STPEHEN LIU YIU KEUNG AND AKAN GROUP LTD

HCA926, 928 & 929/2004
(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 926 OF 2004

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(Heard together)

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DECISION

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1.  The defendants in the three actions have made identical applications by summonses for stay of execution of the judgment handed down on 17 December 2004 and perfected on 28 December 2004 (“the Judgment”).  Since same counsel and solicitors are involved and the arguments are essentially identical, the applications were heard at the same time.

2.  There are before the court in each action two summonses for stay.  The first was issued on 7 February 2005 and returnable on 13 April 2005.  The second was issued on 21 February 2005 and returnable on 22 February 2005.  With agreement of counsel, all summonses are heard today.

The Judgment

3.  By the Judgment, final judgment was entered for the plaintiff for:

(1)	An order for vacant possession, and the respective defendants do deliver up vacant possession, of the properties in Hong Kong Parkview (“Parkview Property”) in HCA 926/2004, Dynasty Court (“Dynasty Court property”) in HCA 928/2004 and in Altadena House (“Altadena House property”) in HAC 929/2004.
(2)	A declaration that the respective tenancy agreements made between Keen Lloyd Resources Ltd (formerly Keen Lloyd Holdings Ltd) (“KL”) and the defendants in respect of the above properties are null void and of no effect as against the plaintiff.
(3)	An injunction restraining the respective defendants from remaining in possession or occupation of the respective properties.
(4)	Mesne profits together with interest.

Events since the handing down of the Judgment

4.  Subsequent to the handing down of the Judgment, Messrs Alvan Liu & Partners (“ALP”) was instructed on 31 December 2004 to act for the defendants in the place of Messrs. Paul Chan & Co.  On 3 January 2005, ALP wrote to the plaintiff’s solicitors, Messrs Simmons & Simmons (“SS”) seeking their agreement to a stay of the Judgment.  SS replied on the same day refusing consent.  On 11 January 2005, the defendants filed their Notices of Appeal.  By a letter dated 14 January 2005, ALP made a further request to SS for a stay of execution.  SS replied on 17 January 2005 that the plaintiff did not agree to stay the Judgment.

5.  Meanwhile, the plaintiff had applied for and was granted leave to issue Writs of possession and fieri facias combined.

6.  On 7 February 2005, the defendants filed the first summons for stay, returnable on 13 April 2005.  On 8 February 2005, Notices to Occupier and the Writs of possession and fieri facias combined were served by the bailiff.  The defendants through ALP were further advised that the bailiff would proceed to execute the Writs on 25 February 2005.

7.  On 19 February 2005, the defendants applied inter partes to the Duty Judge for stay of execution.  The application was refused and it was pointed out to the defendants that the application should initially be made to the trial judge.

8.  On 21 February 2005, ALP wrote to the court seeking an urgent appointment to hear their applications for either an interim stay or an interlocutory stay.  On the same day, the defendants issued their second summons and the hearing was fixed for 22 February 2005.

The applications for stay

9.  By the summonses, the defendants seek to stay the execution of the Judgment pending the determination of their appeals to the Court of Appeal.  The stay is sought on the basis that their appeals are bona fide and arguable and that the appeals will be rendered nugatory without a stay in place.

10.  The plaintiff opposes the stay on the ground that the appeals are devoid of merits and that the stay will occasion serious prejudice to the plaintiff.  Alternatively, the plaintiff says that the stay should only be granted on condition that the defendants pay into court all the mesne profits up to date and future mesne profits pending the determination of the appeals.  

The urgency of the applications

11.  For the defendants, it is said that ALP had acted reasonably and had at the outset endeavoured to seek the plaintiff’s consent to a stay, but the consent was not forthcoming.  It is also said that ALP needs time to prepare for the applications because of difficulties in getting instructions and the documentation involved.  The plaintiff, on the other hand, comments that the urgency of the situation has been self-created.

12.  In my view, two points need to be made about the urgency of the situation.  Firstly, the plaintiff had as early as 3 January 2005 made it plain that he would not consent to staying the Judgment.  It is therefore incumbent upon the defendants to take prompt action to make applications to the court.  Yet, the first set of summonses was only filed more than a month later.  Secondly, insofar as it is said that ALP needs time to familiarize with the cases and to take instructions, it should be noted that ALP was acting for KL way back in 2003 and the Provisional Liquidator of KL, acting by Mr Kenneth Yeo, had on 16 October 2003 written to ALP to raise queries on the three tenancy agreements in issue.  Only after that and on 23 October 2003, ALP informed Mr Yeo that they no longer had instructions.   

The evidence in support of the stay applications

13.  The plaintiff takes objection to the admissibility of the two affirmations of Ng Kam Sing and the affirmation of Guo Si De filed on behalf of the defendants in support of the stay applications and also the appeal.  The objection is on the basis that the deponents had not stated their residential addresses in the affirmations, contrary to the requirements of Order 41 Rule 1(4) of Rules of the High Court.  Interestingly, it appears that for all the affirmations previously filed on behalf of the defendants, except those of Mr Paul Chan (who had given his office address), none of the deponents had stated their address, residential or otherwise.  This was not picked up at the last hearing, probably because the affirmations were only filed that very day.   Be that as it is, after taking instructions, ALP indicated that they are aware of the addresses of Mr Ng and Mr Guo.  Upon ALP’s undertaking to the Court given through Mr Cooney to file and serve within 3 days affidavits to correct the irregularity, the affirmations are allowed to be used for the purpose of the stay applications.    

The legal principles

14.  Counsel are in agreement as to the legal principles governing the grant of a stay of execution pending appeal.  In summary, it is a matter of discretion: Caine Tai Investment Co Ltd v. Ayala International Finance Ltd & Anor [1983] 1HKC 163 at 166G. 

15.  In Star Play Development Ltd v. Bess Fashion Management Co Ltd (unreported) HCA 4726 of 2001, 7 June 2002 at paras. 6-10, cited in Wendon Engineering Services Co Ltd v. Lee Shing Yue Construction Co Ltd (unreported) HCCT 90 of 1999, 17 July 2002, Ma J (as he then was) held that it was ultimately a balancing exercise.  The starting point at all times is that the successful party is not to be deprived of the fruits of his success.  Where the merits of the appeal are strong, the balance will be tilted in favour of granting a stay.  But in the majority of cases and where the appeals are merely arguable, something more has to be shown to justify a stay.  One of the justifying circumstances is that the appeal will be rendered nugatory if no stay is in place.  Ma J further pointed out it is always relevant to consider the prejudice that would be caused to the successful party by the stay and if necessary to impose conditions to minimise the prejudice so caused.

Merits of the appeal

16.  Although a stay application is not the appropriate occasion to embark upon a detailed analysis of the merits and strengths of an appeal, it is necessary for the court hearing the application to form a preliminary view of the matter.  This is because an arguable appeal is the minimum requirement for a stay application: Star Play Development Ltd Ltd v. Bess Fashion Management Co Ltd at para. 9(6).

17.  In the present case, I note that the defendants had since filed various new affirmations for the purpose of the appeals.  Mr Fung SC has rightly observed that there is as yet no application to the Court of Appeal for admission of new evidence and the necessary materials for seeking leave to adduce new evidence are at the moment not present: see Order 59 rule 10(2) of Rules of the High Court and Ladd v Marshall [1954] 1 WLR 1489.  In particular, there is as yet no explanations as to why the new affirmations and the matters raised in them, could not have been made available at the hearing of the Order 14 applications.  It is to be noted that there was a gap of more than 2 weeks between the service of the Order 14 summonses and the hearing, and the defendants had no reason to assume that the applications would not be proceeded with at hearing.

18.  However, for the purpose of the applications, I will proceed on the assumption that the defendants will be able to adduce the new evidence.   Notwithstanding that, in considering whether there is an arguable appeal, the court is necessarily looking at the grounds stated in the Notice of Appeal.   The new evidence will also have to be viewed in the context of the Grounds of Appeal.

19.  Insofar as the defendants are appealing against the refusal of adjournment, it would appear that this part of the appeals was lodged without reference to the two affirmations of Paul Chan, which were the only materials before the court for the purpose of the adjournment applications, and upon which the court’s discretion was exercised.  Mr Cooney informed me that neither ALP nor him had sight of the affirmations until this hearing.  The affirmations have now been included in the plaintiff’s hearing bundle.  This is a surprising situation, given that the main ground of appeal in this regard is that the court’s discretion was exercised wrongly.  I would additionally point out that there was no indication at all at the adjournment application that the new affirmations that the defendants now seek to adduce would be forthcoming.

20.  As to the part of the appeals relating to the Judgment, Mr Fung SC had given an analysis of their merits in his skeleton submissions.  I am in agreement with it. So far as Ground 4 is concerned, it is in direct contradiction to the Court of Appeal’s decision in Tan Eng Guan v. Southland Co Ltd [1996] 2 HKLR 117.  As for Ground 5, notwithstanding the new affirmations, it remains the position that there is no primary documents evidencing the movement of funds and the making over of the loans for which the tenancy agreements between KL and the defendants, and in the case of Open Shares, its assignor, were created.  In the case of Ground 6, there is nothing before the court to indicate what the “other grounds” are that justify the cases proceeding to trial.

21.  In my view, the appeals are fraught with difficulties.  At best, they are barely arguable.

The appeals rendered nugatory?

22.  All the defendants contend that without a stay, their appeals would be rendered nugatory.  Evidently, the defendants are focusing primarily on the part of the Judgment on delivery up of vacant possession and the injunctions restraining them from remaining in possession or occupation of the three properties.  The defendants have not adduced any evidence to support this contention in relation to the monetary part of the Judgment.

23.  In the case of Akan Group Limited (“Akan”), the tenancy agreement in question is due to expire on 19 April 2005, which is less than two months away.  In all likelihood, the appeals will not be heard and determined before the end of the tenancy agreement.  The contention that without a stay, the appeal by Akan will be rendered nugatory is irrelevant.  Further, any damages of Akan, if a stay is not imposed, will be minimal when compared to the prejudice occasioned to the plaintiff by a stay, to which I shall return to deal with.

24.  As for Open Share Investments Limited (“Open Share”) and Winko Motor Industries Limited (“Winko”), their case is that they will suffer loss if they have to vacate the properties in that they cannot set off the rentals under their respective tenancy agreements against the indebtedness due from KL.  It is also said that damages will not be an adequate remedy because KL is in liquidation.

25.  The reality however is that Dynasty Court property is only used occasionally by Mr Guo and his guests when they happen to visit Hong Kong.  That is the extent of the prejudice to Open Share, if there is no stay.

26.  In the case of Winko, the reality is that it has allowed Mr Chun (or Chin) and his family to use the Altadena House property.   According to Ng Kam Sing’s affirmations, Mr Chun is the chairman of KL responsible for the business of Winko, hence he has been given accommodation benefits.  At the same time, however, Mr Ng said that Mr Chun had since November 2001 ceased to be a director of Winko, and that Winko is not a subsidiary or related company of KL, which is clearly incorrect since Mr Ng accepted that Winko is wholly owned by KL.  Plainly therefore, Winko has allowed the Altadena House property to be used by Mr Chun, in his capacity as the chairman of KL when KL, on Winko’s case, is its debtor. In the final analysis, the so-called set-off arrangement will appear to be no more than an accounting exercise on paper.  In substance, the benefits of the tenancy agreement go to Mr Chun and his family.  There is nothing in the evidence to explain why Winko should be conferring accommodation benefits on the chairman of its debtor and further on his family after Mr Chun has been imprisoned.  The suggestion that Winko stands to suffer loss or prejudice without a stay, in my judgment, is simply ludicrous.

27.  In any case, when the alleged tenancy agreements were created, all defendants clearly knew that the properties were mortgaged to the Bank and that KL was financially unsound, which was the very reason for the creation of the tenancy agreements.  It follows that the defendants must be aware of the risks of the Bank exercising its rights under the mortgages against KL.  The defendants ought further to have appreciated that, even if the Bank, exercising its rights as mortgagee, were to permit the defendants to remain in possession or occupation of the properties, the defendants would not be able to set-off the rentals against the debts allegedly owed by KL.  Further, the defendants would have to pay the Bank for their occupation and use of the properties.  It is to be noted that it is not the defendants’ case that they knew from the outset that the Legal Charges in question are liable to be set aside.  Thus analysed, the loss or prejudice that the defendants say they stand to suffer if the Judgment is not stayed, must be within the contemplation of the defendants when they entered into the tenancy agreements.         

28.  As to the defendants’ case that the Legal Charges in question are liable to be set aside for fraudulent misrepresentation, one must not lose sight of the fact that any right of setting aside is that of KL and not of the defendants.  KL is in liquidation.  The liquidators have taken no step to dispute the validity of the Legal Charges.  There is also no evidence that the liquidators share the views and arguments of the defendants.  At best, there is only a draft affirmation of Mr Chun in which it is said that the liquidators are awaiting counsel advice before deciding whether to be joined as a plaintiff to HCA 1299 of 2004, which was brought by Keen Lloyd Energy Limited.  The suggestion that the plaintiff’s appointment as the receiver of the properties will cease with the setting aside of the Legal Charges is therefore rather speculative.

29.  On the other hand, there is clear evidence from the plaintiff as to his loss.  The plaintiff has since late 2003 sought to recover possession of the properties.  The accrued rental up to date is no less than $10,125,000 ($2,625,000 from Akan, $2,700,000 from Open Share and $4,800,000 from Winko) and further rental is running at $315,000 per month.  As noted before, there is no evidence to explain why the monetary part of the Judgment should be stayed.

30.  In the circumstances, to give recognition of the plaintiff’s rights under the Judgment, any stay of execution must be granted on terms.  It is an appropriate condition to have the accrued rental or mesne profits brought into court and for the future mesne profits to be paid into court monthly. 

31.  The defendants have, however, through Mr Cooney offered the following alternative terms:

(1)	Shares in a UK company called Arko Holdings plc equivalent to the rental payable in future be deposited with and held by ALP, upon ALP’s undertaking to the plaintiff not to release them to the defendants without order of the court.
(2)	The defendants pay into court the future rentals 14 days after the end of each month, on the assumption that rents under the tenancy agreements become due in arrears on the last day of the month.

32.  The first alternative is plainly unacceptable since there is no information on the UK company, the identity of the owner(s) of the shares and the value of the shares.

33.  As to the second alternative, it is also unacceptable.  As said before, there is no justification for withholding the payment of accrued mesne profits under the Judgment.  Accordingly in the absence of reasons, the payment of future mesne profits is hardly sufficient to safeguard the plaintiff’s position and entitlements under the Judgment.

Conclusion

34.  For the above reasons, the defendants’ applications for stay of execution of the Judgment have to be dismissed.   The two summonses in each of the three actions are dismissed with costs to the plaintiff against the respective defendants, to be taxed if not agreed.

Mr Patrick Fung SC instructed by Messrs Simmons & Simmons for the plaintiff in HCA 926, 928 & 929/2004.

Mr Nicholas Cooney instructed by Messrs Alvan Liu & Partners for the defendants in HCA 926, 928 & 929/2004.

HCA926, 927 & 929/2004

(Heard Together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 926 OF 2004

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ACTION NO. 928 OF 2004

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BETWEEN

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ACTION NO. 929 OF 2004

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BETWEEN

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(Heard Together)

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J U D G M E N T

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1.  By three summonses issued on 9 August 2004, the plaintiff in each of the three actions applies for summary judgment and alternatively, for interlocutory mandatory injunction orders.  As the facts and issues involved are substantially the same, the three applications were listed and heard together.

2.  In all the three actions, the plaintiff as receiver appointed under three legal charges seeks to recover vacant possession of the properties charged and other relief against the defendants, who claim to be tenants under three tenancy agreements created by the charger.  The dispute turns on whether the tenancy agreements are validly created under the relevant legal charges and whether the defendants are entitled to remain in possession on the ground that legal charges are void or liable to be set aside by reason of fraudulent misrepresentation.  

The facts

3.  Keen Lloyd Resources Limited (formerly known as Keen Lloyd (Holdings) Limited) (“KL”) is the registered owner of three properties known as:

(1)      Flat No. 97, 19/F., Tower 18, Hong Kong Parkview and car parking space no.224 (“Parkview property”);

(2)      Penthouse B, 41^st and 42^nd Floors, Tower 4, Dynasty Court and car parking space nos. 78 & 78A on Level LG2 (“Dynasty Court property”); and

(3)      3^rd and 4^th Floors of House no. E2, Altadena House, No.27 Barker Road, The Peak, and car parking space nos. 12 & 13 on the Lower Ground Floor (“Altadena House property”).

4.  KL was controlled by Mr Chun Kam Chiu.  In March 2004, Mr Chun and his co-director Miss Tsang Siu Lan were convicted of conspiracy to defraud the Sin Hua Bank Limited. Mr Chun is now serving a sentence of 6-1/2 years imprisonment.

5.  Between 1 May 1997 and 5 March 1998, KL created eight Legal Charges over the three properties in favour of Sin Hua Bank Limited (“the Bank”) to secure banking facilities for KL and other companies within the Keen Lloyd group of companies, including Keen Lloyd Energy Limited (“KL Energy”).  They are as follows:

          Parkview Property

(1)     1^st Legal Charge dated 9 January 1998

(2)     2^nd Legal Charge dated 9 January 1998

          Dynasty Court Property

(1)    1^st Legal Charge dated 19 June 1997

(2)     2^nd Legal Charge dated 5 March 1998

(3)     3^rd Legal Charge dated 5 March 1998

          Altadena House Property

(1)     1^st Lega1 Charge dated 1 May 1997

(2)      2^nd Legal Charge dated 5 March 1998

(3)      3^rd Legal Charge dated 5 March 1998

6.  The provisions and contents of the deeds creating the eight legal charges are similar. 

7.  Since about March 2000, KL has defaulted in making repayments to the Bank.

8.  At the request of KL and KL Energy to withhold taking immediate legal proceeding, the bank and KL and KL Energy signed a Memorandum of Agreement dated 14 April 2000 (“MOA”), which is in essence a debt restructuring agreement.  Under the MOA, the Bank shall have no right to take legal action against KL and KL Energy upon KL and KL Energy doing a number of things, including selling no less than two of the charged properties, surrendering possession of some of the charged properties and settling partial outstanding loans by instalments.

9.  KL and KL Energy defaulted in their obligations under the MOA.   On 3 October 2000, the Bank commenced three actions against KL and KL Energy under HCA 9309, 9310 and 9311 of 2000 to recover the outstanding indebtedness.

10.  The Bank also exercised its power to appoint receiver under clause 11 of each of the1st Legal Charge over the three properties.  By a Deed of Appointment dated 15 February 2001, the plaintiff and Mr O’Driscoll of Messrs. Ernst & Young were appointed the Receivers of the three properties.  Notice of the appointment was given to KL and the Registrar of Companies.  Mr O’Driscoll ceased to be a Receiver on 1 November 2003.

11.  On 23 March 2001, KL and KL Energy commenced HCA 1319 of 2001 against the Bank and the Receivers claiming that the Bank had acted in breach of the MOA.  KL and KL Energy further applied and obtained interim injunction restraining the Bank from proceeding with the three High Court actions and restraining the Receivers from acting as receivers over 57 properties that were mortgaged to the Bank by KL and KL Energy.

12.  On 23 July 2003, KL was ordered to be compulsorily wound up in High Court Winding-up proceedings no. HCCW 1134 of 2002.  The Official Receiver was constituted the Provisional Liquidator of the affairs of KL.  On 8 August 2003, the plaintiff and Mr Kenneth Yeo were appointed the agents of the Official Receiver and Provisional Liquidator.

13.  On 1 November 2003, the injunction over the Receivers in respect of 46 properties charged by KL to the Bank, including the three properties in question, was discharged.  The injunction in respect of the remaining 11 properties that were charged to the Bank by KL Energy was discharged on 16 April 2004.

14.  After the winding-up order was made, the plaintiff and the agents of the Official Receiver and Provisional Liquidator took steps to recover possession of the three properties in question.

15.  By a letter dated 19 September 2003, the defendant in HCA 928 of 2003 (“Open Share”) claimed to be the tenant of the Dynasty Court property under a tenancy agreement dated 13 September 2002 made between Open Share and KL.  Under the tenancy agreement, Open Share was entitled to rent the Dynasty Court property for a term of 5 years commencing on 16 September 2002 at a monthly rent of $90,000 inclusive of management fees, rates and government rent.  It was further stipulated that the monthly rental was to be offset from an outstanding indebtedness of $5.4 million owed by KL to Open Share.

16.  By a letter dated 23 September 2003, the defendant in HCA 926 of 2003 (“Akan”) claimed itself to be the tenant of the Parkview property under a tenancy agreement dated 18 April 2003 and signed by KL and Akan.   Under the tenancy agreement, Akan was entitled to rent the Parkview property for a term of 3 years commencing on 20 April 2002 at a monthly rent of $75,000 inclusive of management fees, government rates and rent, air-conditioning fees and club membership fee.  It was further stipulated that the monthly rental was to be offset from an outstanding indebtedness of $2.7 million owed by KL to Akan.

17.  By a letter dated 3 October 2003, the defendant in HCA 929 of 2003 (“Winko”) claimed itself to be the tenant of the Altadena House Property under a tenancy agreement dated 27 June 2002 made between KL and Winko. 

18.  In a letter dated 7 October 2003, Winko informed the Official Receiver that the tenancy agreement was made pursuant to a Memorandum of Understanding dated 6 September 2000 made between Winko and KL.  Under the Memorandum, Winko was to make a $15.6 million interest free loan to KL to be “repaid in non-monetary manner which interprets that the loan, either in full or in part, could be offset by way of deduction from rental of a premises owned by [KL] and it is an entire right of [Winko] to choose a premises which he/she desires to rent amongst the list of estate properties owned by [KL] by the time [Winko] exercises this right”: clause 2.3.3 of the Memorandum.

19.  Under the tenancy agreement signed by Winko and KL, the Altadena House property was let for a term of 7 years commencing on 1 July 2002 at a monthly rental of $150,000 inclusive of management fee, government rates and rent.  It was also stipulated that the monthly rental was to be offset from the outstanding indebtedness owed from KL to Winko, which was stated to be $12.6 million.

20.  All the three defendants are BVI companies and admittedly are subsidiaries of KL and companies within the Keen Lloyd group.

21.  Inquiries conducted by the plaintiff shows that the Altadena House property has all along been occupied by Mr Chun Kam Chiu and his family.  

22.  Upon receipt of the defendants’ claims to be tenants of the properties, the plaintiff had by letters requested the defendants for details of the loans and indebtedness stated in the tenancy agreements and other information.  All three defendants refused to answer the queries or to provide the information requested.

The actions

23.  On 21 April 2004, the plaintiff commenced the three actions herein.  The plaintiff’s claims in the three actions are similar.  They are for (1) a declaration that the three tenancy agreements are null and void and of no effect as against the plaintiff, (2) vacant possession of the three properties, (4) an injunction restraining the defendants from remaining in possession or occupying the properties and (5) mesne profits with interest.

24.  On 21 June 2004, leave to serve the Writs outside jurisdiction was granted.  On 29 July 2004, the defendants through Messrs Paul Chan & Co gave notice of intention to defend the actions.  On 9 August 2004, the plaintiff issued the three summonses for summary judgment and alternatively, interim injunctive relief.  The summonses and the supporting affidavits were served on the same day.  On 18 August 2004, the defendants applied by summonses to adjourn the hearing of the plaintiff summonses scheduled for 25 August 2004.  On 24 August 2004, I dismissed the adjournment application. 

25.  At the hearing of the plaintiff’s summonses, the defendants sought leave to file and use two affirmations.  The application was opposed by the plaintiff.  In the end, I granted leave for the affirmations to be filed and used.  The first of the affirmations is by Leung Suk Ching, Angela that relates to all three actions.  The other affirmation of Ng Ling Wai is only in relation to HCA 929 of 2004.  Mr Hui who appears for the defendants also asked to hear only HCA 929 of 2004 first and to adjourn the applications in the other two actions.  In the end, however, he did not insist on this course, which in my view is unjustified.

The defendants’ case

26.  The defendants resist the applications for summary judgment  on the basis that there are triable issues that warrant the actions proceeding to trial. In substance, the defendants raise three grounds of defence.  Firstly, it is said that the Legal Charges over the three properties are liable to be set aside by reason of fraudulent misrepresentation made by the Bank.  Secondly, it is said that the three tenancy agreements are genuine commercial transactions. Thirdly, it is said that the Bank had given consent and had constructive notice of the tenancy agreements.  The defendants also contend that the O.14 procedure is inappropriate given that there are allegations of fraud.   As to the alternative applications for interlocutory mandatory injunction, the defendants say that the balance of convenience should lie in favour of refusing the relief. 

The Bank’s consent or notice

27.  I will deal firstly with the defence that the Bank had given consent and had constructive notice of the three tenancies, which is a very short point.

28.  All the 1^st Legal Charges of the three properties contain restriction against alienation by KL.  Clause 9.16 of the three 1^st Legal Charges provides that:

“[KL] shall not, except with the prior written consent of the [Bank] and then only in conformity with any conditions which the [Bank] may in its absolute discretion impose during the subsistence of this security, part with the use, occupation or possession of the Property or any part thereof in any way whatsoever whether by way of letting, subletting, lending, sharing, assigning or other means whereby any person other than [KL] obtains the use, occupation or possession of the Property or any part thereof, irrespective of whether any rental or other consideration is given for such use, occupation or possession.”

29.  Plainly, for the three tenancy agreements to be binding on the Bank and the plaintiff, it must be shown that the Bank had given prior written consent to the creation of the tenancies or to KL parting with the use occupation or possession of the properties in favour of the defendants. 

30.  None of the defendants has adduced any evidence that the requisite prior written consent had been obtained from the Bank.  All that is said in the affirmations is that Mr Chun had told them that “the personnel [sic] in Sin Hua Bank, Castle Peak Road sub-branch were aware of the existence of the three tenancies” and “Miss Kwan, the property manager of [Keen Lloyd Group] told the same to the three tenants”: paragraph (14) of the affirmation of Angela Leung.

31.  The assertion that the Bank had given consent and had constructive notice of the three tenancies are mere bare assertions.  That is hardly sufficient for the purpose of resisting an Order 14 application given that the burden is on a defendant to condescend on particulars.   The defendants have therefore failed to make good this defence.

Fraudulent misrepresentation

32.  The defendants’ case on fraudulent misrepresentation can be summarized as follows:

(1)     In mid-1997, Mr Chun requested the Bank to increase the credit facilities granted to the Keen Lloyd group from $1.827 billion to $2.3 billion.   This was agreed to on condition that the group would put up more securities.  Consequently, the Dynasty Court property and the Altadena House property and other properties were charged to the Bank. 

(2)     Initially, the group was able to utilise an additional $200 million facilities.  The Bank later requested for more securities because of the falling property market, and the Parkview property and further properties were charged to the Bank.  Despite this, the Bank had not extended further facilities to the group as promised. 

(3)     At the criminal trial of Mr Chun, it was revealed that by reason of the lending restrictions under the guidelines issued by the Hong Kong Monetary Authority, the Bank was not in a position and had no intention to increase the banking facilities of the Keen Lloyd group to $2.3 billion as promised.  The bank had therefore deceived Mr Chun into charging the three properties to the Bank.

(4)     Upon discovery of the fraudulent misrepresentation, Mr Chun had caused KL Energy to commence proceedings under HCA 1299 of 2004 against the Bank for damages and other relief. 

33.  Mr Fung SC for the plaintiff submits that this defence of fraudulent misrepresentation is incredible and untenable.  I agree.

34.  Firstly, Miss Angela Leung, who was Mr Chun’s personal assistant, said in her affirmation that Mr Chun had on 1 August 1997  written a letter to the Bank to press for a reply to the request to increase the facilities to $2.3 billion, and that in December 1997, Mr Chun was told the Bank had approved the request.  However, the 1^st Legal Charge of the Altadena House property and that of the Dynasty Court property were created as early as 1 May and 19 June 1997.  They could not have been charged to the Bank in consequence or in furtherance of the alleged promise to increase the facilities. 

35.  Secondly, the Altadena House property and the Dynasty Court property were acquired on 1^st May and 19 June 1997 respectively and were charged to the bank on the same day as their acquisitions.  Clearly, the Legal Charges were for the purpose of financing the acquisitions.  This is inconsistent with, if not directly contradictory to, the contention that it was charged to the Bank as a condition for increasing the banking facilities for the group.  The creation of further legal charges over these properties in 1998 is also inconsistent with the defence case that the Bank demanded further securities be put up for the increased facilities because the property market was falling.  

36.  Thirdly, Miss Leung stated that according to Mr Chun, but for the fraudulent misrepresentation, he could have diverted part of the group’s business to other banks and would have charged the properties in question to other banks.  However, from the extracts of the transcript of Mr Chun’s criminal trial, it can be seen that counsel for Mr Chun had put it to Mr Ng Chi Leong, a former officer of the Bank, that in 1998 Mr Chun was complaining about the Bank not extending extra facilities to him and had threatened to pull his accounts from the Bank, to which Mr Ng agreed.   Mr Chun was therefore fully aware then that further facilities Bank were not forthcoming.  Yet he continued to create further legal charges over the properties in the course of 1998.

37.  Not only that, KL and KL Energy had as late as April 2000 requested the Bank to refrain from immediate legal proceedings to enforce the Legal Charges and to recover the indebtedness due and further entered into debt restructuring agreement with the Bank under the MOA.  By then, Mr Chun or the Keen Lloyd group must be fully aware that the Bank had not honoured its alleged promise. 

38.  Fourthly, HCA 1299 of 2004 is brought by KL Energy, who does not own the three properties in question.  The liquidators of KL have not been made a party to the action.  In her affirmation, Miss Angela Leung described the action as “representative proceedings”.  That is not understood.

39.  Further, although the Writ was issued on 1 June 2004, no statement of claim has been filed.  According to the endorsement on the Writ, KL Energy’s claim is only for $5 billion damages.  No relief for setting aside any transaction, let alone the Legal Charges in issue, is sought.  The institution of HCA 1299 of 2004 is hardly a fact in support of the defence case of fraudulent misrepresentation or that upon realising the fraudulent misrepresentation, Mr Chun had taken steps to set aside the Legal Charges.

40.   Fifthly, in the second affirmation of Paul Chan filed in support of the defendants’ adjournment application, the matter was put on the basis of a failure of consideration that entitled KL to set aside the Legal Charges in issue.  This affirmation was made only two days before Miss Leung and Miss Ng made their affirmations in opposition to the plaintiff’s application.  There was then no allegation or suggestion of fraud.

41.  In my view, the defence that the Legal Charges are liable to be set aside for fraudulent misrepresentation has no substance.

42.  That being the case, it is not necessary to consider the argument that because of the allegation of fraud, this is not an appropriate case for Order 14.   In any case, this is not a case in which the plaintiff is alleging fraud.

Genuineness of the tenancy agreements

43.  It is the plaintiff’s secondary case that the tenancy agreements are not genuine or bona fide.  The defendants on the other hand assert that they are genuine commercial transactions.  In my view, there are a number of matters that cast doubt on the genuineness and fides of the three tenancies.

44.  Firstly, the defendants are the subsidiaries of and companies related to KL.  As such, they ought to be aware of the restrictions on alienation contained in the Legal Charges and also the fact that the Bank has been taking steps to enforce the Legal Charges.  Secondly, the terms are unusual.  Thirdly, despite requests from the plaintiff and the agent of the Official Receiver and Provisional Liquidators, the defendants had refused without good reason to provide details and further information on the loans and indebtedness said to have given rise to the creation of the tenancies.  Fourthly, in the case of the Altadena House property, it was occupied by Mr Chun and remains to be occupied by his family. 

45.  Notwithstanding their assertion that the tenancy agreements are genuine transactions, the defendants have in these proceedings provided no evidence to substantiate the alleged loans and indebtedness due from KL to each of them.   The fact that Mr Chun is imprisoned is not a reason for the vacuum in the evidence since the defendants are themselves parties to the alleged loans and indebtedness. 

46.  In short, the plaintiff has in each of the three actions made out a case for summary judgment against the defendants.  The defendants have filed to show there are any triable issues.  In the circumstances, it is not necessary to deal with the alternative application for interlocutory mandatory injunction.     

Conclusion

47. For the reasons set out above, the plaintiff in each of the three actions is entitled to summary judgment as sought.  Accordingly, I enter final judgment for the plaintiff against the respective defendant in terms of the relief sought in paragraphs 1 to 6 of the plaintiff’s respective summonses.  Applying the normal rule of costs follow event, I also make an order nisi that the defendants pay the plaintiff the costs of their respective action, including the costs of the application for summary judgment, to be taxed if not agreed.  There is a certificate for two counsel. 

Mr Patrick Fung SC and Mr Michael Liu instructed by Messrs Simmons & Simmons for the plaintiff in HCA 926, 928 & 929/2004.

Mr Lawrence Hui instructed by Messrs Paul Chan & Co for the defendants in HCA 926, 928 & 929/2004.

HCA926, 928 & 929/2004

(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 926 OF 2004

______________________

______________________

ACTION NO. 928 OF 2004

______________________

BETWEEN

______________________

ACTION NO. 929 OF 2004

______________________

BETWEEN

(Heard together)

____________

DECISION

____________ 

1.  The defendants in these three actions have made identical applications by summonses for adjournment of the Order 14 hearing scheduled for 25 August 2004.  Since the same counsel and solicitors are involved and the arguments are essentially identical, the applications were heard at the same time.  At the conclusion of the arguments, I dismissed the defendants’ applications and gave oral reasons for my decision.  I now reduce the reasons into writing.

The factual background

2.  The three actions involve a total of eight Legal Charges created by one Keen Lloyd (Holdings) Limited, which subsequently changed its bane to Keen Lloyd Resources Limited (“KL”) in favour of Sin Hua Bank Limited (“the Bank”) between 1 May 1997 and 5 March 1998 in respect of three lots of residential properties and car parking spaces.  The key person in control of KL and other companies within the Keen Lloyd group of companies is Mr Chun (or Chin) Kam Chiu.

3.  The plaintiff is the Receiver appointed by the Bank under three of the Legal Charges for the properties secured under the various legal charges.  HCA 926/2004 relates to two Legal Charges both dated 9 January 1998, and the properties involved are a flat and a car parking space at Hong Kong Parkview.  As for HCA 928/2004, it concerns three Legal charges dated 19 June 1997 and 5 March 1998, and the properties comprise the penthouse and two flats and two car parking spaces at Dynasty Court.  In the case of HCA929/2004, three Legal Charges dated 1 May 1997 and 5 March 1998 are involved, and the properties comprise two flats and two car parking spaces at Altadena House, Baker Road. 

4.   The defendants in the three actions are BVI companies and claim to be the tenants of the respective properties.  The tenancy agreements were all made with Keen Lloyd Resources Limited and dated 18 April 2002 in the case of HCA 926/2004, 13 September 2002 in the case of HCA 928/2002 and 27 June 2002 in the case of HCA 929/2004.  

5.  On 21 April 2004, the plaintiff issued the Writs in the three actions.  In each of the actions, the plaintiff seeks a declaration that the tenancy agreement involved is null and void and of no effect, an order for possession, an injunction restraining the respective defendants from remaining in possession or occupation of the properties and mesne profits together with interest.

6.  As a result of the need to obtain leave to effect service outside jurisdiction, the Writs were only served on the respective defendants on 7 July 2004.  On 29 July 2004, the defendants through Messrs Paul Chan & Co gave notice of intention to defend.

The application to adjourn

7.  On 9 August 2004, the plaintiff issued in each of the three actions a summons for summary judgment and, alternatively for interlocutory mandatory injunction.  The summonses and the supporting affirmations were served on the same day.  The summonses were all made returnable before a judge in view of the relief of injunction sought.  The hearing is scheduled for 25 August 2004 with 2 hours reserved.

The application for adjournment

8.  On 18 August 2004, Messrs Paul Chan & Co caused to be issued a summons for the adjournment of the plaintiff’s three summonses.  The summons was returnable on 24 August 2004.  As there is no order consolidating the three actions, separate summonses were subsequently filed in each of the actions.  A supporting affirmation was also filed in HCA 926/2004 on 18 August 2004.  On 23 August 2004, a second affirmation in support of the application for adjournment was filed.

9.  The adjournment is sought on the basis that the defendants require time to retain counsel and to collate information in support of the proposed defence.  Although there are some complaints in the affirmations about listing the summonses for summary judgment before a judge as opposed to a master, it is not disputed by Mr Hingorani who appears for all the defendants that the plaintiff’s applications were made in compliance with the procedural requirements under Rules of the High Court.

10.  The defendants ask for 28 days to file evidence in opposition to the plaintiff’s applications.  It is explained because KL had been compulsorily wound up and Mr Chun is serving a term of imprisonment, the solicitor has difficulties in taking instructions and accessing the relevant documents.  

11.  The plaintiff opposes the adjournment on two broad bases. Firstly, it is said that the defendants’ proposed defence has no merits and is not reasonably arguable.  Secondly, it is said that the adjournment will occasion grave prejudice to the plaintiff.

The proposed defence

12.  The plaintiff’s claim against the defendants is twofold.  Firstly, the plaintiff says the tenancy agreements are not binding on the plaintiff because they were created without the prior written consent of the Bank or the plaintiff (whose appointment as Receiver pre-dated the tenancy agreements), and in breach of the Legal Charges, which had been registered in the Land Office.  Secondly, it is said that the tenancy agreements are not genuine. 

13.  The first affirmation of Mr Paul Chan in support of an adjournment did not disclose what the defendants’ defence is.  In the second affirmation of Mr Paul Chan, only one ground of defence was disclosed.  In essence, it is said that some time after mid-1997, it was agreed between Mr Chun and officials of the Bank that the Bank would increase the amount of facilities extended to the Keen Lloyd group of companies to HK$2.3 billion against collaterals already held by the Bank and additional collaterals.  As a result, further legal charges were created covering properties that include the properties that are the subject matters of the present actions.  It is said that the Bank was in breach of the agreement in that the facilities extended was less than $2 billion, and that the Bank was in fact unable to extend the agreed amount of facilities because it would exceed its lending limits.  It is said that this amounts to a failure of consideration by reason of which the Keen Lloyd group is entitled to set aside the Legal Charges involved.  

14.  In support of the contention that the Legal Charges are liable to be set aside, reference was made to High Court Action No. 1299 of 2004, which Mr Chan said was commenced by “Keen Lloyd Group” against the Bank to set aside various agreements made with the Bank.  As the Writ was not exhibited to Mr Chan’s two affirmations, the plaintiff had handed up a copy of it at the hearing.

15.  I accept that generally speaking, the court is reluctant to embark upon a detailed examination of the merits of the proposed defence on an application to adjourn for the purpose of filing evidence in support.  This is because the materials before the court are likely to be incomplete.  In the present instance, however, there are clearly a number of insurmountable obstacles associated with the defendants’ defence.

16.   Firstly, there is no legal basis for setting aside the Legal Charges purely because the Bank had failed to advance up to the allegedly agreed level of $2.3 billion.  Quite apart from the fact that it is inapt to regard this as amounting to a failure of consideration, it is said in Mr Paul Chan’s 2nd affirmation that the Keen Lloyd Group had performed the alleged agreement and it is not in dispute that the Bank had made advances, though not up to the level of $2.3 billion.  Hence, even if the Bank were indeed in breach of the agreement as alleged, the remedy would be in damages but not for setting aside of the legal charges and the discharge of the securities.

17.  Secondly, HCA 1299 of 2004 was brought by Keen Lloyd Energy Limited and KL or its Liquidators was not made a party to it. The claim as appeared from the Indorsement of Claim prepared by Messrs Paul Chan & Co., is for damages in the sum of $ 5 billion.  No rescission or setting aside of any agreement, let alone Legal Charges, is claimed by way of relief.  The assertion Mr Paul Chan made in his affirmation that the Keen Lloyd Group had commenced HCA 1299 of 2004 to set aside the legal charges in these actions is plainly incorrect.

18.  Thirdly, KL and Keen Lloyd Energy Limited had entered into a Memorandum of Agreement dated 14 April 2000 (“the Memorandum”), which is in effect a debt restructuring agreement, with the Bank.  The preamble of the Memorandum states that “… [the companies] have requested [the Bank] to withhold taking immediate legal proceedings against the Group for the time being for the recovery of outstanding indebtedness …”.   The companies also agreed under the Memorandum to sell and surrender possession of properties charged to the Bank by the companies.  It is not disputed that the three lots of properties and the Legal Charges involved in these proceedings form part of the subject matter of the Memorandum. 

19.  In 2001, Keen Lloyd and Keen Lloyd Energy Limited commenced HCA 1319 of 2001 against the Bank and its Receivers, including the plaintiff, claiming that the Bank had acted in breach of the Memorandum.  In applying for interlocutory injunction and resisting the application for discharge, the two companies had mentioned nothing about the Bank being in breach of an agreement to increase the facilities such that the Legal Charges and the securities given to the Bank were liable to be set aside or discharged. 

20.  Not only that, in entering into the Memorandum, the companies must have effectively affirmed, among others, the Legal Charges in question.  KL cannot now turn round and say the Legal Charges are liable to be set aside, and dispute the Bank’s and its Receiver’s rights over the properties charged.

21.  It is also to be noted that the three tenancy agreements relied upon by the defendants were all made in 2002, after the commencement of HCA 1319 of 2001.  The evidence also suggests that the defendants are related companies or subsidiaries of KL so that they ought to have known of the restriction on alienation imposed on KL under the Legal Charges.  The defendants have adduced no evidence suggesting that the prior written consent of the Bank, as required by the terms of Legal Charges, had been sought and/or granted.

22.  Further, despite that the plaintiff disputes the genuineness of the tenancy agreements and that in an Order 14 application, the defendant has the burden of showing triable issues, there is no explanation as to the  true status of the defendants and the alleged loan transactions that gave rise to the tenancy agreements.

23.  In seeking an adjournment, the defendant bears the burden of showing that the adjournment will not be fertile and will serve useful purpose.  The defendants have plainly failed to discharge this burden.

Prejudice to the plaintiff

24.  The plaintiff says that it will suffer grave prejudice if the adjournment is granted in that the Bank and its Receiver will continue to be deprived of the possession of the properties and they have for quite some time not received any repayment or income from the properties.  I accept that these are real prejudice.

Conclusion

25.  For the reasons set out above, I am of the view that the discretion should be exercised against granting an adjournment.  I therefore refuse the defendants’ applications and dismiss all the three summonses for adjournment.  The costs of the summonses are to be paid by the defendants to the plaintiff in any event, to be taxed if not agreed.

Mr Patrick Fung SC and Mr Michael Liu instructed by Messrs Simmons & Simmons for the plaintiff in HCA 926, 928 & 929/2004.

Mr J Hingorani instructed by Messrs Paul Chan & Co for the defendants in HCA 926, 928 & 929/2004.