Capital Union Inc. v. China Railway Investments Group (Hong Kong) Ltd
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HCA 2432/2007 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 2432 OF 2007 ----------------------
---------------------- Before: Hon Barma J in Chambers Date of Hearing: 16 July 2008 Date of Judgment: 17 October 2008 ---------------------- J U D G M E N T ---------------------- 1.This was the hearing of an application for summary judgment by the Plaintiff in these proceedings, Capital Union Inc. against the Defendant, China Railway Investments Group (Hong Kong) Limited. The writ in these proceedings, which was indorsed with a Statement of Claim, was issued on 16 November 2007. A Defence was filed on 28 November 2007, with a Reply being filed on 12 December 2008. Shortly thereafter, on 20 December 2008, the Plaintiff issued a summons seeking summary judgment pursuant to RHC Orders 14 and 14A. However, at the hearing, Mr Jonathan Wong, appearing for the Plaintiff, confirmed that the application was pursued under Order 14 only. 2.The Plaintiff’s claim is based on two loan agreements. The first loan agreement, which was dated 15 August 2007, related to a loan by the Plaintiff to the Defendant of HK$100,000,000 apparently for the purpose of buying listed shares. The second, which was dated 23 August 2007, related to a further loan of HK$50,000,000 for the same purpose. It is common ground that the loans were used to purchase shares in a Hong Kong listed company called Forefront Group Limited (“Forefront”). There are, however, disputes between the parties as to whether or not the loans are binding on the Defendant, and indeed whether the loans were genuine loans at all. 3.The Plaintiff’s case is fairly straightforward. It alleges that it lent the sums of HK$100,000,000 and HK$50,000,000 to the Defendant, and that the Defendant has failed, despite demands, to repay the Plaintiff. It therefore claims repayment of the loans together with accrued interest thereon. 4.By its Defence, the Defendant contends that it is not bound by the loan agreements, as they were not entered into pursuant to any valid board resolution of the Defendant. The Defendant’s case is that under its memorandum and articles of association, it is required to have at least two directors at all times (articles 9 and 14), and two directors are required to form a quorum for a directors meeting (article 20). However, at the time of the loan agreements, and of what it says are purported board minutes authorising the taking of the loans, the Defendant had only one director, a fact that it says was known to Mr Eugene Chuang Yue Chien, the principal shareholder of the Plaintiff, who acted for the Plaintiff in relation to these purported loans. 5.The Defendant’s Defence also sets out a number of other bases for resisting the Plaintiff’s claim. However, these were not pursued by Mr Kenneth Chan, who appeared for the Defendant. Instead, he raised one further matter by way of defence – namely, that the purported loans were not real loans at all, but were sham transactions which were intended to disguise the fact that the Plaintiff, or its controller, Mr Chuang, was the true investor in the shares of Forefront that were acquired using the proceeds of the purported loans. 6.The evidence filed by the Defendant consisted principally of an affirmation by one of its current directors, Mr Liang Jiyuan. Mr Liang was not a director of the Defendant at the time of the transactions in question. His affirmation was made on the basis of information supplied by Mr Wang Jing, who was, it seems, the only director of the Defendant at the relevant time. Mr Wang was said to have been unable to make an affirmation because he was unable to leave the Mainland to come to Hong Kong, having been prevented by the authorities there from doing so. However, shortly before the hearing, Mr Wang also made an affirmation in which he confirmed and adopted the contents of Mr Liang’s evidence. 7.According to the Defendant, earlier in 2007, it had entered into a joint venture agreement with another company controlled by Mr Chuang (known as Natural Harvest Investment Limited (“Natural Harvest”)), to develop a platform for the electronic sale of railway tickets in the Mainland through the internet. It was said that some HK$500,000,000 was to be invested in the joint venture. The joint venture does not, however, appear to have worked out, and it appears that the Defendant has commenced arbitration proceedings on the Mainland in respect of the joint venture. 8.Mr Chuang agrees that there was such a joint venture. He says that after entering into it, he decided to transfer the shares of Natural Harvest to Forefront. This was done on about 7 August 2007. Mr Chuang says that it was just after this that he was approached by Mr Wang, who said that the Defendant wished to purchase shares in Forefront, as it was expected that such shares would rise in value in the longer term, given the injection of Natural Harvest (and thus an interest in the joint venture) into Forefront. He says that Mr Wang told him that the Defendant did not have funds available for this, and that it wished to borrow the necessary funds to enable it to do so. Mr Chuang says that he agreed that the Plaintiff would lend the Defendant a total of HK$150,000,000 to purchase shares in Forefront, and that this was the reason for the loans which are the subject of these proceedings. Mr Chuang also says that the loans were insufficient to cover the cost of the shares that were purchased, but that the balance of the cost of the shares was made available to the Defendant by way of margin facilities provided by Chung Nam Securities Limited (“Chung Nam”), a securities dealing company of which he was the major shareholder. He says that Mr Wang gave him authority to purchase Forefront shares on behalf of the Defendant, using the proceeds of the loans, and that he duly did so, acquiring a total of 140 million shares in Forefront for the Defendant on 14, 15 and 22 August 2007, at a total consideration of HK$204,135,963.38 using the loan from the Plaintiff and the margin facilities from Chung Nam. 9.The Defendant’s version of events is very different. It says that it was in fact Mr Chuang who wanted to acquire shares in Forefront, and that he suggested that instead of doing so himself, or through companies controlled by him, he should do so using the name of the Defendant. He explained to Mr Wang that by doing this, it would create the impression that a substantial Mainland company associated with the Ministry of Railways was acquiring a significant stake in Forefront, which had just acquired the shareholding in Natural Harvest and thus an interest in the joint venture. This would be likely to cause the value of the Forefront shares to rise, to Mr Chuang’s advantage. The Defendant says that Mr Wang reluctantly agreed to this, as he did not want to jeopardise the substantial investment that was to be made in the joint venture. The Defendant says that Mr Wang made it known at around this time to Mr Chuang that the Defendant had only a single director, but that Mr Chuang said that this was not important, as he was the person really acquiring the shares. In support of this version of events, the Defendant has pointed to a number of factors, to which I shall refer below. 10.There are therefore two main defences put forward by the Defendant. First, that the loan agreements are not binding on it, for want of a valid board resolution authorising them, a matter which was (or should have been) known to the Plaintiff through Mr Chuang. Second, that the loans were not genuine loans to the Defendant at all, but merely a means to disguise Mr Chuang’s interest in the Forefront shares that were acquired in August 2007. The Defendant also contends that the Plaintiff failed to sell the shares at the best price obtainable, as it did not held on to the shares for a period after the alleged default, during which time the share price decreased substantially. 11.As to the first argument, Mr Chan submitted that the Plaintiff must be taken to have notice of the public documents of the Defendant such as its memorandum and articles of association, which were registered with the Companies Registry. It would have known from such documents that the Defendant was required to have a minimum of two directors, and that the quorum for board meetings was two directors. However, it was apparent from the board resolutions relied upon by the Plaintiff that they were purportedly passed at a meeting with only one director present. Further, Mr Chan submitted that the Defendant’s evidence was that Mr Chuang had been told in terms that the Defendant had only a single director at the time. 12.The board resolutions of the Defendant authorising the borrowing of the loans are dated 1 August 2007 and 20 August 2007. They do appear to make it clear on their face that they were made by a single director, and that only a single director (Mr Wang) was present at the meeting. It is also the case that the Defendant’s evidence is that Mr Chuang was told of this fact at around this time. 13.Mr Wong submitted that the Plaintiff was entitled to rely on the rule in Turquand’s case, and to assume that all matters of internal management on the part of the Defendant were in order. However, I do not think that that principle goes far enough for the Plaintiff’s purposes here. The rule in Turquand’s case enables an outsider dealing with a company to assume that all matters of internal management are in order. It is in essence an application of the principles relating to ostensible authority to the case of companies, in that where a person is put forward by a company to act on its behalf, the party with whom he deals is entitled to assume, absent knowledge to the contrary, that he has been properly authorised to do so. However, where the other party to the contract or arrangement is aware of facts that negate that ostensible authority, he will not be able to invoke the rule in his favour. In this case, the Plaintiff is taken to know the terms of the relevant articles in the Defendant’s articles of association. From these, the Plaintiff must be taken to know that a board resolution must be passed at a board meeting attended by two directors. However, the board minutes of the Defendant that are relied upon make it clear that only one director was present. Moreover, the Defendant’s case is that Mr Wang told Mr Chuang that this was the position. Although that is denied by Mr Chuang, that gives rise to a dispute of fact on a matter that goes to the heart of this argument, which cannot, I think, be decided on the basis of the affirmation evidence alone. 14.It is also to be noted that the 1 August 2007 minutes have certain other curious features:-
15.Mr Wong’s fall back position was to submit that it was not open to the Defendant to rely on this point, having regard to the fact that it had commenced arbitration proceedings on the Mainland in relation to the joint venture agreement, which was similarly entered into at a time when, on the Defendant’s case, it had but one director. Mr Wong argued that it could not be right to allow the Defendant to blow hot and cold on this point, by claiming that some transactions (on which it wished to rely) were validly entered into, but others (which it wished to disown) were not. 16.However, the difficulty is that there was little, if any evidence, as to the circumstances in which the joint venture agreement were entered into, and as to whether or not it might or might not have been ratified by the shareholders of the Defendant, even if there were some defect in the authority of its directors to enter into it. In the absence of any evidence as to this, I do not think that it is possible to say with sufficient confidence that the position in relation to the joint venture agreement must be the same. 17.Thus, while I do not say that the Defendant will, or even will probably, succeed on this defence, I am satisfied that it has sufficient prospects of success to entitle the Defendant to resist summary judgment being entered against it. 18.So far as the Defendant’s other argument – as to the true nature of the arrangement – is concerned, Mr Chan relied on the following matters:-
19.Given the view to which I have come on the first line of defence relied upon by the Defendant, it is not strictly necessary for me to deal with this argument, and I shall do no more than to say that there do appear to be a number of features of the evidence that call into question the true nature of this transaction, which would appear to be best investigated at a trial of these proceedings. 20.Finally, as I am satisfied that the Defendant should be given leave to defend the proceedings, it is unnecessary to consider the argument based on the failure of the Plaintiff to realise the shares at a more favourable price. 21.I shall therefore order that the Defendant is to have unconditional leave to defend this action. I have considered whether the Plaintiff’s application should be dismissed, but having regard to the fact that the arguments put forward by Mr Chan were rather more developed than the defences contained in the Defendant’s Defence, I have come to the view that it would not be appropriate to do so. I shall therefore make a costs order nisi that the costs of this application are to be in the cause.
Mr Jonathan Wong, instructed by Messrs Andrew Lam & Co, for the Plaintiff Mr Kenneth Chan, instructed by Messrs Paul Kwong & Co, for the Defendant |