Top Flying Investment Ltd v. Open Mission Assets Ltd

HCA 566/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 566 OF 2006

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BETWEEN

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Before : Mr Recorder McCoy SC in Chambers (open to public)

Date of Hearing : 30 August 2006

Date of Decision : 30 August 2006

Date of Reasons for Decision: 1 September 2006

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REASONS FOR DECISION

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1.This is an appeal from a decision of Master de Souza on 12 July 2006, granting summary judgment to the Plaintiff against the Defendant.  The Plaintiff sought summary judgment by an amended summons dated 8 May 2006 under Order 14 r1 and Order 86 r1 RHC.  No defence has been filed in the action.  In issue are 50,036,000 shares (representing about 4.5% of the issued shareholding) in Goldwiz Holdings Limited, (“Goldwiz”), a public Hong Kong company.  The trading in shares of Goldwiz has been suspended by the Hong Kong Stock Exchange since 3 January 2006.  The Plaintiff claims entitlement to the shares because a trigger obligation under a Deed of Charge entered into between it and the Defendant was properly activated by a formal notice under clause 4.2.3 of that Deed of Charge on 27 February 2006.  The Defendant resists 3 different ways.

2.The Defendant’s case is a) that on the construction of clause 4.2.3 no obligation had been triggered; b) that there was in any event a collateral oral agreement that the Deed would not be enforced and c) that in relation to remedy, specific performance of the transfer of the shares is impossible.

Background

3.The Plaintiff relies on a Deed of Charge entered on 25 August 2004 between itself and the Defendant.  The same day, a Loan Agreement was entered into between the Plaintiff and Better Management Industrial Company Limited for HK$50 million.  The security given was in terms of Goldwiz shares.

4.The Deed of Charge contains a Top Up Obligation, this is defined in clause 4.2.3 of the deed as follows:

“	4.2.3	Top Up Obligation:  if the average share price of the listed shares of Goldwiz quoted by the Stock Exchange is HK$0.40 or less over a period of seven consecutive days on which the Stock Exchange is open for trading, it will:
		(a)	provide the Lender with such Additional Investments in Goldwiz as the Lender may require; and
		(b)	deposit or procure the deposit with the Lender and permit the Lender to hold and retain all stock and share certificates and documents of title relating to each of the Additional Investments at such time,
		to the intent and effect that such Additional Investments shall be subject to the charge set out in this Deed and all references to Investments in this Deed were deemed to also include references to Additional Investments, but provided that no more than 250,036,000 shares of the Chargor in Goldwiz shall become charged to the Lender pursuant to this Deed.”

5.It therefore essentially provides that if the average share price of the share quoted by the Hong Kong Stock Exchange is HK$0.40 cents or less over a period of 7 consecutive days, on which the Stock Exchange is trading, the Defendant will provide the lender with such additional shares as the lender may require, but no more than 250,036,000 shares.  The lender already holds 200,000,000 shares and in these proceedings seek the difference as an additional security.

Common Ground

6.From 24 June 2005, the average share price was less than HK$0.40 cents over a period of 7 consecutive trading days.

7.It has not been disputed that the Defendant Company did enter into the Deed of Charge and that it was signed by Mr Liu Xue Lin, (“Mr Liu”) its sole director.  Mr Liu is a beneficial owner of the Defendant and was at the material time also the owner of 23.55% of the shares of Goldwiz.  He was also the Chairman of Goldwiz until 13 March 2006.

8.As it is typical in structured lending transactions, the obligations of the Defendant are expressly stated to be additional to and not in substitution for any related security, therefore giving the Plaintiff the right to immediately enforce the Deed of Charge without having recourse to any related security it may hold.

9.Clause 11 of the Charge is a standard No Waiver clause which provides that any failure or delay in the Plaintiff’s exercise of any right shall not operate as a waiver of any right or remedy.  Material to this is that the fact that the first demand made by the Plaintiff was not until 27 February 2006, in relation to the under performance by the company which began in June 2005.

First Ground of Appeal: Construction of Clause 4.2.3

10.Counsel for the Defendant, Mr Jonathan Wong, argued as a matter of construction that clause 4.2.3 raised a triable issue.  He sought to emphasize that the critical words in that clause “… may require …” could not mean what the Plaintiff contends it to mean, because it would not provide for a commercial solution say if the share price dipped under 40 cents for over 7 days and then handsomely rebounded well over 40 cents, he submitted that the Plaintiff ought not to be able to activate the trigger under clause 4.2.3 in that circumstances.  In my judgment the clause means what it says and gives the lender the freedom to exercise the trigger point as long as the condition precedent has been met.  It is an unfettered commercial decision for the lender to activate the trigger or not while the Charge remains.

Second Ground of Appeal: Collateral Oral Agreement

11.A collateral oral agreement that would have the effect, if true, of destroying the financial efficacy of a commercial document of security is undoubtedly a thing oozing with suspicion.  The proper approach is identified in Bank of India v Surtani [1994] 1 HKC 7, 11I – 12C(CA).

12.Mr Jonathan Wong, spent very little time indeed on this aspect of his appeal – which in my judgment correctly represents an exact sense of proportionality in relation to its merit.

13.The suggested oral agreement was a phantasmagoria.  I respectfully adopt the reasoning and conclusion of Master de Souza.

Third Ground of Appeal: Specific Performance of Share Transfer: Defence of Impossibility?

14.On 22 May 2006, Mr Liu revealed, for the first time that he had (on his evidence) as long ago on 16 November 2005 pledged to a Mr Huang Xin Zhi (“Mr Huang”), “a business counterpart”, the 50,036,000 shares in Goldwiz which the Defendant still held after the Deed of Charge was entered into.  Mr Liu stated that the Defendant was therefore incapable of giving specific performance, as Mr Huang now had equitable and possessory rights to the shares.

15.Mr Huang, by an affirmation, dated 23 August 2006 stated, with little other detail, that he was a “business associate” of Mr Liu and that he had lent RMB 20,000,000 to Mr Liu in November 2005 against the security by pledge of the 50,036,000 shares in Goldwiz.  Mr Huang exhibited a copy of the share certificate, stating that he holds the original share certificate in his office in Chongqing in the Mainland.

16.His affirmation revealed that because the payments totaling RMB 20,000,000 to Mr Liu were entirely made in cash, he has no written records to establish the payments he made and he cannot either recall the exact dates on which the payments were made.  Mr Huang then states that he had in January 2006 demanded the early repayment of the loan he had made to Mr Liu – as permitted under the Loan Agreement.  He remains however unpaid by Mr Liu so he therefore retains the shares by way of equitable mortgage, unless and until he is repaid in full by Mr Liu.

17.There is no paper trial to evidence this commercial loan.  There is in short: no receipts, no bank statements showing where or when the money was paid to or from, (even though clause 3 of the Loan Agreement itself referred to payment by Mr Huang being into Mr Liu’s account.)  Even the dates of the payments are problematically obscure.

18.With only the bare Loan Agreement itself to evidence the entire supposed transaction, it is a matter of wonderment that Mr Huang did not seek to be more prudential and commercial himself in parting with so much money with so little documentation.  The highest denomination of Mainland banknotes is RMB 100 and the cubic dimension of the RMB 20,000,000 cash handed to Mr Liu would be in itself impressive.

19.On 21 February 2006, while Mr Liu was still Chairman of Goldwiz, the company in a letter from the Board to all Shareholders acknowledged that Mr Liu had a short position of 50,036,000 shares in the company and that the Plaintiff had the same number of shares which “represent the same security interest held by [the Plaintiff]”.  This Circular, too is on its face inconsistent with the suggestion that Mr Huang had loaned money to Mr Liu on a pledge of the shares.

20.In my judgment the evidence of Mr Liu and Mr Huang as to the Loan Agreement, is a transparent device to seek to circumvent the enforceability by the Plaintiff of its rights under the Deed against the Defendant: Manciple Ltd. v Chan On Man [1995] 3 HKC 459, 466.  It is a fable straight out of moonshine country: Man Earn Ltd. v Wing Ting Fong [1996] 1 HKC 225, 228 E.

21.A defendant’s own deliberate exiguity in evidence adduced with a view to prevent summary judgment, does not generate a triable issue against the plaintiff – it generates an exploitable issue for the plaintiff against the defendant.

22.I adopt the approach of Deputy Judge Reyes SC (as he then was) in Sumikin Bussan International (HK) Ltd. v The Precast Piling & Engineering Co. Ltd., HCA 3814/2001, 10 April 2002 para [39]

“Faced with an Order 14 application, a defendant cannot be sparing of the particulars of his defence and then claim, as a result of his own parsimony in detail, that there is an obscurity which must await trial for illumination”. 

23.But, even if the combined interlocking evidence of Messrs Liu and Huang was somehow credible, the Defendant still has no valid case to deny specific performance, by asserting that the remedy is impossible of performance.

24.Mr Maurellet, who argued the appeal for the Plaintiff with adroitness, correctly submitted that the shares are still beneficially owned by Mr Liu, so that if he were to repay the loan to Mr Huang, Mr Liu would regain the shares and then be able to provide them to the Plaintiff.  There is no evidence that Mr Liu cannot make the required payment.

Damages Sufficient Remedy?

25.Mr Wong for the Defendant argued that if liability was established, damages would suffice.  The Plaintiff’s looming difficulty in the potential enforcement of any such judgment for damages is utterly apparent.  Where, as here, there is at bare minimum a realistic doubt as to whether any judgment for damages would be satisfied, then damages are prima facie not an adequate remedy: Evans Marshall & Co. Ltd. v Bertola SA [1973] 1 WLR 349, 380H – 381B (CA).  The Defendant is a BVI company and to boot one with no other apparent assets in the jurisdiction (or elsewhere).  There is nothing in the Defendant’s argument against specific performance.

Mr Liu’s Three Affirmations

26.In these proceedings, Mr Liu filed an affirmation sworn by him at Penang, before a Solicitor and Advocate of the Supreme Court of Malaysia.  His second affirmation was sworn in Sydney before a Solicitor of the Supreme Court of New South Wales.  Both affirmations were before the learned Master.

27.Upon the hearing of this appeal, Mr Jonathan Wong (who admirably presented a difficult case) sought leave to use a third affirmation very recently sworn by Mr Liu, which on this occasion had been sworn before a Notary Public in Sydney.  Leave to adduce it was granted.

28.In relation to this third affirmation though, (which substantively incorporated the content of the other 2 affirmations), Mr Maurellet objected to it on the basis that it did not specify Mr Liu’s “place of residence” in terms of the requirement of O41 r1(4), even though Mr Liu provided a detailed Shenzen address in the introductory lines of his affirmation, prior to the first numbered paragraph: O41 r1(5).

29.In my judgment this objection was arid and technical.  As Tang J (as he then was) emphasised in Tsui Koon Wah v. Lam King Yuen HCA 890/2003, 27 May 2004, the rationale for requiring a deponent to provide his place of residence, is only to ensure that the identity of a deponent is unequivocally established.  Same too, for the requirement to state an occupation (if any).  Mr Li’s identity was not in issue.  An objection to a defect of this nature is one very readily curable under O41 r4.  Here leave was not necessary.  The early decision in Hyde v. Hyde (1888) 59 LT 523 and the one sentence judgment of Chitty J in In re Levy (1889) 37 WR 396 referred to in the 2006 Hong Kong White Book at 41/1/5 should now be viewed in the light of the rationale provided in Tsui Koon Wah v. Lam King Yuen.

30.However, Mr Li’s first 2 affirmations were inadmissible.  He needed to file the third.  There can be no doubt that affidavits and affirmations sworn inside or outside the Hong Kong SAR, for proceedings in the Hong Kong SAR, before foreign legal practitioners are not merely “defective” (as being potentially curable under O41 r4) but are fundamentally inadmissible and logically therefore incurable.

31.The identical conclusion also pertains to affidavits and affirmations sworn out of the jurisdiction by solicitors of the Hong Kong SAR, for use within the Hong Kong SAR.  The Law Society of Hong Kong in Circular 00-127 (PA), 2 May 2000, in my judgment correctly states that the power of a Hong Kong solicitor to take an oath or statutory declaration is not extra-territorial; the right does not exist outside the Hong Kong SAR.  In Yiu Ping Fong v Lam Lai Hing Lana [1998] 4 HKC 476, 481 Yuen J (as she then was) held that a statutory declaration is inadmissible in evidence in Hong Kong unless made within the jurisdiction.  I respectfully agree.  A person “authorized by law to administer an oath” in s. 12 Oaths and Declarations Ordinance, Cap. 11 does not include a person authorised by foreign law to administer an oath.  Further s. 7A Legal Practitioners Ordinance Cap. 159 is equally also not extra-territorial.

32.Under O41 r1(2), as modified by the effect of s. 6 Hong Kong Reunification Ordinance, Cap. 2601 and Schedule 8 of the Interpretation and General Clauses Ordinance, Cap. 1, now provides that affidavits and affirmations sworn outside the Hong Kong SAR before a Chinese Diplomatic or Consular Official or a Notary Public will be admissible in proceedings in the Hong Kong SAR: see s. 10 Oaths and Declarations Ordinance Cap. 11.  A foreign Notary Public may notarise documents outside the Hong Kong SAR for use in the Hong Kong SAR, but a Hong Kong SAR Notary Public may not notarize a document or otherwise exercise his office as a Notary outside the Hong Kong SAR.  Again the Law Society of Hong Kong Circular is fully accurate in this regard.

33.Another, wholly separate reason, which reinforces the conclusion that any affirmation or affidavit sworn out of this jurisdiction before a foreign lawyer (not a foreign Notary), for use within this jurisdiction is not lawfully sworn and is inadmissible here, is found in the lack of sanction available in Hong Kong under the criminal law for such a scenario.  A fundamental rationale for sworn evidence is that deliberate false evidence exposes the miscreant to penalty under the criminal law.

34.Although s. 40 Crimes Ordinance Cap. 200 provides:

“Any person who wilfully uses for any purpose any affidavit which he knows to be false or does not believe to be true, wherever such affidavit may be sworn, shall be guilty of an offence …”

a document purporting to be an affidavit but which is not lawfully sworn, “wherever such affidavit may have been sworn”, is not an affidavit at all for the purpose of the substantive offence under s. 40 Crimes Ordinance.  In contradistinction, 11 Judges have held that where a person is lawfully sworn but then gives evidence which is irrelevant and therefore inadmissible, such inadmissible evidence can still provide the basis for a conviction for perjury:R v Gibbons (1862) 9 Cox CC 105, 107-108 (CCCR).

Disposition

35.For the reasons given above and also those given by Master de Souza below, (which I respectfully adopt), the appeal is dismissed with costs to the Plaintiff.

Mr José-Antonio Maurellet, instructed by Messrs Barlow Lyde & Gilbert, for the Plaintiff

Mr Jonathan Wong, instructed by Messrs Richards Butler, for the Defendant