Johnson Electric International Ltd v. Bel Global Resources Holdings Ltd

HCA 1240/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1240 OF 2012

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D E C I S I O N

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Introduction

1.On 30 January 2013, I entered summary judgment for the Plaintiff against the Defendant in the sum of $28,750,000, pursuant to Order 14 rule 1 of the Rules of the High Court (“RHC”).  The reasons for the decision was handed down on 17 April 2013 (the “Decision”).  The Defendant appeals against that judgment.  The grounds of the said appeal are set out in its Supplemental Notice of Appeal dated 29 August 2013. 

2.The Defendant now applies for stay of execution of the said judgment until the final determination of the appeal by the Court of Appeal in CACV 36/2013.  In the meantime, the Plaintiff has commenced winding up proceedings against the Defendant in respect of the judgment debt.  The hearing of the winding up petition has been adjourned pending the determination of this application.

The background

3.The factual background of this case is set out in paragraphs 2 to 6 of my Decision.

4.The Defendant’s case as presented by the affidavit evidence filed on its behalf at the hearing of the Order 14 application was that it was a victim of a fraudulent misrepresentation by Elite Dragon Limited (“Elite Dragon”) that nickel ore up to the pre-determined target of 250,000 metric tonnes from a specific mine in the District of Bunta in Indonesia (the “Mine”) had been delivered when in fact two deliveries of nickel ore did not come the Mine.  The issuance of the subject bond was procured by the fraud of Stephen Sy, the de facto controller of the Defendant and Elite Dragon at the material time, who had full knowledge that the pre-determined target had not been met.  Meeting of that pre-determined target was the condition precedent for the issuance of the subject bond by the Defendant under the agreement between the Defendant’s wholly owned subsidiary and Elite Dragon for the sale and purchase of the company owning the Mine (the “Agreement”).

5.The primary defence relied on by the Defendant at the Order 14 hearing was common mistake with fraudulent misrepresentation as a fall back. I dismissed the Defendant’s argument based on common mistake due to lack of such evidence.  In the fall back argument, the Defendant argued that the Plaintiff had constructive notice of the fraud by reason of the significant premium with which the subject bond was received by the Plaintiff in payment of the debt owed to its holding company.  That argument was rejected by me also for lack of evidential basis on which the inference of constructive notice was raised.  As the Plaintiff was a bona fide purchaser of the subject bond for value without notice of the underlying fraud, the Defendant lost its right to avoid the issuance of the subject bond.  Accordingly, I entered judgment for the Plaintiff.

The applicable legal principles for stay of execution

6.Whether to grant a stay of execution is an exercise of the court’s discretion. The principles governing the exercise of this discretion are well established.  They are succinctly summarized in the judgment of Ma J, as he then was, in Star Play Development Ltd v Bess Fashion Management Co Ltd[1]. These are:

(1)   the minimum requirement before a court will even consider granting a stay is the existence of an arguable appeal; if the court is not convinced that arguable grounds of appeal exist, no stay will be granted;

(2)   while the existence of a strong appeal or a strong likelihood that the appeal will succeed will usually by itself enable a stay to be granted; the existence of a merely arguable appeal cannot by itself amount to a sufficient reason to justify a stay, the appellant must provide additional reasons as to why a stay is justified;

(3)   one such additional reasons justifying a stay may be that without a stay, the appeal will be rendered nugatory, eg an appreciable risk that the respondent to the appeal would not be able to repay in the event of a successful appeal or where the levying of execution would result in financial ruin or other serious financial consequences;

(4)   where an appellant alleges that the levying of execution will result in his financial ruin or other serious financial consequences, the court will require good evidence to support such contention, such as production of accounts or other relevant documents; a bare assertion is unlikely to be sufficient; and

(5)   the position of the respondent must be considered, the starting point being that the respondent as the successful party is not to be deprived of the fruits of his success.

7.Thus, in brief, a stay will be granted in either of the following two situations:

(1) if an appellant can show he has such a strong meritorious appeal that justice requires the execution of the judgment to be stayed; or

(2)   short of that, if he only has an arguable appeal, he has to show, in addition, that without a stay the appeal would be rendered nugatory in the event of his being successful. 

Grounds of appeal

8.Two grounds of appeal are advanced by Mr Joffe, counsel for the Defendant: (1) the “non bona fide ground”; and (2) the “subject to equities ground”. 

9.The first ground is raised in its Supplemental Notice of Appeal. The Defendant alleges that on the basis of the new evidence now available, the court would have held the Plaintiff was not a bona fide purchaser for value without notice of the fraud, and that the Plaintiff knew the subject bond should not have been issued.  The Defendant asserts that the new evidence will demonstrate:

(1)   that Stephen Sy and his son perpetrated a fraud against the Defendant in inducing it to issue the subject bond by wrongfully including two shipments of ore in the calculation of output from the Mine when in fact they did not come from the Mine; and

(2)   that by reason of the involvement of members of the senior management of the Plaintiff or its holding company in certain matters set out in the Supplemental Notice of Appeal, the Plaintiff had notice of the fact that the subject bond was procured by fraud.  

10.The second ground is raised in Mr Joffe’s skeleton argument.  He argues that the subject bond, being a chose in action was transferred subject to all the equities affecting it in the hands of the assignor, including the right of rescission for fraud.  Hence, the Defendant should still be allowed to cancel the bond as against the Defendant on the ground of Elite Dragon’s fraud.  This ground had not been argued by counsel during the hearing of the Order 14 application.

11.Mr Joffe argues that bearing in mind that the judgment being appealed against is a summary judgment, all that the Defendant is required to demonstrate at this stage is that there is a triable issue.  On that basis, Mr Joffe submits that the Defendant has strong grounds of appeal.

Non bona fide ground

12.Mr Burns argues that before the Defendant can rely on the new evidence which forms the basis of its “non bona fide ground”, it has to overcome the hurdle imposed by Order 59 rule 10(2) of the RHC and the rule in Ladd v Marshall[2]. He submits that it is highly unlikely that the Defendant will be able to satisfy either the first or the second of the Ladd v Marshall conditions, ie (a) that the further evidence could not have been obtained at the trial or hearing with reasonable diligence, and (b) that the further evidence would or might, if believed, have a very important effect on the mind of the tribunal.  I assume he concedes that the third condition that the new evidence is of a sort which is inherently not improbable is met.  Whether the conditions in Ladd v Marshall are met is a matter for the Court of Appeal when hearing the appeal.  For the purpose of this application, I am just concerned with whether it is arguable that the conditions are met so that I can decide if the Defendant can show a strong meritorious appeal or just an arguable one or none at all.

13.Mr Joffe submits that in cases involving fraud, deceit or impropriety, the rule in Ladd v Marshall is applied with more flexibility.  Once a prima facie case of fraud could be made out, as long as the applicant did not deliberately fail to raise the issue at trial and the other two conditions were met, the court will admit the new evidence than to deny a retrial which could lead to a miscarriage of justice: see Hamilton v Brodie Brittain Racing Ltd[3]. He further submits that in an appeal against summary judgment, the application of the three conditions require some modification and the standard of diligence required of an applicant in preparing his case, especially under pressure of time, will not be as high as that required in preparing for trial: see Langdale v Danby[4] and Fortis Insurance Co (Asia) v Lam Hau Wah Inneo[5].  The test is whether a party acting with reasonable care could have anticipated the need to call the relevant evidence: see Phipson on Evidence.[6]  I agree with the approach adopted in these authorities.

14.The issue of fraud perpetrated by Stephen Sy had been raised at the Order 14 hearing: see §§ 12 and 13 of the Decision, though counsel then representing the Defendant placed little reliance on that evidence and even submitted that he “cannot rule out the possibility that being party to the quarterly statement, Stephen Sy was under genuine belief that he was entitled to” include in the quarterly supply statement nickel ore purchased from sources other than from the Mine. The Defendant’s staff prepared the quarterly supply statement using the information provided by Stephen Sy.  Prima facie, this is a case of fraud on the Defendant.

15.This action was commenced in July 2012.  A special investigation committee was set up by the Defendant on 10 July 2012 to investigate the fraud committed by Stephen Sy.  Given the lapse of time on the one hand and the shortness of time between the application for summary judgment and the hearing on the other, the difficulties the Defendant faced could well be understood. Furthermore, of the seven executive directors on the date on which the subject bond was issued, only two remained.  Stephen Sy, his son and his wife who are the key characters involved in this fraud were obviously uncooperative.  They left no documents after their departure from the Defendant.  The Defendant’s computer system also happened to be damaged at about the same time.  But for the late start in the investigation, I am satisfied that given the time constraint, the evidence could not have been obtained at the hearing of the Order 14 application with reasonable diligence.

16.While counsel spend a full day arguing on the merits of the two grounds of appeal, for the purpose of the present application, I think it suffice to give my overall view of the merits.  In gist, the Defendant seeks to infer knowledge of Stephen Sy’s fraud on the part of the Plaintiff by reason of his wife’s involvement in the preparation of sales contracts, shipping documents and payments in relation to the nickel ore, the substantial shareholding in the Defendant by senior members of the management of the Plaintiff and its holding company, including Stephen Sy’s father-in-law, at the time of issue of the subject bond and the financing of the two shipments of the ores by the Plaintiff’s associated companies, including Green Vision Holdings Limited (“Green Vision”).

17.Stephen Sy, his son and his wife were in control of Bel Trade Group and Elite Dragon at the time of the sale of Elite Dragon.  His wife who prepared the sales contracts, shipping documents and payments for the two shipments of ores in question obviously knew the ore did not come from the Mine.  Obviously, Stephen Sy and his wife were practicing a fraud on the Defendant when misrepresenting that the two shipments of ore were from the Mine.

18.Members of the senior management of the Plaintiff and its holding company, namely Patrick Wang, Philip Cheung, Paul Yue and Stephen Sy’s father-in-law acquired some other bonds, the Tranche 1 bonds, issued previously and held substantial shareholdings in the Defendant. 

19.Patrick Wang who was in control of the Plaintiff’s holding company was at one time, ie 21 May 2008, the largest single shareholder of the Defendant.  He acquired the Tranche 1 bond with a total principal amount of $42.75 million, ie 71.25 million shares in the Defendant. He also acquired another 28.751 million shares in Bel Trade Group, the major business vehicle of Stephen Sy.  

20.Paul Yue and Philip Cheung, are senior managers of the Plaintiff.  They each acquired the Tranche 1 bond with a total principal amount of $0.75 million, ie 1.25 million shares in the Defendant.

21.Stephen Sy’s father-in-law acquired the Tranche 1 bond with a total principal amount of $1.5 million, ie 2.5 million shares in the Defendant.

22.As significant investors and members of the Defendant, it can be reasonably inferred that they were at the material times aware of the terms of the Agreement including the condition for issue of the subject bond as disclosed by the Defendant in various announcements and circulars, given that the investment in nickel ore in Indonesia was the major business of the Defendant.  This is particularly so for Patrick Wang who was the single largest shareholder and is intricately connected with Stephen Sy through his shareholding in Bel Trade Group.  Their knowledge may be imputed to the Plaintiff.

23.The inference that Stephen Sy’s father-in-law knew that the ore was not from the Mine may also be drawn from his close relationship with his daughter and Stephen Sy.

24.One of the associated companies of the Plaintiff which participated in financing the two shipments is Green Vision.  One of its emails to Sze, copied to Stephen Sy, his wife and his father-in-law, all at the email address of Green Vision, showed that the members of the senior management of the Plaintiff and its holding company knew that the loading port of the two shipments was Gee Island and not Bunta.  Nonetheless, they signed sale and purchase contracts in respect of those shipments which wrongly stated Bunta as the loading port.

25.The Plaintiff argued that Patrick Wang’s acquisition of shares of the Defendant and the financing of the two shipments of ore were mere business dealings.  It also suggested other possible scenarios explaining that the condition precedent had been fulfilled.  Be that as it may, those explanations have to be scrutinized against the light of the relationship between Stephen Sy and the senior management of the Plaintiff and its holding company.  It is indisputable that Patrick Wang was the single largest shareholder in the Defendant at the material time and was intricately associated with Stephen Sy through his shareholding in the Bel Trade Group.  The inference that he and through him the Plaintiff had knowledge that the two shipments of ore were not from the Mine and that the subject bond was obtained by fraud could be drawn. 

26.As the evidence which surfaced after the summary judgment suggests that the Plaintiff was aware of the fraud committed by Stephen Sy, this is a case in which the first condition in Ladd v Marshall ought in the interest of justice be relaxed.  For the purpose of this application, I am satisfied that all the three conditions in that case are met.  On the basis of the new evidence, I am also satisfied that the Defendant has raised a triable issue on the question of knowledge and bona fides of the Plaintiff.  I would not go that far as to hold that the Defendant has shown a strong meritorious appeal.  But certainly an arguable appeal has been shown.

Subject to equities defence

27.This is an argument which had not been raised at the hearing of the Order 14 application.  Mr Burns complained that this ground was not raised in the Supplemental Notice of Appeal either, but only advanced for the first time in the Defendant’s skeleton argument.  This ground is purely based on legal argument. There is nothing to prevent the Defendant from raising this new ground of appeal by filing a Supplemental Notice of Appeal, pursuant to Order 59, rule 7 of the RHC, three weeks prior to the date fixed for hearing the appeal.  I shall consider this ground of appeal.

28.Mr Joffe’s argument under this ground may be summarized as follows.  As distinct from shares, the subject bond being a registered bond is a legal chose in action, which may only be claimed or enforced by legal action of the registered owner and not taken by physical possession.  It is settled law that an assignee of a chose in action cannot acquire a better right than what the assignor had, and takes the chose in action subject to all the equities affecting it in the hands of the assignor which are in existence before notice is received by the debtor: see Snell’s Equity[7]. One of such equities is the debtor’s right to rescission.  As the contract under which the subject bond was issued was voidable, the Defendant may set up that claim by way of defence against the Plaintiff as assignee, even though it has given value for the assignment.

29.In reply, Mr Burns argues that the “subject to equities” rule may be modified or excluded by the terms of the contract between the debtor and the assignor: see Re Agra and Masterman’s Bank[8], Re Blakely Ordnance Company[9]; Re Goy & Co Ltd[10]and Hilger Analytical Ltd v Rank Precision Industries Ltd[11].  He argues that the rule was clearly excluded by the terms and conditions of the bond and in the certificate of the subject bond. 

30.Clauses 2.1 and 2.4 of the terms and conditions expressly provided that the bond constitutes a “direct” and “unconditional” obligation of the Defendant and that the holder of the subject bond will be treated as “its absolute owner for all purposes”.  The certificate of the subject bond which states that the Defendant “promise[s] to pay the person who appears at the relevant time on the Register of Bondholder as holder of the Bonds in respect of which this Certificate is issued” further reinforces the Defendant’s obligation as absolute, unconditional and not subject to any equities.

31.Clause 3.1 of the terms and conditions of the bond which provides for the rights of a transferor or assignor of the bond sets out comprehensive requirements for effecting such transfer.  On the strength of that clause, it is beyond sensible argument that it was envisaged that the original holder of the subject bond would be entitled to transfer the bond to a third party free of any equities.  This conclusion is further supported by paragraph 111 of the Defendant’s Bye-laws, adopted by a written resolution of its members on 17 August 2006, which provided that “debentures, bonds and other securities may be made assignable free from any equities between the company and the person to whom the same may be issued”.

32.Mr Burns further argues that even if on a proper construction of the terms and conditions of the bond the rule is not excluded, the Defendant had by its conduct released both the assignor of the bond and therefore the Plaintiff from any such equities and is now estopped from relying on them.  He referred to Higgs v Assam Tea Co[12] which held that where debentures have been assigned to a bona fide third party and those debentures have been duly registered by the debtor company, that act itself may amount to an acknowledgement that the assignee is the owner of the debenture and may well give rise to an estoppel, such that the debtor company is precluded from subsequently setting up any equities against the assignee.

33.In the present case, the Defendant had registered the Plaintiff as bondholder.  That act, combined with the strong language contained in the certificate and terms and conditions of the bond, is clear recognition of the Plaintiff as the absolute owner of the subject bond.  The Defendant is therefore estopped from relying on the right to rescind as a defence to the Plaintiff’s claim.

34.I agree with Mr Burns’ submission. This ground is unarguable.

Whether the appeal would be rendered nugatory

35.In the ultimate analysis, the Defendant has only shown an arguable appeal based on the “bona fide ground”.  It will have to show in addition that without a stay the appeal would be rendered nugatory in the event of its being successful in the appeal.

36.The Defendant is a company listed on the stock exchange.  The trading of its shares has been suspended since 4 July 2011.  The Plaintiff has commenced winding up proceedings against the Defendant.  The hearing of the winding up petition has been adjourned pending the determination of this application.  Though no evidence of financial ruin or serious financial consequences has been adduced by the Defendant, it can well be assumed that without a stay, the Defendant would be wound up in the normal course.  The consequence would be disastrous.  Its business would have to be stopped.  Its assets would have to be sold at a fraction of their cost in a forced sale.  Under such circumstances, that winding up process would be irreversible.  This is not a question of whether the Defendant would be able to recover the judgment debt paid to the Plaintiff.  I am satisfied that without a stay the appeal would be rendered nugatory in the event that the Defendant is successful.

Conclusion

37.On the basis of the new evidence, I am satisfied that the Defendant has shown an arguable appeal and that without a stay the appeal would be rendered nugatory in the event that the Defendant is successful.  Accordingly, I grant the Defendant’s application for stay.

38.The Plaintiff has failed in contesting the Defendant’s application. However, the Defendant is successful only on the basis of the new evidence, which remains to be tested and argued.  The Defendant should only be entitled to its costs of this application should it be successful in the appeal.  I therefore make a costs order nisi that the costs of this application shall be the Defendant’s costs in the appeal.

Mr Ashley Burns SC and Mr Justin Ho, instructed by Mayer Brown JSM, for the Plaintiff

Mr Victor Joffe and Mr Victor Dawes, instructed by Reed Smith Richards Butler, for the Defendant