Taibao Investment and Management (Hong Kong) Co Ltd v. Kary Enterprises (Holdings) Ltd and Another

HCA 642/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 642 OF 2011

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Before: Deputy High Court Judge Lok in Chambers

Date of Hearing: 8 March 2012

Date of Decision: 16 April 2012

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DECISION

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1.This is an application by the defendants for leave to appeal against the order “by consent” of Master Yu on 17 June 2011 (“the June Order”) and to appeal against the June Order out of time, and further an appeal by the defendants against the order made by Master Yu on 4 January 2012 (“the January Order”) whereby the learned Master refused to set aside the June Order or to give leave to appeal against the June Order.

Background

2.The 1^st defendant is a limited company incorporated in Hong Kong.  It has and at all material times had a 90% interest in a Mainland joint venture known as Sanshui Spring Golf Club (三水溫泉高爾夫球俱樂部) (“the Golf Club”).  The Golf Club owned a golf course in Sanshui in the Mainland.

3.The 2^nd defendant became a director and 80% shareholder of the 1^st defendant in June 2007.  One Ms Lee Chun Hing (“Lee”) also became a director and 20% shareholder of the 1^st defendant in June 2007.

4.On 12 April 2011, the plaintiff commenced the present proceedings against the defendants.  In the Statement of Claim, the plaintiff alleges, inter alia, as follows:

(i)  on or about 4 March 2004, a collateral loan agreement was signed and executed by one Mr. Li Zhong (李忠) (“Li”) as lender, the 1^st defendant as borrower, the 2^nd defendant as chargor and one 東莞市四達紙品有限公司as payee (“the Loan Agreement”);

(ii)  under the Loan Agreement, Li advanced and the 1^st defendant authorised the said payee to accept RMB 8 million as loan from Li to the 1^st defendant;

(iii)  the loan was due on 3 March 2005, and the 1^st defendant undertook to repay it with interest on 3 March 2005;

(iv)  the 1^st defendant agreed to pledge its investment in the Golf Club as a charge to the loan, and if the 1^st defendant was unable to repay the loan and interest on time, Li had the right to dispose of the charge and its right in the Golf Club;

(v)  the 2^nd defendant agreed to charge 95% of his shareholding in the 1^st defendant against the loan and interest, and in the case of default, Li had the right to dispose of the 2^nd defendant’s shareholdings in the 1^st defendant;

(vi)  the 2^nd defendant guaranteed that he was the legal and beneficial owner of 95% shareholding in the 1^st defendant;

(vii)  two subsequent loan transfer agreements were signed whereby Li’s rights under the Loan Agreement were eventually transferred to the plaintiff, and notice of such assignment was duly given to the defendants;

(viii)  by a letter dated 29 May 2009, the plaintiff demanded the 2^nd defendant to repay the outstanding amount due under the Loan Agreement but it remained unpaid; and

(ix)  the 2^nd defendant did not in fact own 95% of the shareholding in the 1^st defendant as at the date of the Loan Agreement, and he held not more than 80% of the shares in the 1^st defendant from 25 June 2007 up to the date of the writ.

5.Despite the aforesaid allegations, the plaintiff makes no claim against the 1^st defendant in the prayer for relief in the Statement of Claim.  In the prayer, the plaintiff only claims against the 2^nd defendant for:

(i)  an order that the 8,000 shares held by the 2^nd defendant be transferred to the plaintiff; and

(ii)  an order that the 2^nd defendant do pay to the plaintiff an amount calculated with reference to 15% of the sum of RMB 8 million plus interest.

6.On 21 April 2011, the 2^nd defendant and Lee sold their 100% shareholding in the 1^st defendant to one Victory Profit International Ltd.  At that time, the 2^nd defendant and Lee were the only directors of the 1^st defendant.  The transfer of shares was effected on 28 April 2011.

7.On 25 April 2011, Lee resigned as director while one Mr Yu De Cai (“Yu”) was appointed director of the 1^st defendant. According to Yu in his affirmation, the 2^nd defendant stayed on as director to assist in managing the golf course.

8.On 23 May 2011, both defendants, at that time represented by Huen & Partners, filed a Defence.  It was pleaded in the Defence, inter alia, that:

(i)  all of the plaintiff’s claims are denied; and

(ii)  “[the] 1^st and 2^nd defendants were arranging to repay RMB8,000,000.00 principal to the plaintiff with 10% interest as per [the Loan Agreement]” (as contained in §23 of the Defence).

9.On 8 June 2011, the plaintiff issued a summons under O 27 r 3 of the RHC for an order that, since the defendants have jointly and severally in §23 of the Defence admitted liability, they do make repayment to the plaintiff in the sum of RMB 8 million and interest.

10.On 17 June 2011, the said summons was heard by Master Yu.  The Master ordered “by consent” that the 1^st and 2^nd defendants do jointly and severally make repayment to the plaintiff in the sum of RMB 8 million plus interest.

11.On 21 July 2011, the 2^nd defendant was replaced by one Mr Guo Bing Sheng as director of the 1^st defendant.  After that, both defendants changed their solicitors from Huen & Partners to their current respective solicitors.

12.On 27 July 2011, the plaintiff took out a summons for summary judgment against both defendants claiming for the relief stated in the prayer for relief in the Statement of Claim.

13.By a summons dated 12 August 2011, the 2^nd defendant applied to set aside the June Order.

14.By another summons dated 12 August 2011 as amended on 12 September 2011, the 1^st defendant also sought to set aside the June Order, or alternatively, to appeal against the June Order.

15.As explained in the 1^st affirmation of Yu:

(i)  in or about mid to late July 2011, the 2^nd defendant through his agent in the Mainland orally informed Yu for the first time:

(a)  of the existence of this suit;

(b)  that the 2^nd defendant had instructed Huen & Partners to act for both defendants in defending this suit; and

(c)  this court had on 17 June 2011 granted the June Order;

(ii)  prior to that, Yu did not know that the 1^st defendant was being sued by the plaintiff; and

(iii)  the 2^nd defendant had no authority to instruct Huen & Partners to act on behalf of the 1^st defendant, and so the said solicitors had no authority to file the Defence or enter into the June Order on behalf of the 1^st defendant.

16.Both summonses dated 12 August 2011 were heard by Master Yu on 15 & 19 December 2011.  By the January Order, the Master dismissed the defendants’ application to set aside or for leave to appeal against the June Order.

17.On 16 January 2012, the 1^st defendant issued two Notices of Appeal.  According to the first Notice as amended subsequently, the 1^st defendant applies to set aside the June Order.  Alternatively, the 1^st defendant applies for the time to appeal against the June Order be enlarged and for leave to appeal against the June Order, and if leave is so granted, the court would proceed to hear the appeal itself.  According to the second Notice, the 1^st defendant applies to set aside the January Order.

18.On 17 January 2012, the 2^nd defendant issued two similar Notices of Appeal.

19.Both defendants now seek to appeal against the June Order and the January Order.  Their main argument is that the June Order is not a consent order in the true sense, and so the defendants, in seeking to set aside the June Order, are not subject to the same limitation in setting aside a consent agreement.  Further, the learned Master had no jurisdiction under O 27 r 3 to make the June Order because there was no claim for relief against the 1^st defendant and no claim for the outstanding loan against the 2^nd defendant in the Statement of Claim.  Finally, the 1^st defendant also claims that, irrespective of whether Huen & Partners had authority to act in this action, they certainly had no authority to make an admission or enter into the June Order on behalf of the 1^st defendant.

20.I would deal with these arguments in turn.

Nature of the June Order

21.The June Order was stated to be made “by consent”. However, there are two types of consent order with the difference explained by Lord Denning MR in Siebe Gorman & Co Ltd v Pneupac Ltd [1982] 1 WLR 185:

“We have had a discussion about ‘consent orders.’ It should be clearly understood by the profession that, when an order is expressed to be made ‘by consent’, it is ambiguous. There are two meanings to the words ‘by consent’. … … … One meaning is this: the words ‘by consent’ may evidence a real contract between the parties. In such a case the court will only interfere with such an order on the same grounds as it would with any other contract. The other meaning is this: the words ‘by consent’ may mean ‘the parties hereto not objecting.’ In such a case there is no real contract between the parties. The order can be altered or varied by the court in the same circumstances as any other order that is made by the court without the consent of the parties. In every case it is necessary to discover which meaning is used. Does the order evidence a real contract between the parties? Or does it only evidence an order made without objection?” (at p 189E-G)

22.Templeman LJ also said the following in the judgment:

“The service of this summons was not an offer and was not intended to create or result in a contractual relationship. The summons constituted a demand and a threat. ... ... ... If the plaintiffs had written back to the defendants announcing that they would consent to the order sought by the defendants, the announcement would not and could not have constituted acceptance of a non-existent offer or be capable of creating a contractual relationship. The announcement would have been no more than the intimation of an intention on the part of the plaintiffs not to argue against the grant of the relief sought by the defendants but to submit to an order in the terms of the summons.” (at p 192F-H)

23.I do have the opportunity of perusing the transcript of the hearing before Master Yu on 17 June 2011.  To me, the exchanges between Master Yu and the then solicitor acting for the defendants clearly show that the latter was only conceding to the plaintiff’s application.  There is simply no evidence of any offer or acceptance or passing of considerations between the parties in entering into the judgment under the June Order. Further, the plaintiff is still pursuing it main claim, and indeed the only claim according to its pleading, relating to the provision of security against the defendants through an O 14 application, which was only adjourned sine die on 15 December 2011 before Master Yu.  To me, the O 14 application removes all possible arguments by the plaintiff that the judgment under the June Order was a contractual compromise, as the plaintiff had clearly compromised nothing in the June hearing.  Hence, I agree with the defendants’ counsel that the June Order falls squarely within the “no objection” category of consent order as defined by Lord Denning in Siebe Gorman, and this court can intervene the June Order like any other orders which are not made by consent.

Whether the June Order was properly made under O 27 r 3?

24.Both Mr Ng SC and Mr Chan, counsel for the 1^st and 2^nd defendants respectively, argue that it was not proper for the Master to enter judgment for the outstanding loan in the amount of RMB 8 million against the defendants, as the plaintiff made no claim against the 1^st defendant and no claim for the outstanding loan against the 2^nd defendant in the prayer for relief in the Statement of Claim.  Further, the defendants made no clear admission of the liability for the outstanding loan in the pleading and so it was not appropriate for judgment to be entered under such circumstances.  I agree.

25.O 27 r 3 reads as follows:

“Where admissions of fact or of part of a case are made by a party to a cause or matter either by his pleadings or otherwise, any other party to the cause or matter may apply to the Court for such judgment or order as upon those admissions he may be entitled to, without waiting for the determination of any other question between the parties, and the Court may give such judgment, or make such order, on the application as it thinks just. … … … ”

26.O. 27 r 3 refers to “admissions of fact” or “admissions of part of a case”.  Admission to pay the sum due under the Loan Agreement is certainly not an admission of fact but an admission of legal liability.

27.Ms Lai, counsel for the plaintiff, seeks to argue, by reference to the actual terms in the Loan Agreement, that the defendants are liable for the outstanding loan.  However, as the plaintiff makes no claim against the 1^st defendant in the prayer for relief, it is certainly not part of the plaintiff’s case as pleaded that the 1^st defendant is liable to repay RMB 8 million under the Loan Agreement.

28.For the claim against the 2^nd defendant, it is averred in the Statement of Claim that the 2^nd defendant was a pledgor of 95% shareholding in the 1^st defendant as a security for the RMB 8 million loan.  The cause of action against the 2^nd defendant is the alleged failure by the 2^nd defendant to provide the said security at the material times, and it is not the plaintiff’s case that the 2^nd defendant is jointly and severally liable to repay the RMB 8 million loan either as principal debtor or guarantor.

29.From the transcript, it is clear that the Master, in the hearing on 17 June 2011, was under the false impression that the plaintiff had made two separate claims against the defendants: one relating to the failure to provide security for the loan and the other one for the sum of RMB 8 million allegedly due under the Loan Agreement.  However, the reality is that the plaintiff has made no claim against the 1^st defendant and only one claim relating to the provision of security against the 2^nd defendant.  As the alleged admission is not related to “part of the plaintiff’s case”, it was not appropriate for the Master to enter judgment for the RMB 8 million loan against the defendants under O 27 r 3 of the RHC.

30.Further, the alleged admission in §23 of the Defence is far from clear.  It only states that “[the] 1^st and 2^nd defendants were arranging to repay RMB8,000,000.00 principal to the plaintiff with 10% interest as per [the Loan Agreement].”  I agree with the defendants’ counsel that it was a mere statement of the actions being taken by the defendants with no admission that the defendants took those actions on the basis of any legal liability.

31.In fact, the defence advanced by the defendants is, in essence, that the parties were not intended to be bound by the terms of the Loan Agreement, as the actual arrangement between the parties was that the defendants would purchase on Li’s behalf certain shares in the joint venture held by a third party with the RMB 8 million provided by Li.  With the said defence being repeated throughout in the pleading, it is stated in §22 of the Defence that they deny the liability under the plaintiff’s claim.  In such context, I agree that the alleged admission is neither clear nor unambiguous to the extent that justifies the granting of the judgment under the June Order.

32.Ms Lai also seeks to rely on an alleged admission contained in a letter from Huen & Partners dated 24 June 2011. However, that letter was issued after the making of the June Order, and so in my judgment, the court should ignore that letter in considering the propriety of the June Order.

33.Based on the reasons mentioned above, the June Order should be set aside.  In such circumstances, it is quite unnecessary for me to consider the 1^st defendant’s argument as to whether Huen & Partners had authority to make an admission or enter into the June Order on behalf of the 1^st defendant.

Other procedural matters

34.Since the June Order is an order determining in a summary way the substantive rights of a party to an action, under O 59 r 21 of the RHC, no leave is required to appeal against the June Order.  However, since both defendants filed the Notices of Appeal after the expiration of the appeal period, the defendants need to obtain the leave of the court to extend the time for the filing of the Notices of Appeal.

35.In deciding whether or not to grant such extension of time, the court would normally take into account the following factors:

(i)  the length of the delay;

(ii)  the reason for the delay;

(iii)  the chances of the appeal succeeding if time for appealing is extended; and

(iv)  the degree of prejudice to the potential respondent if the application is granted.

Lastly, the court must consider all the circumstances and decide whether the overall justice of the case requires the exercise of the discretion to extend the time.

36.After considering the overall justice of the case, I decide to exercise such discretion in favour of the defendants.

37.Firstly, as demonstrated above, the defendants have strong grounds to set aside the June Order.  If extension of time is not granted, the defendants will suffer grave injustice.  In particular, apart from the other defences of the defendants mentioned above, the defence of limitation is prima facie available to the defendants as the plaintiff commenced the present action against the defendants after a long period of time.

38.Secondly, although the two relevant Notices to Appeal were taken out in January 2012 after the making of the January Order, the defendants had taken steps to challenge the June Order as early as in August 2011.  As the June Order falls within “no objection” category of consent order, the procedure then adopted by the defendants to challenge June Order might not be correct.  Despite that, the plaintiff knew about the defendants’ challenge to the June Order as early as in August 2011, which was not a long period of time after the making of the June Order, and so the plaintiff should not suffer any real prejudice if the court extends the time for the defendants to appeal against the June Order.  I therefore extend the time for such appeal.

39.In the case that extension of time is given, Ms Lai has no objection for the court to treat this hearing as the substantive hearing of the appeal.  I therefore did so, and based on the reasons mentioned above, I allow the appeal and set aside the June Order.

40.As mentioned above, since the June Order falls within “no objection” category of consent order, it was wrong for the defendants to make an application before Master Yu to set aside the June Order in a way like setting aside a consent agreement.  The proper procedure would be for the defendants to appeal directly against the June Order.  It therefore follows that the hearing in January 2012 before Master Yu was completely unnecessary, and the court should take that into account in dealing with the issue of costs in due course.  For the purpose of this appeal, I should also allow the appeal and set aside the January Order as well.

41.My preliminary view is that the defendants, or at least their solicitors in the hearing on 17 June 2011, should bear considerable responsibility for the unfortunate and protracted development of this case. Hence, I make an order nisi that there be no order as to costs of the following:

(i)  the plaintiff’s summons dated 8 June 2011 (the O 27 r 3 summons) including the hearing on 17 June 2011;

(ii)  the 1^st defendant’s summons dated 12 August 2011 as amended on 12 September 2011 including the hearings on 15 & 19 December 2011;

(iii)  the 2^nd defendant’s summons dated 12 August 2011 including the hearings on 15 & 19 December 2011; and

(iv)  the various appeals of the defendants including the hearing on 8 March 2011.

The costs order nisi shall be made absolute 14 days after the date of the handing down of this decision.

Ms Annie Lai, instructed by Jal N Karbhari & Company, for the plaintiff

Mr Peter Ng SC and Mr Norman Nip, instructed by Anthony Siu & Co, for the 1^st defendant

Mr Issac Chan, instructed by David Y Y Fung & Co, for the 2^nd defendant