and Counterclaim was filed and in circumstances where, on their own evidence, the Appellants knew of the alleged falsity of the various additional representations that the Amendment Application seeks to introduce (referred to in the draft RADCC as “the FO Representations”) by November 2020.

35.Further and finally, the Appellants’ case on the FO Representations is in my view legally unsustainable.

36.The key averments in this regard are at RADCC §38D, which identify the following as collectively the FO Representations:

“ 38D. In late 2017, LSM made the following verbal representations to KC Chan of the Defendant and Sky Clear Bright:-

38D.1 More shops should be opened by Fine Ocean pursuant to the licence granted by HKO, so that the income of HKO (in the form of management fees) could be increased.

38D.2 During the process of opening new shops for Fine Ocean, there will be no need to HKO to incur any additional expenses (including capital and operational expenses).”

37.Taken as pleaded, the FO Representations are at most statements of opinion of a non-actionable nature. They do not suffice, whether on their own or in conjunction with the Alleged Representations, to found any viable cause of action for fraudulent misrepresentation.

F. DISPOSITION AND COSTS

38.In sum, the appeal is unsustainable and is dismissed. So too is the Amendment Application.

39.Costs should follow the event.

40.In their skeleton submissions in opposition to the appeal and the Amendment Application the Respondents submitted that, upon dismissal of the same, the scale of costs should be in accordance with Clause 13 of the 2^nd Loan Agreement. Clause 13 provides for full indemnification of the lender (CJCS) “against all costs and expenses incurred by it” in enforcing the agreement. The Appellants made no submissions in response as regards the scale of costs.

41.Having regard to the wording of Clause 13 and bearing in mind that the 2^nd Loan Agreement is indeed between CJCS and SoftMedx only, I will award costs to CJCS on an indemnity basis with the costs of PRG and LSM to be paid on the standard party to party basis.

Mr Richard Leung and Mr Tommy Cheung, instructed by Haldanes, for the defendant (by original action) and the plaintiffs (by counterclaim)

Mr Ken T.C. Lee, instructed by KWC & Associates, for the plaintiff (by original action) and the defendants (by counterclaim)