Elco Holland Bv v. Airwell Air Conditioning (Asia) Company Ltd
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HCA 741/2014 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 741 OF 2014 ________________
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_______________________ REASONS FOR DECISION 1.This is an appeal against the order of Master S Lo dated 12 January 2015 whereby he gave judgment for the plaintiff under Order 14 for RMB10,784,520 with interest at 4.9% from 8 November 2012 until judgment and thereafter at the judgment rate together with costs, summarily assessed at HK$295,000. 2.The plaintiff company, incorporated in the Netherlands, became the beneficial owner of 20% of the issued share capital of the defendant, a Hong Kong company, in or about 11 April 2012. Two other companies became the beneficial owners of the remaining issued share capital (40% each), a French company ACE SAS. It is not necessary to consider the terms of the relevant sale and purchase agreement. 3.By a shareholders’ loan agreement dated 7 November 2012, the plaintiff and its co‑shareholders agreed to make a loan to the defendant in the total sum of RMB 53,922,600. The plaintiff’s share of the loan made was the judgment sum, viz RMB10,784,520, the other two shareholders advancing the balance of the loan in equal amounts. The Loan Agreement 4.The purpose of the loan to the defendant is made clear as is the term — 12 months after 8 November 2012 — ie 7 November 2013. 5.The rate of interest was 6.6% per annum but this was reduced by a later agreement (to be considered) to 4.9% per annum dated 10 December 2012. In every other respect the original Shareholders’ Loan agreement was replicated. 6.The principal of the loan plus accrued interest:
There are default provisions. Mr Avi Israeli signed on behalf of the plaintiff lender. The signature for the defendant is indecipherable. The Amendments Agreement 7.This was entered into by a number of parties including all the parties to the Shareholders’ Loan Agreement. It is dated 8 November 2012 also. 8.The preamble is not relevant but the defendant seeks to rely upon clause 3.2.3, in particular, concerning the ATC loan which is identified in an earlier clause as a loan from AAC (the defendant) to ATC, it appears for the same purpose as the defendant obtained the loan from the plaintiff and its co‑shareholders under the Shareholders’ Loan Agreement. The term is the same and the rate of interest (subsequently varied also to 4.9%) is also the same. 9.Clause 3.2.3 refers to the ATC loan being funded on a back‑to‑back basis by the AAC loan in the Shareholders Loan Agreement. The term back‑to‑back has no significance other than to indicate that AAC was using the money it had borrowed to loan to ATC, for, it appears the same, purpose. The clause repeats the duration of the AAC loan and its rate of interest. 10.Clause 7 stipulates that the provisions of all agreements referred to shall remain in full force and effect. Subsequent events 11.On 7 November 2013, the date on which repayment of the loan was due, the plaintiff wrote to the defendant pointing out that the principal and accrued interest were now due, to be paid in one lump sum. 12.It also reflected the request for a discussion with a view to extending the maturity (ie repayment) date, adding that it was prepared to discuss the matter provided that it was finalised by 29 November 2013 at the latest. Although the letter was not specifically marked “Without Prejudice”, clearly the text of the letter, and the last paragraph in particular, indicated as much. 13.One of the plaintiff’s co‑shareholders wrote to the plaintiff seeking its agreement to an extension of the maturity date of the loan for a 2‑year period and that interest on the loan would be waived. The plaintiff declined to agree to this. Proceedings followed. The plaintiff’s case 14.The Shareholders Loan Agreement is unambiguous in all respects. No variation of its terms was permissible without the agreement of all expressed in writing. When the rate of interest on the loan was reduced by agreement it was provided for in a new agreement one month later. The period of the loan was repeated, unchanged. 15.The fact that the defendant was prepared to extend the maturity date of its loan to ATC is irrelevant. There was no stipulated interdependency between the two loans. Commercial reality dictated that the shareholders’ loan was free‑standing and none of its provisions was contingent. 16.Accordingly, only the written agreement of the parties could vary its terms. The subsequent variation on the rate of interest exemplifies the form necessary for any change to any provision. 17.The willingness of the other co‑shareholders (and lenders) to extend the maturity date and waive interest in respect of the amounts loaned by them, in no way binds the plaintiff. The defendant’s case 18.The pleaded case at paragraph 10 is that “it was an express term of the Amendments Agreement that the term of the Shareholders’ Loan Agreement … were and were to remain at all material times identical”. On my putting this averment to Mr Jose Maurellet for the defendant he acknowledged that there was no basis for that plea and that his case was based on implied terms and “business efficacy”, a somewhat vague term which could mean different things to different people. I will examine both these contentions. 19.The implied term contended for is that the original Shareholders Loan Agreement must be subject to any changes to the Second Loan Agreement, to which of course, the plaintiff in this action is not a party. Boiled down to the bare bones, it means that the variation made to the Second Loan Agreement, postponing the maturity date to 9 December 2014 applies equally to the original Shareholders’ Loan Agreement despite the clear unequivocal provision that any such change had to be agreed by the parties in writing. 20.The reference to back‑to‑back agreements, it is argued, means an acceptance that any variation to the latter, equally affects the former because the purpose of the original loan was to enable the defendant to make a loan, in the same total sum, to its subsidiary (ATC) to discharge debts due to ACE ASS. This is the “business efficacy argument”. If the subsidiary company could not repay the loan within the stipulated time, then the defendant was equally unable to repay the plaintiff (and the other lending co‑shareholders), and therefore the plaintiff, as a matter of commercial reality, was “obliged” to extend the maturity date to bring it into line with the date extended to ATC in the Second Loan Agreement. I have to say that there is no logic in this argument. 21.Before I consider shortly the approach of the courts to implied terms I need to dispose of an argument appearing in paragraphs 17 and 18 of the skeleton submissions on behalf of the defendant. Paragraph 17 puts the cart before the horse. Even though the Amendments Agreement has the same date as the first (and second) Loan Agreement, the loans (or either of them) were not “entered into in fulfilment of the parties’ obligations pursuant to the … Amendments Agreement” as pleaded in paragraph 5. 22.The Loan Agreements stand first in order of creation and priority and logic. The Amendments Agreement confirms the self‑contained provisions of the loan agreements, otherwise it would make a nonsense of the title of the former. It is predicated on the basis of these pre‑existing agreements. Clause 7.1 is also unambiguous — “except as expressly amended hereby the provisions of the agreements referred to in this agreement (which included the agreement which is the subject of this action) shall remain in full force and effect.” There were incidentally no amendments to the Shareholders Loan made by the plaintiff and its co‑shareholders. The law on implied terms relied upon 23.Reliance is placed on certain statements by Lord Hoffmann in Att Gen of Belize v Belize Telecom Ltd (PC) (2009) 1 WLR 1988. It may be helpful to start with Lord Hoffmann’s approval of part of Lord Pearson’s judgment in Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 WLR 601, at page 609:
24.The thinking succinctly expressed, as applied to the Shareholders Loan Agreement and the Amendment Agreement to the limited extent to which the latter refers to the former, means quite simply that the provision in the former, clearly set out, that there was to be no variation without the express agreement of all in writing, must apply. This was illustrated by a formal written agreement, in compliance with that provision, which reduced the rate of interest to 4.9% 25.The same theme runs through the decision of the court in Equitable Life Assurance Society v Hyman [2002] 1 AC 408. Citing Lord Steyn’s words:
Lord Hoffmann went on to say (at page 1994 of the Belize case):
He also adopted the conditions set out by Lord Simon of Glaisdale in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, seeing them:
They were:
26.The only condition that the contended for implied term meets, is the fourth. 27.Although my attention has been directed to a number of other decisions, none of them contradicts the expressed reasonableness and equitable approach in the decisions to which I have referred. Conclusion 28.The Shareholders’ Loan Agreement is a free-standing commercial contract. It made specific provision as to how it could be varied. That provision was complied with, to the letter, in respect of the change in the rate of interest. 29.Although the Loan Agreement was a single one, identifying three lenders with their specific respective loans, it was to be treated as if there were three separate agreements. There was nothing in it, expressly or impliedly which would justify any one lender being bound by any extension or change agreed to by the other lenders, let alone by the debtor. 30.To seek to interpret it as allowing, as a matter of commercial convenience, necessity or obligation, an adjustment to bring one lender into line with others who have chosen to extend their period of credit, would make a nonsense of the agreement’s careful drafting and fly in the face of the criteria set out by Lord Hoffmann and others. 31.One or more lenders may have thought that their commercial interests were best served by extending the deadline for payment. Another, as in this case, may have taken the view that its commercial interests were not best served by extending it. Again logic serves to explain the requirement of strict provisions in relation to any variation. 32.In my judgment a business efficacy argument which simply serves the interest of the defaulting debtor and imposes upon the creditor an obligation to extend the period of credit has no rational basis. The only business efficacy which should come into play is the carefully structured basis upon which a creditor has provided by an unequivocal written agreement for the terms of the loan advanced, leaving him alone to decide whether he is prepared to vary any of these terms in the event of circumstances arising which he is prepared to consider in the context of his own commercial reality. 33.The alleged implied term is tantamount to saying that the lender is obliged to extend the period of credit if the debtor finds difficulty in obtaining from its contracting subsidiary the wherewithal to repay the loan. The creditor’s loan agreement reflects its own ‘business efficacy’. An implied term of the nature sought would take that away from him. That would be inequitable. 34.I am satisfied that there is no such defence available to the defendant and this appeal is dismissed with costs. Postscript 35.Hovering above the undeserving defendant is the obvious fact that the deadline for which it sought this extension for payment via an express term, had passed –– 9 December 2014. It has not paid. 36.There is no defence in any event, none having seen raised in respect of any other factor which could postpone repayment or disentitle the plaintiff. 37.Mr Maurellet sought to imply that there might be some defence available but that is simply unacceptable. If there had been, it would have been pleaded long ago. 38.Since writing the above, the plaintiff’s solicitors have applied to the court for payment out of sums of money which, by agreement, the defendant paid into court to stave off execution of the Master’s judgment. 39.These sums should be paid out to the plaintiff’s solicitors within seven days of the handing down of these Reasons for Decision. If the defendant seeks to postpone this payment too, then it must apply to do so within that period.
Mr Eugene Kwok, instructed by Baker & McKenzie, for the plaintiff Mr Jose Maurellet, instructed by Deacons, for the defendant |