Civil Action2013

UNION GLORY FINANCE INCAND OTHERS v. MERRILL LYNCH INTERNATIONAL BANK LTD AND ANOTHER

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CACV205/2016UNION GLORY FINANCE INC. AND OTHERS v. MERRILL LYNCH INTERNATIONAL BANK LTD AND ANOTHER

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107242-EN-2016-12-13

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HCA 2494/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2494 OF 2013

____________________

BETWEEN
	UNION GLORY FINANCE INC	1st Plaintiff
	DOUBLE SMART FINANCE LIMITED	2nd Plaintiff
	HANSON FINANCE LIMITED	3rd Plaintiff
	CW FINANCING LIMITED (formerly known as WILLIE FINANCING LIMITED)	4th Plaintiff
and
	MERRILL LYNCH INTERNATIONAL BANK LIMITED	1st Defendant
	MERRILL LYNCH (ASIA PACIFIC) LIMITED	2nd Defendant
____________________


Before: Deputy High Court Judge Cooney SC in Chambers

Date of Written Submissions by the defendants: 6 October 2016

Date of Written Submissions by the plaintiffs: 20 October 2016

Date of Decision on Costs: 13 December 2016

_________________________

DECISION ON COSTS

_________________________

Introduction

1. On 22 September 2016, I dismissed the plaintiffs’ claims and ordered the plaintiffs to pay the defendants’ costs. By written submissions, dated 6 October 2016, the defendants applied for costs on an indemnity basis and for interest on those costs at 10% above judgment rate. The plaintiffs replied by written submissions, dated 20 October 2016.

2. By letter, dated 10 November 2016, the defendants’ solicitors asked the court to make an order that the plaintiffs pay the defendants costs on an indemnity basis from a date which the court deemed appropriate, with certificate for two counsel.

3. By letter, dated 15 November 2016, the defendants’ solicitors advised that the defendants were seeking a certificate for two counsel for both the pre‑trial review on 13 January 2016 and for the trial.

4. The grounds relied upon by the defendants are:

(1) On 30 December 2014, the defendants made a Calderbank offer to settle on the basis that the proceedings be discontinued with the parties bearing their own costs; and
(2) On 29 May 2015, the defendants made a sanctioned payment into court in the sum of HK$1,167,000.00.

5. The defendants rely upon Order 22, rule 23 of the Rules of the High Court, which provides:

“(1) This rule applies where a plaintiff —
(a) fails to obtain a judgment better than the sanctioned payment; …
(3) The court may order the plaintiff to pay any costs incurred by the defendant after the latest date on which the payment or offer could have been accepted without requiring the leave of the court.
(4) The court may also order that the defendant is entitled to —
(a) his costs on the indemnity basis after the latest date on which the plaintiff could have accepted the payment or offer without requiring the leave of the court; and
(b) interest on the costs referred to in paragraph (3) or sub‑paragraph (a) at a rate not exceeding 10% above judgment rate.
(5) Where this rule applies, the Court shall make the orders referred to in paragraphs (2), (3) and (4) unless it considers it unjust to do so.”

6. When considering whether it would be unjust to make the orders referred to in para (3) and (4) the court shall take into account all the circumstances of the case including the matters set out in Order 22, rule 23(6), namely, the terms of the sanctioned offer, the stage at which any sanctioned offer was made, the information available to the parties at the time when the sanctioned offer was made and the conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the offer to be made or evaluated.

7. The defendants ask for indemnity costs and interest on those costs from 30 December 2014 (the date of the Calderbank offer) or 26 June 2015, the latter date being the latest date (28 days after payment) on which the plaintiff could have accepted the sanctioned payment without requiring the court’s leave.

8. As the plaintiffs failed in their claim entirely, they plainly failed to better the sanctioned payment and this is a case for consideration of indemnity costs and interest above judgment rate.

9. As noted in Hong Kong Civil Procedure 2017 Vol 1, para 22/24/1, indemnity costs and interest above judgment rate are not penal. The rules are designed to provide important incentives to encourage parties to make, and accept, settlement offers at appropriate levels. The objective is to achieve a fair result.

Indemnity costs

10. The plaintiffs submitted an award of indemnity costs would be unjust for the following reasons:‑

(1) That the sanctioned payment was manifestly insufficient when compared with the total of the plaintiffs’ claims (HK$45,475,899.41) plus interest.
(2) The plaintiffs’ considered they had a strong case. They had conducted financial checks on the subject borrower and found it to be in poor shape such that they would not be prepared to lend money to it unless their loans were protected by what they believed was a commitment by Merrill Lynch to lend the borrower HK$200,000,000.
(3) The plaintiffs’ witness was only prepared to recommend the loans to the defendants because he believed Merrill Lynch had committed to lending the borrower HK$200,000,000.
(4) The plaintiffs were entitled to take the view that a court, taking into account inherent probabilities and improbabilities, would accept that there clearly was something which motivated the plaintiffs to advance over HK$70,000,000 to an uncreditworthy borrower and that that something was the alleged misrepresentation that Merrill Lynch had committed to lend HK$200,000,000 to the borrower.
(5) In other words, the decision to reject the minimal sanctioned payment was a considered and not a frivolous decision.
(6) There were no adverse findings of untruthfulness made by the court regarding the plaintiffs’ witnesses.
(7) The court had rejected part of one of the defendants’ witness’ evidence.
(8) Of seven days of evidence, the plaintiffs’ case took 5½ days, principally consisting of cross‑examination by the defendants’ leading counsel. In contrast the defendants’ case lasted only one day, including cross‑examination confined to only the essentials. The plaintiffs did not prolong the trial unnecessarily.

Discussion

11. The procedural requirements of Order 22 were complied with.

12. Regarding the terms of the sanctioned offer, as noted in Hong Kong Civil Procedure 2017 Vol 1, para 22/24/1, a sanctioned offer does not have to be of a large amount and a nominal amount qualifies. In CEP Ltd v Wuxi Jiacheng Solar Energy Technology Co Ltd [2014] 4 HKLRD 44, Recorder Jat Sew Tong SC held that a sanctioned payment for a nominal sum was not in itself unreasonable.

13. In a long letter to the plaintiffs’ solicitors, dated 30 December 2014, the defendants’ solicitors set out detailed reasons why the defendants considered that the plaintiffs’ claims would fail. In that letter, the defendants proposed that the plaintiff discontinue the proceedings, with the parties bearing their own costs. At the time the sanctioned payment was paid into court, in a letter, dated 29 May 2015, the plaintiffs’ solicitors referred to their earlier letter and repeated that the defendants considered the claims were without merit and advised that the defendants were prepared to settle the matter by way of the sanctioned payment with a view to avoiding wasting further time and costs.

14. The letters indicate that the defendants considered they had a good defence and were making a genuine offer to settle. In the circumstances, I am not prepared to refuse indemnity costs because of the amount of the sanctioned payment.

15. As to the plaintiffs’ assessment of the strength of their case, whatever strength the plaintiffs perceived in their case, the fact remains that they failed to better the sanctioned payment. That they believed in their case and were not frivolous does not mean that an award of indemnity costs would be unjust. Litigation carries risk and belief in the strength of a case is a matter of assessment of that risk. Howsoever the plaintiffs assessed their risk, the result was that the plaintiffs failed to establish fundamental elements of a case of misrepresentation.

16. Turning to the stage in proceedings at which the sanctioned payment was made, the sanctioned payment was made at an early stage, about 1½ years before trial. By the time the sanctioned payment was made, lists of documents and witness statements (apart from one) had been filed and served. The issues and the parties’ respective cases should have been clear by that time. The sanctioned payment was made at an appropriate stage in proceedings and I have not been referred to any evidence demonstrating that the plaintiffs were refused any relevant information for the purposes of enabling the offer to be evaluated.

17. As for the defendants’ witness whose evidence was partly rejected, if that part of his evidence caused the plaintiffs to consider that they had a strong case, that evidence was not determinative. The plaintiffs failed because they failed to prove their own case. Not only did they fail to prove that the defendants’ witnesses made the representations pleaded in the statement of claim and in the evidence of their witnesses, they also failed to establish the necessary relationship to give rise to a duty of care owed by the defendants and they failed to establish reliance, both of which are elements for the plaintiffs to prove.

18. I do not consider the defendants unnecessarily prolonged the trial.

19. After considering all of the circumstances, I do not consider that an award of indemnity costs would be unjust.

20. As for the date from which indemnity costs should apply, I consider they should apply from 27 June 2015, which is the first day after the latest date on which the plaintiff could have accepted the payment. Rules of the High Court Order 62, rule 5(1) provides:

“… the court in exercising its discretion as to costs shall, to such extent, if any, as may be appropriate in the circumstances, take into account —
(d) any written offer which is expressed to be ‘without prejudice save as to costs’ and which relates to any issue in the proceedings, but the court may not take the offer into account if, at the time it is made, the party making it could have protected his position as to costs by means of a sanctioned payment or a sanctioned offer under Order 22.”

21. The defendants have not suggested that they could not have made a sanctioned payment or sanctioned offer when they made their Calderbank offer on 30 December 2014. Accordingly, I exclude that offer from consideration under Order 62, rule 5(1)(d).

22. In CEP Ltd v Wuxi Jiacheng Solar Energy Technology Ltd Co [2016] 1 HKLRD 960, Lam V‑P and McWalters JA considered, obiter, what was termed the “exclusionary rule” in Order 62, rule 5(1)(d) and stated that it should be deleted. Notwithstanding their Lordships’ observations, the exclusionary rule has not been deleted and still operates, such that I am obliged to have regard to it.

Interest

23. With regard to interest, the first consideration is whether it would be unjust to award interest at a rate above judgment rate. Having considered all the circumstances, including those discussed above, I consider that it would not be unjust to award interest above judgment rate.

24. The second consideration is the rate of interest. The defendants submitted that 10% above judgment rate would be appropriate for the following reasons:

(1) the plaintiffs’ claims were without merit;
(2) the defendants adopted a reasonable approach to settlement negotiations, in contrast the plaintiffs did not provide their own proposals for settlement;
(3) the judgment demonstrates that the defendants were justified in adopting their approach to settlement;
(4) the plaintiffs’ case shifted at the beginning of and during the trial;
(5) indemnity costs would not adequately compensate the defendants for the substantial and prolonged inconvenience and injustice they have had to deal with in defending the claim. The plaintiffs waited until the end of the limitation period before commencing proceedings and the litigation progressed at a “leisurely pace”, only reaching trial three years after the writ was filed. In the interim, the plaintiffs unsuccessfully challenged interlocutory matters which ought to have been conceded;
(6) there is no award of damages to the defendants. The award of enhanced interest is a proportionate and reasonable means by which to reflect a material difference to the outcome of the case; and
(7) the sanctioned payment was not a nominal sum.

25. In McPhilemy v Times Newspapers Ltd (No 2) [2002] 1 WLR 934, Chadwick LJ observed, at p 944H:

“The purpose for which the power to order interest on costs under [the equivalent of O 22, r 23(4)(b)] is conferred is, I think, plain. It is to redress, in a case to which [the equivalent of O 22, r 23] applies, the element of perceived unfairness which arises from the general rule that interest is not allowed on costs paid before judgment … . So, in the ordinary case, the successful claimant who has made payments to his own solicitor on account of costs in advance of the trial will be out of pocket even if he obtains, at the trial, an order for costs on an indemnity basis. He will get interest on his costs from the date of the order (whether he has actually paid them or not); but he will get nothing to compensate him for the cost of money (or the loss of the use of money) which he has had to bear before trial in relation to payments which he has made on account of costs. An order under [the equivalent of O 22, r 23(4)(b)] enables the court to achieve a fairer result in that respect. But, having regard to the point which, as it seems to me, [the equivalent of O 22, r 23(4)(b)] is intended to meet, I would order payment of interest at a rate which reflects (albeit generously) the cost of money, say, 4% over base rate; and I would direct that interest runs, on the costs to which the order applies, from the date upon which the work was done or liability for disbursements was incurred.” (emphasis added)

26. Following McPhilemy v Times Newspapers Ltd (No 2), the purpose of payment of interest on costs is to mitigate the general rule that interest is not allowed on costs paid before judgment by compensating for the cost of money or the loss of the use of money, and the rate of interest should reflect the cost of money. None of the reasons given by the defendants in support of a rate of 10% above judgment rate, set out in para 24 above, concern the cost of money or the loss of its use.

27. I shall say something in particular about the reason set out in para 24(6) above. The effect of the submission is that, because the defendants were not awarded damages, then they should be awarded interest on costs to properly reflect the outcome of the case. This submission appears to be based upon Little and Others v George Little Sebire and Co TLR 17.11.99, (which was included in the defendants’ authorities) in which Mr David Foskett QC, sitting as a deputy judge of the Queen’s Bench Division, stated:

“Unless the discretions conferred by the rule were exercised in away (sic) that made a material, albeit proportionate, difference to the eventual award in the case, the rule itself would become redundant.
One appropriate way in which the issue might be approached was to start with the proposition that enhanced interest of 10 per cent above base rate be awarded on the whole of the judgment, excluding interest, from the earliest date when it could be awarded and then to evaluate whether the effect of doing so would itself work an injustice or result in a disproportionate advantage to the claimant or a disproportionate disadvantage to the defendant.”

28. Although the report refers to the deputy judge awarding indemnity costs, the deputy judge’s reference to “10 per cent above base rate be awarded on the whole of the judgment, excluding interest, from the earliest date when it could be awarded” appears to be a reference to the discretion to award interest on any sum of money awarded to a claimant provided for by CPR rule 36.21(2), which is in the following terms:

“(2) The court may order interest on the whole or part of any sum of money (excluding interest) awarded to a claimant at a rate not exceeding 10% above base rate for some or all of the period starting with the latest date on which the defendant could have accepted the offer without needing the permission of the court.”

29. The discretion to award indemnity costs and interest on those costs is provided for separately by CPR rule 36.21(3), which makes no reference to “the whole of the judgment” or “excluding interest”, as referred to by the deputy judge.

30. Notwithstanding my observations as to the rule to which the deputy judge was referring, assuming the deputy judge’s observations were directed to the discretion to award interest on indemnity costs, I do not agree that the discretion should be exercised in a way that makes a material difference to the eventual award in the case, starting with the proposition that enhanced interest of 10% above judgment rate be awarded and then to evaluate whether the effect of doing so would itself work an injustice or result in a disproportionate advantage to the claimant or a disproportionate disadvantage to the defendant. My reason for not agreeing is that the purpose of interest on costs is to reflect the cost of money (McPhilemy v Times Newspapers Ltd (No 2)), as such, 10% above base rate is not the starting point but is a maximum. As HH Judge Mimmie Chan (as she then was) observed in Maysun Engineering Co Ltd v International Education and Academic Exchanges Foundation Co Ltd [2011] 2 HKLRD 844, para 16:

“[10% above judgment rate] does no more than to indicate the order which can be made by the Court.”

Discussion

31. I consider 10% above judgment rate to be too high. The plaintiff submitted that the cost of money in Hong Kong is, and has been for some considerable time, low and referred me to the interest awarded by HH Judge Mimmie Chan in Maysun Engineering Co Ltd v International Education and Academic Exchanges Foundation Co Ltdsupra, (2% above judgment rate) and by Recorder Jat Sew Tong SC in CEP Ltd v Wuxi Jiacheng Solar Energy Technology Ltd Cosupra, (2½% above judgment rate).

32. In CEP Ltd v Wuxi Jiacheng Solar Energy Technology Co Ltdsupra, the 2½% awarded by Recorder Jat Sew Tong SC was half the rate which he would otherwise have ordered, following his approach in Kai Min Fashion (HK) Ltd v Fond Express Logistics Ltd [2013] 1 HKC 563. In Kai Min Fashion (HK) Ltd v Fond Express Logistics Ltd, after noting that to follow the principle that the plaintiffs should have interest on each item of cost from the dates on which work was done or incurred would be overly complicated, Recorder Jat Sew Tong SC adopted a “simplified process” by ordering that interest would be payable on all items of costs at half the rate which would otherwise be ordered. Recorder Jat Sew Tong SC was applying a “simplified process”, which had been applied earlier by Johnson Lam J in Golden Eagle International (Group) Ltd v GR Investment Holdings Ltd [2010] 3 HKLRD 273 at para 18:

“… There is no evidence of actual payment of costs by the plaintiff. In principle the defendant should pay the plaintiff interest on costs incurred after 1 February 2010 running from the date when the works were done respectively. However, it would be a complicated process if each item of work were to carry interest from a different date. To simplify the process, I shall borrow a well‑established approach in working out interest for special damages in personal injuries litigation. I will order interest at half of the rate I would otherwise order on all the costs incurred after 1 February 2010 with interest starting to run from 1 February 2010 for all the items. … .”

33. This simplified process is referred to in para 22/22 of Hong Kong Civil Procedure 2017 Vol 1.

34. After noting the rationale for payment of interest on costs as explained in McPhilemy v Times Newspapers Ltd (No 2)supra, and that the Court of Appeal awarded interest of 4% over base rate, HH Judge Mimmie Chan appears to have adopted the simplified process as explained in paras 23 and 24 of her decision in Maysun Engineering Co Ltd v International Education and Academic Exchanges Foundation Co Ltdsupra:

“23. In the case of KR v Bryn Alyn Community (Holdings) Ltd [2003] PIQR P30, the court pointed out that interest on costs is intended to compensate a litigant who is out of pocket, having funded litigation which he should not have had to fund, and that in cases where there is no evidence to demonstrate the actual dates when clients had put up funds from which interest will run, the court may order interest to run from the date when the work was done or liability for disbursements was incurred, as in McPhilemy v Times Newspapers Ltd (No 2).
24. There is no evidence in this case as to when MEC was out of pocket in having to make payment on account of costs, or in having to actually put up funds for payment of its legal costs. Nor is there evidence of when liability for disbursements such as counsel’s fees was incurred. If I do not make an order for enhanced interest on costs …, interest on costs will run from the date of the judgment … . To reflect the spirit of O 22 and the principle of compensation for the cost of money paid before trial, I will order interest on indemnity costs from [the latest date on which the defendant could have accepted the sanctioned offer], at a lower rate of 2% above judgment rate.”

35. In the present case there is no evidence as to when the plaintiffs incurred liability for costs or evidence of payment of costs or having paid money on account of their legal costs. In these circumstances, I shall adopt the simplified approach and order a rate of interest of half of what I would otherwise have ordered. As to that rate, in the absence of evidence as to the actual cost of money, I take a broad approach and I consider the rates applied by Recorder Jat Sew Tong and HH Judge Mimmie Chan to be appropriate, in which case I order interest on the indemnity costs from 27 June 2015 at a rate of 2½%.

36. There was a dispute between the parties as to whether interest should be paid to the date of judgment or the date of payment, with the defendants seeking interest to the date of payment. Section 49(1) of the High Court Ordinance, Cap 4, provides:

“(1) Judgment debts shall carry simple interest‑
(a) at such rate as the Court of First Instance may order; or
(b) in the absence of such order, at such rate as may be determined from time to time by the Chief Justice by order,
on the aggregate amount thereof, or on such part thereof as for the time being remains unsatisfied from the date of judgment until satisfaction.”

37. As noted by HH Judge Mimmie Chan in Maysun Engineering Co Ltd v International Education and Academic Exchanges Foundation Co Ltd supra, an order for payment of costs is a judgment debt.

38. In Hong Kong Civil Procedure 2017 Vol 1, para 22/24/2 there is a reference to conflicting authorities as to whether the court has jurisdiction to award interest until the date of judgment or the date of payment.

39. On the one hand, Recorder Jat Sew Tong SC in Kai Min Fashion (HK) Ltd v Fond Express Logistics Ltd supra, following McPhilemy v Times Newspapers Ltd (No 2) supra, held that the court did not have jurisdiction to order enhanced interest until the date of judgment. On the other hand, HH Judge Mimmie Chan in Maysun Engineering Co Ltd v International Education and Academic Exchanges Foundation Co Ltd supra, held that enhanced interest could be awarded until after the date of judgment. HH Judge Mimmie Chan distinguished McPhilemy v Times Newspapers Ltd (No 2) on the basis that that court concluded, inter alia, that the courts in England did not have the power under the equivalent rule to Order 22, rule 23 to fix the rate of interest payable on judgment debts, which power is conferred on the Lord Chancellor under section 17 of the Judgments Act 1838 and section 44 of the Administration of Justice Act 1970, whereas under section 50(1)(a) of the District Court Ordinance, Cap 336 judgment debts are to carry simple interest at the rate the court orders or, in the absence of an order, at the rate the Chief Justice determines by order. (Recorder Jat Sew Tong SC was not referred to Maysun Engineering Co Ltd v International Education and Academic Exchanges Foundation Co Ltd.)

40. With respect, I agree with HH Judge Mimmie Chan. Under section 49(1) of the High Court Ordinance, the Court of First Instance has the power to determine a rate of interest, which rate, by operation of section 49(1), a judgment debt shall carry “until satisfaction”. In my view, “until satisfaction” includes “until payment” such that the court has jurisdiction to award interest until payment of costs.

Orders

41. Accordingly, I order:

(1) The plaintiffs to pay the defendants’ costs on a party‑and‑party basis up to and including 26 June 2015;
(2) The plaintiffs to pay the defendants costs’ on an indemnity basis from 27 June 2015, with a certificate for two counsel;
(3) Interest on the indemnity costs at a rate of 2½% above judgment rate from 27 June 2015 until payment;
(4) The sanctioned payment to be paid out from the court to the defendants through their solicitors, Clifford Chance.

	(Nicholas Cooney SC)
	Deputy High Court Judge

Mr Kevin B Egan and Mr Minju Kim, instructed by Lam & Co, for the plaintiffs

Mr Douglas Lam SC, leading Ms Rachel Lam, instructed by Clifford Chance, for the defendants

106004-EN-2016-09-22

UNION GLORY FINANCE INC. AND OTHERS v. MERRILL LYNCH INTERNATIONAL BANK LTD AND ANOTHER

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HCA 2494/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2494 OF 2013

________________________

BETWEEN

	UNION GLORY FINANCE INC.	1^st Plaintiff
	DOUBLE SMART FINANCE LIMITED	2^nd Plaintiff
	HANSOM FINANCE LIMITED	3^rd Plaintiff
	CW FINANCING LIMITED (formerly known as WILLIE FINANCING LIMITED)	4^th Plaintiff
	and
	MERRILL LYNCH INTERNATIONAL BANK LIMITED	1^st Defendant
	MERRILL LYNCH (ASIA PACIFIC) LIMITED	2^nd Defendant

________________________

Before: Deputy High Court Judge Cooney SC in Court

Dates of Hearing: 11 – 15, 18 – 20 April and 23 – 24 May 2016

Date of Judgment: 22 September 2016

________________________

JUDGMENT

________________________

1. The plaintiffs claim damages for negligent misrepresentation.

2. Briefly, the plaintiffs were moneylenders. They claim that they relied upon and were induced to lend money to Tack Fat Group International Limited (“Tack Fat Group”) by certain representations made to them by a Mr Chuang Yue‑chien, Eugene (a witness for the plaintiffs), that “Merrill Lynch” had agreed to lend Tack Fat Group HK$200,000,000. Mr Chuang said that representatives of the defendants made the representations to him, that he believed the representations and passed them on to the plaintiffs. Tack Fat Group went into liquidation and failed to repay the loans in full. The plaintiffs allege the representations were false.

BACKGROUND

3. The 1^st defendant (“Merrill Lynch International”) engages in banking and financial services. The 2^nd defendant (“Merrill Lynch Asia Pacific”) engages in financial advisory and investment banking services.

4. During the period from January to July 2008, Merrill Lynch Asia Pacific employed Mr John C Lee as Head of Hong Kong and Managing Director of its Investment Banking division. The scope of the Investment Banking division’s business involved investment banking relating to debt and equity markets as well as mergers and acquisitions advisory work. Mr Lee’s primary responsibilities were to maintain client relationships and originate business for Merrill Lynch Asia Pacific by presenting ideas to clients and pitching for work. Mr Lee gave evidence for the defendants.

5. During the same period, Mr Samson Lo was Vice‑President of the Investment Banking division. Mr Lo reported to Mr Lee. Mr Lo’s primary job responsibilities were to assist Mr Lee to maintain client relationships and to originate business for the bank by presenting ideas to clients and pitching for work. Mr Lo was involved in the day‑to‑day management and execution of transactions for clients. Mr Lo also gave evidence for the defendants.

A proposed loan by Merrill Lynch International to Tack Fat Group

6. Mr Lee stated that, in 2006, he met Mr Kwok Wing, the founder and Chairman of Tack Fat Group. Mr Kwok was also the chairman of Tack Fat Group’s majority shareholders, Efulfilment Enterprises Limited (“Efulfilment”) and Sharp Asset Holdings Limited (“Sharp Asset”). Thereafter, Mr Lee contacted Mr Kwok to present business proposals. Despite these proposals not materializing into any business dealings, Mr Lee maintained a continuing business dialogue with Mr Kwok from 2006 to 2008 and he became Merrill Lynch Asia Pacific’s main relationship manager for Tack Fat Group. Mr Lee introduced Mr Lo to Mr Kwok in early 2008 and Mr Lo assisted Mr Lee in the latter’s role as the relationship manager for Tack Fat Group.

7. Around 3 March 2008, Mr Lee attended a business meeting with Mr Kwok to discuss a potential “take private” or management buy‑out of Tack Fat Group’s issued shares. Mr Lo and another person from Merrill Lynch Asia Pacific were also at the meeting. Efulfilment and Sharp Asset required debt and equity financing for the management buy‑out. In respect of this, a confidentiality agreement, an advisory engagement letter and a financing engagement letter respectively, were executed on 2 April 2008. By the financing engagement letter, Merrill Lynch Asia Pacific agreed to act for Efulfilment and Sharp Asset as the exclusive mandated lead arranger for the financing of the management buy‑out. An internal email, dated 6 June 2008, indicated that “Merrill Lynch” would earn a total fee of US$14,000,000.

8. Subsequently, Tack Fat Group contemplated a rights issue to raise funds to pay down two mandatory loan amortisations due in June and August 2008 respectively. The June 2008 payment was due to Citic Ka Wah Bank in the sum of HK$65,000,000 (“the Citic loan”). Discussions regarding the management buy‑out were put on hold whilst Tack Fat Group considered the rights issue.

9. Around 6 May 2008, Mr Kwok telephoned Mr Lee asking him for Merrill Lynch Asia Pacific’s help to obtain a bridging loan of HK$200,000,000 because he did not think he could get the rights issue completed in time to pay the loans falling due in June and August 2008. Mr Lee advised Mr Lo of this conversation by email on the same day.

10. As the Investment Banking division was the mandated lead arranger for the management buy‑out, in order to avoid any conflict of interest, on 13 May 2008, Mr Kevin Tham of Merrill Lynch Asia Pacific’s Credit Trading team was introduced to Mr Kwok to discuss a bridging loan. Mr Lee and Mr Lo continued to work on the management buy‑out.

11. On 19 May 2008, Mr Lo met with Mr Kwok who told him that Tack Fat Group had “pretty much” agreed the bridge loan terms orally and would allow access to due diligence that week and expected to execute a finalized term sheet by the end of the following week. Mr Lo advised Mr Lee of this by way of a status update.

12. On 28 May 2008, Merrill Lynch’s solicitors sent a draft Facility Agreement for the proposed loan to Tack Fat’s chief financial officer, Mr Kenny Fung.

13. From discussions Mr Lee had with Mr Lo on 29 May 2008, Mr Lee understood that Tack Fat Group had received a draft Facility Agreement from Mr Tham or Merrill Lynch Asia Pacific’s solicitors and that Mr Kwok was extremely happy with the progress of the proposed loan. This is confirmed in a email from Mr Lo to Mr Lee, dated 29 May 2008. Mr Lee also understood that, because of the urgent need for a bridging loan, the two processes of due diligence and documentation were being conducted in parallel, rather than the usual procedure of due diligence preceding documentation.

14. By email, dated 30 May 2008, Mr Tham advised Mr Lee and Mr Lo and others that a Debt Markets Commitment Committee (“DMCC”) meeting had been scheduled for 3 June 2008. A “summary writeup” was attached to the email and it is clear from the summary that, at that stage, the loan was a proposal only. Mr Lee stated in his witness statement that the purpose of the meeting was to discuss whether a bridging loan to Tack Fat Group would be approved.

15. On 3 June 2008, Mr Tham told Mr Lee that, during the DMCC meeting, Mr Salvatore Petrancosta, the Head of the Global Risk Division of Merrill Lynch in Asia Pacific, held a negative view towards the proposed loan due to his concerns about Tack Fat Group’s credit and ability to repay. Mr Lee told Mr Tham that he would pass him information about the rights issue, which information Mr Lee thought might alleviate some of Mr Petrancosta’s concerns. Mr Lee was informed that the DMCC required evidence from Tack Fat Group that it would carry out the rights issue, specifically, commitment letters from Tack Fat Group’s advisers.

16. Also on 3 June 2008, Mr Kwok told Mr Lo that the deadline for the Citic loan had been extended to 10 June 2008.

17. On 4 June 2008, Mr Lee told Mr Kwok that DMCC approval was required for the loan. Mr Kwok said that he would call Mr Lo later regarding the required commitment letters. On that day, Mr Lee emailed Mr Lo:

“Kwok called me. He will call u later today to show u the letter.”

Mr Lo responded:

“Yes I have been breathing down Kenny’s [Fung] neck to get the letter today.”

18. In the afternoon of 4 June 2008, Mr Lo collected the two advisers’ commitment letters, both dated 4 June 2008, from the offices of Chung Nam Securities Limited. Get Nice Securities Limited and Chung Nam Securities Limited provided a letter by which they undertook to underwrite the rights issue. Get Nice Capital Limited and CU Corporate Finance Limited provided the other letter confirming an agreement to be engaged by Tack Fat Group as its joint financial advisers in respect of the rights issue.

19. Mr Lo’s evidence was that, when he attended to collect the letters, Mr Chuang and a Mr Dickson Chan were meeting with Mr Kwok, working on the commitment letters.

20. On 5 June 2008, Mr Lo emailed Mr Nicholas Lee of Merrill Lynch’s Equity Capital Markets division:

“Nick, we have a huge favor to ask. We have a corporate client Tack Fat group who is currently getting a bridge loan from Kevin Tham in our firm. After going to DMCC, Sal [Petrancosta] asked that we come back w a Rights offering commitment ltr from Tack Fat’s two advisors to verify the validity of the commitment ltr and the track record of these two advisors.
Sal basically just wants someone from ECM to verify this ltr and feel comfortable that the rights can be underwritten by these two securities firms.
Can you help us out? We are planning to call sal after 530 today. …”

21. Mr Tham commented upon Mr Lee’s approach to Mr Nicholas Lee in an email to a Mr Lim, dated 5 June 2008:

“IBK [Mr Lee and Mr Lo] is putting in a last ditch effort, getting [Equity Capital Markets division] to comment on viability of Rights Issue, but at this stage looks unlikely that it will be strong enough to change Sal’s mind.
This puts Tack Fat in a very tight spot, and IBK will have a serious relationship issue to manage. We’ve been assisting IBK throughout, but they know the state of play. …”

22. However, Mr Petrancosta did not consider the commitment letters satisfactory and asked for a binding underwriting offer agreement before he would consider the proposed loan.

23. On 5 June 2008, Mr Lo responded to an email from a colleague inquiring as to how his day was going:

“Completely screwed up. Tack fact [sic] is not getting money.”

24. Also on 5 June 2008, Mr Tham emailed Mr Lee and Mr Lo indicating that Mr Kwok was planning to sign the Facility Agreement for the loan on 6 June 2008 and advising that, unless things changed, Tack Fat Group needed to be told about the current situation regarding the loan. Mr Lee telephoned Mr Kwok and told him that the proposed loan was still going through internal approvals and it was unlikely that there would be a response until around 6 June 2008. Mr Kwok was dissatisfied.

25. On either 5 or 6 June 2008, Mr Lee spoke to Mr Damian Chunilal, the Head of International Banking for the Pacific Rim and Mr Patrick Moran, the Head Legal Counsel for International Banking in Asia, seeking their support for the proposed loan.

26. On 6 June 2008, Mr Lo sent Mr Chunilal an email setting out arguments in support of the loan.

27. On 6 June 2008, Mr Tham sent an email to Mr Lee and Mr Lo advising them that Mr Kwok had signed the Facility Agreement, which Mr Kwok would send to him, and asking what was being said to Mr Kwok. Mr Lee responded by email on the same day advising:

“I told him that we are trying our best and will let him know before 2pm. As he is flying off at 2pm and will not be back by Mon evening, he has gone ahead to sign the docs and waiting for our confirmation.”

28. A Facility Agreement, executed by Tack Fat Swimwear Manufacturing Limited as borrower and signed by Mr Kwok, bearing date 6 June 2008, was sent to Merrill Lynch Asia Pacific on 6 June 2008. The Facility Agreement names Merrill Lynch International as lender. On the same day, Tack Fat Group’s chief financial officer, Mr Kenny Fung, sent to Mr Tham a signed Drawdown Request for HK$74,840,000 with HK$65,340,000 to be credited to Citic Ka Wah Bank Ltd.

29. Also on 6 June 2008, Mr Lo sent the following email to Mr Lee:

“John, [Mr Kwok] has been calling me … non stop. Despite the debacle, he was still very nice …. I told him he really has nothing to worry about and we just need final nod from new york. We shld just give him a call tonight and let him know we are almost there. …”

30. Mr Lee responded:

“I spoke with him around 6pm and asked him not to worry and we will update him tomorrow pm. …”

31. On the same day, Mr Tham had sent another email to Mr Lee:

“Understand that you may be speaking to Damian [Chunilal] this afternoon. Sounds like he’s positive and appreciate his support. …, one key thing that you should further emphasise would be the relationship/business importance of [Tack Fat Group] in terms of the other mandates that ML is pursuing with them. He probably hasn’t had time to go through all the information and understand the P&L at stake, but I feel a business/‌relationship angle … should be what Sal is looking for.”

32. To which Mr Lee responded:

“That is why I am planning to speak with Damian separately before he takes off to London. I want him to understand that it is more than just a bridge loan but also the overall relationship/ML reputation etc. I told [Mr Kwok] that we need to get one final sign‑off from NY overnight and hopefully will get him a final answer by tomorrow afternoon. …”

33. Later on 6 June 2008, Mr Lee emailed Mr Tham:

“I spoke with Damian this afternoon.
He is supportive and said that from a commercial perspective, we should do this deal assuming Kevin is fully comfortable to do this deal. He said that it is also morally wrong for us not to do this deal at this stage. …”

34. It transpired that subsequently Mr Chunilal did not support the loan and on 8 June 2008, emails were exchanged between Mr Petrancosta and a Mr Antony Hung, with the former opposing the loan. Finally on that day, Mr Hung emailed Mr Petrancosta, with a copy to Mr Tham and forwarded to Mr Lee:

“Let’s pass and move onto the next one. …”

35. On 9 June 2008, Mr Lee and Mr Tham discussed by email ways to get approval for a loan. Also on 9 June 2008, Mr Lee discussed the proposed loan with Mr Chunilal over the telephone and reported in an email to a Mr Rodney Tsang that he told Mr Chunilal that “… I am willing to put my own neck on the line for this deal.” There were also emails between Mr Lee and Mr Chunilal discussing what may be required to obtain approval.

36. On 9 June 2008, Mr Lee emailed Mr Petrancosta proposing a telephone call to discuss the proposed loan with a view to a final decision, to which Mr Petrancosta replied:

“I can not [sic] do a call on this given personal and ML commitments. We have numerous serious credit concerns on this one. It is not an acceptable credit. …”

Mr Lee forwarded that email to Mr Tsang, stating the following:

“Fyi. This is ridiculous. I just spoke with Antony [Hung]. He is going to call Sal to discuss this to see whether he can put Sal in the right position.”

37. Emails indicate that on 10 and 11 June 2008, Mr Lee and Mr Lo were discussing with Mr Kwok whether he could provide security for the loan. Nevertheless, Mr Petrancosta maintained his opposition to the loan.

38. By email to Mr Chunilal, dated 11 June 2008, Mr Lee advised that he was exploring a funding alternative, referring to enquiries with his friends who may be able to provide a loan to Tack Fat Group.

39. On 12 June 2008, by email Mr Lee asked Mr Lo for an update on the loan and Mr Lo replied:

“On the bridge loan, [Mr Kwok] pulled it together with friends and private companies and paid HK$65mm today to Citi Ka Wah. As far as the amortization in August 2008 is concerned, [Mr Kwok] is going to push very hard on the Rights offering.
[Mr Kwok] and the rest of the crew are still very enthusiastic about the take private despite the loan debacle and would like to pick it up. …”

40. On 13 June 2008, Mr Tham advised Merrill Lynch’s solicitors, by email, that Merrill Lynch would not be able to proceed with the bridge loan “as we have internal approval issues”.

41. No loan was ever advanced by Merrill Lynch International to Tack Fat Group.

The plaintiffs lend money to Tack Fat Group

42. The following is taken from the evidence of Mr Chuang and Mr Dickson Chan (another witness for the plaintiffs) and represents the plaintiffs’ case.

43. In mid‑May 2008, Mr Kwok met with Mr Chuang and Mr Chan. At that time, both Mr Chuang and Mr Chan were Responsible Officers for CU Corporate Finance Limited (“CUCF”), which was licensed to carry out businesses under Type 6 of the Securities and Futures Ordinance and regulated by the Securities and Futures Commission. Type 6 permitted CUCF to carry out corporate advisory business, including advising lenders and borrowers in arranging syndicated loans.

44. During the meeting, Mr Kwok told Mr Chuang and Mr Chan that Tack Fat Group faced short term financial difficulty, namely, one of its creditors, Citic Ka Wah Bank Limited, had threatened to petition to wind up Tack Fat Group if it failed to meet its demand for payment of a loan which was due on 9 June 2008. Mr Kwok also said that Merrill Lynch had agreed to lend Tack Fat Group HK$200,000,000 to enable it to repay most of its loans to various creditors, including Citic Ka Wah Bank. Mr Kwok said that the agreed loan was not forthcoming as Merrill Lynch had to undergo certain internal processing procedures before the loan was available but the repayment to Citic Ka Wah Bank was imminent. Mr Kwok asked if CUCF could arrange a short term loan to meet Citic Ka Wah Bank’s demand.

45. Mr Chuang investigated Tack Fat Group and thought it was in a poor financial position. He did not take Mr Kwok at his word and asked him to arrange a meeting with Merrill Lynch representatives.

46. At lunch time on about 29 May 2008, at an office in North Point, Mr Chuang and Mr Chan met with Mr Kwok, Mr Lee, Mr Lo and a Mr Lam Tang. They met again, at the same location, on about 2 June 2008. Neither Mr Chuang nor Mr Chan could remember how many times they met with Mr Lee and Mr Lo between 29 May 2008 and 2 June 2008 but these are the two dates they provided in their evidence.

47. It was said that Mr Lee did most of the talking for the defendants’ representatives during the meetings. Mr Chuang could not remember exactly what was said during the meetings but he provided what he termed as the “gist”:

“… Mr. Lee told me that the Defendants had carried out extensive studies of TF Group and were convinced that it had a solid fundamental, and that the Defendants were prepared to lend a total sum of HK$200 million to TF Group to meet its short term liabilities. To support his assertion, Mr. Lee showed me the Facility Agreement, the draw down notice and the relevant board minutes of TF Group, which had not been executed by the parties. … he told me that although the Hong Kong office of the Defendants had agreed to lend the sum of HK$200 million to TF Group, it was natural that it should require certain process through internal system in London to complete before the loan could come to hand. I understand those were required as part of the control system by major international financial institutions. According to Mr. Lee, it would require little time to complete the process and the said loan of HK$200 million would reach TF Group and by then, TF Group would be in a position to repay the bridging loan.
I was further assured by Mr. Lee, and Mr. Lo, for the Defendants that if CUCF succeeded in arranging the bridging loan …, in the event the Acquisition proceeded, CUCF would be invited to participate so that CUCF would benefit from the arrangement fees.”

48. Mr Chuang also spoke of a subsequent meeting on a Friday, which was 6 June 2008, at the same location:

“… Mr. Lee told me that he could call London office to confirm the internal process was underway. That was done on speaker phone …, and I remember a person on the other end on the UK number provided by Mr. Lee who spoke English with a strong Indian accent actually confirmed what Mr. Lee had said about the internal processing and the Defendants’ commitment to the loan.”

49. Mr Chan’s evidence as to the gist of Mr Lee’s statements was:

“The Defendants had studied the finance of TF Group and agreed to lend HK$200 million to help sustain its status quo;
However, due to some process through internal system in London required, the agreed loan could not be available on time before the deadline to repay TF Group’s loan to Ka Wah, hence a bridging loan was required urgently;
Once Ka Wah’s threat of petition for winding up discontinued, the Defendants would advance the loan of HK$200 million as agreed, otherwise, the Defendants would have no choice but to withdraw their commitment. Therefore, it was important to obtain the bridging loan to satisfy Ka Wah’s demand of repayment;
If the Acquisition went forward, the Defendants would invite CUCF to participate in the exercise and that would give profits to CUCF.
In one of the meetings, most probably in the first meeting, Mr. Lee produced an unsigned Facility Agreement, with draw down notice and draft relevant board minutes evidencing a loan of HK$200 million to be advanced to TF Group by the Defendants.
I remember there was one meeting on a Friday after working hours at around 6 p.m., Mr. Lee and Mr. Lo, Mr. Kwok and Mr. Lam as well, attended …. A call was made to London office of the Defendants on a number provided by Mr. Lee on speaker phone. A gentleman with strong Indian accent on the line confirmed that it would require little time to process the agreed loan.”

50. Subsequently, Mr Chuang contacted the plaintiffs asking whether they were interested in providing bridging loans to Tack Fat Group.

51. In their written witness statements, each of the plaintiffs’ respective witnesses alleged (each said the same thing, so I need only quote from one statement):

“Mr. Chuang presented to me an opportunity of lending money at attractive interest rate to a listed company called Tack Fat Group International Limited (‘TF Group’). As a matter of adopted procedure, I then ran the financial background of TF Group from the Stock Exchange’s web‑site and noticed that TF Group was not in good shape. Mr. Chuang explained to me that Merrill Lynch, the Defendants, had agreed to salvage the company by lending a sum of HK$200 million to meet its dire need to repay debts to one of its creditor banks Citic Ka Wah Bank Limited (‘Ka Wah’), which threatened to petition for its winding up if the repayment was not made by certain deadline. I remember Mr. Chuang mentioned 9 June, 2008 was the deadline. Mr. Chuang told me that he had met senior staff members of the Defendants, who produced a copy of the Facility Agreement together with some ancillary documents such as draw down notice and relevant board minutes, to persuade him that the Defendants were committed to lend a total sum of HK$200 million to TF Group after certain internal process in little time were completed. According to Mr. Chuang, albeit the Facility Agreement was not signed, the Defendants’ representatives had unequivocally assured him that the Defendants had committed to the lending. Mr. Chuang further said, which I agreed, that the Defendants were an internationally renowned bank and would not make that representation lightly and casually without bearing consequence. …
I was therefore persuaded by Mr. Chuang that it was a good deal for the [plaintiff] to be part of the loan syndicate to TF Group. I then reported to the board of directors of [the plaintiff] and relying on what the Defendants had represented to Mr. Chuang about their commitment in lending HK$200 million to TF Group, subsequently the board of the [plaintiff] unanimously approved and consented to take part in the loan syndicate and extend the loan to TF Group.”

52. The 1^st plaintiff entered into a loan agreement with Tack Fat Group on 6 June 2008, for a sum of HK$30,000,000, which was drawn down on 10 June 2008.

53. The 2^nd plaintiff entered into a loan agreement with Tack Fat Group on 12 June 2008, for a sum of HK$15,000,000, which was drawn down on 12 June 2008.

54. The 3^rd plaintiff entered into a loan agreement with Tack Fat Group on 12 June 2008, for a sum of HK$7,500,000, which was drawn down on 12 June 2008. The 3^rd plaintiff entered into a second loan agreement with Tack Fat Group on 23 July 2008, for a further loan facility in the sum of HK$10,000,000, which was drawn down on 23 July 2008.

55. The 4^th plaintiff entered into a loan agreement with Tack Fat Group on 9 July 2008, for a sum of HK$8,000,000, which was drawn down on 9 July 2008.

56. On 30 July 2008, trading in the shares of Tack Fat Group on the main board of the Stock Exchange was suspended and, on 11 September 2008, provisional liquidators were appointed to Tack Fat Group as a result of Tack Fat Group filing a petition for winding‑up, supported by Bank of America.

57. The 1^st plaintiff claims HK$20,842,334.63, which is the loan balance outstanding after accounting for part repayment (HK$8,100,000) and a dividend received from provisional liquidators (HK$1,057,665.37) plus interest.

58. The 2^nd plaintiff claims HK$13,695,686.10, which is the loan balance outstanding after accounting for part repayment (HK$600,000) and a dividend received from provisional liquidators (HK$704,313.90) plus interest.

59. The 3^rd plaintiff claims HK$7,919,527.54, which is the loan balance outstanding after accounting for part repayment (HK$300,000), proceeds from certain security provided (HK$8,754,118) and a dividend received from provisional liquidators (HK$526,354.46) plus interest.

60. The 4^th plaintiff claims HK$3,018,351.14, which is the loan balance outstanding after accounting for part repayment (HK$150,000), proceeds from certain security provided (HK$4,639,569.46) and a dividend received from provisional liquidators (HK$192,079.40) plus interest.

THE ALLEGED REPRESENTATION

61. I have set out the alleged representation as set out in Mr Chuang’s witness statement and Mr Chan’s witness statement.

62. In paragraph 12(3) of the Statement of Claim, the representation is pleaded as:

“During various meetings in the period from or about 29^th May 2008 to 2^nd June 2008 … Mr. Lee and Mr. [Lo] stated and represented to Mr. Chuang and Mr. Chan that at the arrangement of the 2^nd Defendant, the 1^st Defendant had agreed to lend to TF Swimwear a sum of HK$200 million to enable TF Group to settle some of its debts owed to financial institutions, one of which was Citic Ka Wah Bank Limited …. Mr. Lee and Mr. [Lo] firmly told Mr. Chuang and Mr. Chan that the 1^st Defendant had agreed to advance the said loan of HK$200 million but it would take time to have it processed through the internal system ….”

63. In paragraph 15 of the Statement of Claim, the plaintiffs plead:

“In the premises the 1^st and 2^nd Defendants were under a duty of care as to the truth and accuracy of their contents when making the said statements and representations to CUCF and the potential lenders including the Plaintiffs.”

64. In paragraph 22 of the Statement of Claim, the plaintiffs plead:

“In breach of its [sic] duty of care as aforesaid, the said statements and representations were false and untrue and/or inaccurate and misleading in that the 1^st Defendant did not lend, nor ever intended to lend, to TF Swimwear the said loan of HK$200 million.”

(At trial the plaintiffs abandoned the plea that the 1^st defendant never intended to lend.)

65. In the plaintiffs’ written opening, the representation is stated to be:

“… the Defendants had represented to the Plaintiffs, through Mr. Chuang and/or Mr. Chan, … that the Facility Agreement for HKD200 million had already been agreed as between TF Group and the 1^st Defendant.”

66. When opening the plaintiffs’ case, counsel, Mr Egan, put the representation differently, as being a clear indication by Mr Lee and Mr Lo that the loan was “going to go through” and “it was a done deal but there were internal processes that had to be gone through, Is dotted and Ts crossed”. Mr Egan also used the phrase “effectively a done deal”. When I pointed out to Mr Egan that this formulation was different from that in the plaintiff’s written opening, he did not disagree.

67. The plaintiffs’ case, as put by Mr Egan in opening, is that the representation was made in good faith but recklessly in that Mr Lee and Mr Lo knew that the loan still had to be approved.

68. In his written closing submissions, Mr Egan confined the plaintiffs’ case to negligence. Mr Egan put it that Mr Lee and Mr Lo were both very keen that the Facility Agreement should go ahead and they were confident that it would; that it was, in effect, a “done deal”. Mr Egan submitted that the representation was untrue, as Mr Lee and Mr Lo would have appreciated if they had applied their minds to the issue. The Facility Agreement was not a done deal and there was a material prospect that the requisite internal approvals would not be forthcoming. The representation was made negligently because Mr Lee and Mr Lo failed to properly consider the risk that the requisite approvals would be withheld.

69. In his written closing submissions, Mr Egan confirmed that it was not part of the plaintiffs’ case that Mr Lee and Mr Lo made the representations fraudulently.

70. In his oral closing submissions, when responding to the defendants’ complaint that the plaintiffs had changed their case to one of fraudulent misrepresentation, Mr Egan noted the distinction between a cause of action based upon negligent misrepresentation and one of fraudulent misrepresentation. Mr Egan confirmed that the plaintiffs were not alleging fraudulent misrepresentation and submitted that Mr Lee and Mr Lo were making “a reckless or … cavalier statement” of what they believed the situation to be. My understanding of Mr Egan’s use of the term “reckless” was in the context of presenting a case of negligence. In any event, recklessness was never pleaded.

71. During cross‑examination, Mr Chuang said that Mr Lee and Mr Lo “told me that the loan has been approved and it just takes time for internal processes”. He also said that he was told that the loan would be forthcoming within a number of days, meaning within a few days.

72. In describing why he had not read the Facility Agreement in detail, Mr Chuang said:

“All I’m saying is Merrill Lynch, whether they had breached the loan agreement or not in technical points, that they promised to lend money, and they haven’t. We relied on their promise.”

73. Mr Chuang also said:

“I have seen the form of this agreement in which Merrill Lynch managing director, officer of the bank said we have credit approval to lend 200 million bucks, Tack Fat. That’s it. That’s all I need to know.”

74. Mr Egan’s formulation of the alleged representation is different from the pleaded case and the evidence. I accept that the witnesses cannot be expected to remember precisely what was said in 2008. Mr Egan submitted that the precise words do not matter if evidence discloses the substance of what was said. I accept Mr Egan’s submission as a general proposition but, in this case, it is not necessary to discern the substance of the representation because Mr Chuang was adamant that he was told that the loan had been approved.

75. Moreover, the defendants’ witness statements were prepared in answer to the pleaded case and I am not prepared to consider a formulation of the alleged representation, which is presented for the first time in oral opening.

76. I shall proceed to consider this case on the basis of the pleading (“… the 1^st Defendant had agreed to lend … a sum of HK$200 million … the 1^st Defendant had agreed to advance the said loan of HK$200 million …”) and the gist of the representation as put by Mr Chuang, ie, that he was told that the loan had been approved and all that remained were internal processes (Mr Lee and Mr Lo “told me that the loan has been approved … officer of the bank said we have credit approval to lend 200 million bucks … they promised to lend money … basically checks …”). Indeed, in the plaintiffs’ written closing, the same representation is adopted:

“The Representation that the Facility Agreement was agreed was untrue. The Facility Agreement had not been agreed ….”

THE DEFENDANTS’ CASE

77. Mr Lee and Mr Lo admitted meeting Mr Chuang and Mr Chan on 2 June 2008 but Mr Lee denied that there were any other meetings. Indeed, the meeting is referred to in an email Mr Lo sent to a colleague at 4:38 pm on 2 June 2008:

“Tack fat’s chairman [Mr Kwok] dragged john [Lee] and me to meet w a hedge fund in north point. Totally non‑legit. Looks like a boiler room type operation.”

78. However, in cross‑examination, Mr Lo admitted that there was more than one meeting:

“First of all, you said that I might say that there was no such meeting? I cannot answer your question because there are lots of meetings – when I say there are some meetings between, whenever, 2 to 6 June in Mr Chuang’s office, definitely more than one, so could one of these meetings happen on 6 June? It’s possible.”

79. With regard to a meeting on 6 June 2008, Mr Lee denied such a meeting took place and said that no one with an Indian accent was involved in the transaction. Mr Lo did not recall hearing from someone with an Indian accent.

80. In response to the pleaded case, both Mr Lee and Mr Lo in their witness statements denied representing that the defendants had agree to advance a loan of HK$200,000,000.

81. Mr Lee stated that, on 2 June 2008, at Mr Kwok’s request, he and Mr Lo attended a meeting with Mr Kwok and Mr Chuang at North Point. He recalled that Mr Chuang’s colleagues were present but he could not recall their names. Mr Lee stated that he understood that the purpose of the meeting “was to discuss the funding gap faced by TF Group, in light of the Citic Loan due for repayment ….” He said that during the meeting two solutions already being considered by Tack Fat Group to fill the “financing gap” were discussed, namely, the rights issue and the proposed loan by Merrill Lynch. Mr Lee also stated that neither he nor Mr Lo presented or recommended any lending opportunity to Mr Chuang and that Mr Kwok never discussed with them the idea of Mr Chuang’s involvement in providing alternative third party funding. Mr Lee’s understanding was that Mr Kwok anticipated that Mr Chuang would assist Tack Fat Group by underwriting the rights issue. In particular, Mr Lee stated in his witness statement:

“I recall stating that I hoped ML would be able to provide the Proposed Loan and that I would try my best to facilitate the obtaining of the necessary internal approvals. At all times, I made clear that the provision of the Proposed Loan was contingent upon the internal approvals being granted by the DMCC.”

82. Neither Mr Lee nor Mr Lo recalled showing Mr Chuang or anyone else a copy of the draft Facility Agreement.

83. Mr Lo’s written statement corroborates Mr Lee’s written statement and is in essentially the same terms. Mr Lo stated that he understood that the purpose of the meeting was to discuss the financing gap faced by Tack Fat Group in light of the Citic Ka Wah Bank repayment.

DISCUSSION

84. The evidence is clear from the emails to which I have referred above that, when they met with Mr Chuang on 2 June 2008, Mr Lee and Mr Lo both knew that the loan had not been approved; on 29 May 2008 they knew that only a draft facility agreement had been sent to Mr Kwok and, on 30 May 2008, they had been advised that there would be a DMCC meeting 3 June 2008 to discuss loan approval. They may have been confident that the loan would be approved and the emails demonstrate that they were keen for the loan to be approved, to the extent of making representations after 3 June 2008 in favour of the loan, but I do not accept, on the balance of probabilities, that either Mr Lee or Mr Lo told Mr Chuang, on 2 June 2008, negligently that the loan had been approved. To state that the loan had been approved would be a statement of an existing fact and not a statement of intention. It was not part of the plaintiffs’ evidence that either Mr Lee or Mr Lo said that the loan would be approved. The loan was either approved or it was not, this is not something on which Mr Lee or Mr Lo could have been mistaken.

85. With regard to the meeting on 6 June 2008, in the Statement of Claim no reliance was placed on any representations made in that meeting but Mr Egan submitted that the alleged confirmation by the man with the Indian accent of what Mr Lee had allegedly said about internal processing and the defendants’ commitment to the loan corroborate the fact that the representations relied on were made.

86. In light of Mr Lo’s concession that it is possible a meeting took place on that date, I accept that a meeting occurred on 6 June 2008.

87. However, I do not consider that the alleged confirmation by the man with the Indian accent corroborates the fact that the alleged representations relied on were made, for two reasons. First, confirmation of the defendants’ “commitment to the loan” is different from the alleged representation that the loan had been approved, such that I cannot rule out, on the plaintiffs’ witnesses’ own evidence, that the man with the Indian accent was conveying a different message. Second, the alleged misrepresentation is alleged to be a negligent statement, which does not represent the true state of affairs as at the date the representation was made (31 May 2008 to 2 June 2008). As at 6 June 2008, when the telephone conversation took place, the loan still had not been approved. Hence, if the man with the Indian accent made a statement, which was the same in substance as the alleged misrepresentation, that statement would have been negligent. A negligent statement made by a party at a later date does not corroborate that someone else made a similar negligent statement earlier. A mistake made by one person does not corroborate that another person made the same mistake on an earlier occasion.

88. Mr Chuang said that, prior to meeting Mr Lee and Mr Lo he had assessed Tack Fat Group’s prospects and considered that it was too dangerous to lend and, so, there was no way he would lend without Merrill Lynch’s commitment to lend. I consider that this does not help Mr Chuang because whatever it was that he understood from meeting Mr Lee and Mr Lo, he was not told that Merrill Lynch had agreed to lend money to Tack Fat Group.

89. The plaintiffs’ representatives were people Mr Chuang knew and he described them as “like friends”. This event has caused problems between Mr Chuang and his friends. His demeanour was of a man who was angry and he was impatient. This is not to suggest that Mr Chuang was lying but, given his personal involvement and that his witness statement was prepared more than six years after June 2008, I consider his recollection as to what was said to him by Mr Lee and Mr Lo about the proposed loan is unreliable.

90. In conclusion, the plaintiffs have failed to prove that either Mr Lee or Mr Lo made the representations as alleged in the Statement of Claim and in the evidence of Mr Chuang and Mr Chan. Accordingly, the plaintiffs’ claims are dismissed.

91. Notwithstanding that my conclusion that neither Mr Lee nor Mr Lo made the alleged representation disposes of the plaintiffs’ claims, I shall consider whether the defendants owed the plaintiffs a duty of care nevertheless.

DUTY OF CARE

92. In order to establish a duty of care owed to the plaintiff by a defendant who is alleged to have made a negligent misrepresentation, three requirements must be satisfied: (1) it must be reasonably foreseeable by the defendant that the statement will be relied on by the plaintiff; (2) there must exist the relevant degree of proximity between the parties; and (3) it must be just and reasonable in all the circumstances to impose a duty of care on the part of the defendant to the plaintiff. See: Al Saudi Banque & ors v Clark Pixley (A Firm) [1990] Ch 313 at p 329 per Millett J.

93. In this regard the following dictum of Lord Oliver in Caparo v Dickman [1990] 2 AC 605 at p 638 is instructive:

“… the necessary relationship between the maker of a statement or giver of advice (‘the adviser’) and the recipient who acts in reliance upon it (‘the advisee’) may typically be held to exist where (1) the advice is required for a purpose, whether particularly specified or generally described, which is made known, either actually or inferentially, to the adviser at the time when the advice is given; (2) the adviser knows, either actually or inferentially, that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose; (3) it is known either actually or inferentially, that the advice so communicated is likely to be acted upon by the advisee for that purpose without independent inquiry, and (4) it is so acted upon by the advisee to his detriment. …”

94. There are two control mechanisms for limiting the ambit of the duty of care: (1) to limit the transaction in which the defendant’s statement may be relied upon to the transaction in which he intended it, or knew that it was intended, to be relied upon; and (2) to limit the plaintiff or class of plaintiff to the person or persons to whom the defendant made the statement, or to whom he intended or knew that it was intended to be communicated. See: Al Saudi Banque & ors v Clark Pixley (A Firm), supra at p 330.

95. The authorities above were concerned with the position of auditors or valuers, as the case may be, each expressing an opinion as to the financial circumstances of a company or the value of a property respectively, which opinion or valuation was allegedly relied upon by a third party. The present case is different because it concerns an alleged representation made by a bank as to the status of a commercial dealing with a client, which representation was allegedly relied upon by a third party.

96. The necessary relationship to establish a duty of care was not pleaded. The plaintiffs only pleaded:

“At the time of making the said statements and representations, the Defendants intended and well knew or ought to have known Mr. Chuang, Mr. Chan, CUCF and potential lenders, including the Plaintiffs would rely thereon and would be induced thereby to advance the Bridging Loan to TF Group.”

97. In his witness statement, Mr Chuang stated:

“In the meeting first held on or about 29 May, 2008 and that of the subsequent meeting(s) held on or before 2 June, 2008, Mr. Lee did most of the talking on the Defendants’ behalf. My major concerns, which were unequivocally answered by Mr Lee for the Defendants, were the repayment ability by TF Group, given the distress condition. …
Mr. Lee was well aware that the bridging loan would not have come from CUCF and for what Mr. Lee, and Mr. Lo, had represented to me aforesaid, I would have to repeat the same to the potential lenders.”

98. Mr Chan stated in his witness statement:

“Mr. Lee and Mr. Lo did not expect CUCF would be the lender, therefore, the representation made by them on behalf of the Defendants was expected to be repeated by CUCF to the potential lenders.”

99. When cross‑examined as to why there was such an expectation, Mr Chan said:

“They came, they finished with their representations. Then we said, ‘Well, okay, we will see if we have clients which would be interested.’ ”

100. Both Mr Lee and Mr Lo said that they understood that the purpose of the meeting on 2 June 2008 was to discuss the funding or financing gap faced by Tack Fat Group in light of the fact that the Citic loan was due for repayment in June 2008. Mr Lee said that, during the meeting, the two solutions already being considered by Tack Fat Group to fill the financing gap, namely, the rights issue and the proposed loan, were discussed. Mr Lee also said that neither he nor Mr Lo presented or recommended any lending opportunity to Mr Chuang.

101. Each of Mr Lee and Mr Lo said that he understood that Mr Kwok anticipated Mr Chuang would assist Tack Fat Group by underwriting the rights issue for the purpose of meeting Tack Fat Group’s loan repayments due around August 2008. Both witnesses said that Mr Kwok did not discuss the idea of Mr Chuang becoming involved in providing or arranging third party funding.

102. Mr Egan submitted that I should infer that the funding gap to which Mr Lee and Mr Lo referred was the gap between the anticipated approval by the DMCC on 3 June 2008 and the drawdown of the loan which was anticipated to be 10 June 2008, with the Citic loan falling due on 9 June 2008, ie, falling due in the gap. Hence, the meeting’s topic was third party lending to provide a bridging loan until the Merrill Lynch loan was available.

103. I am not prepared to draw the inference which Mr Egan invites me to draw because, in the context of the evidence, the funding gap referred to is the fact that the rights issue would not be in place in time to meet the Citic loan. This is clear from the evidence discussed in paragraphs 8 and 9 above and Mr Lee’s evidence that, during the meeting on 2 June 2008, the two solutions already being considered by Tack Fat Group to fill the financing gap, namely the rights issue and the proposed loan, were discussed.

104. In any event, an interoffice memorandum to the DMCC, dated 2 June 2008, stated that the drawdown was anticipated to be at the end of the week of 2 June 2008, which would have been 6 June 2008, ie, in time to meet the Citic loan. Also, Mr Lee referred to the same timing in cross‑examination.

105. I turn now to consider whether the representation was required for a purpose, whether particularly specified or generally described, which was made known, either actually or inferentially, to Mr Lee or Mr Lo at the time the representation was made.

106. As I noted above, in this case the representation concerns the status of a commercial transaction between the defendants and a client; it is not the expression of an opinion. When expressing an opinion in a commercial context, one may anticipate that it will be relied upon. On the other hand, when relating the status of a commercial transaction one would be unlikely to anticipate that it would be relied upon unless the possibility of reliance was clearly communicated either actually or inferentially and I require clear and cogent evidence of such communication.

107. In their witness statements, Mr Chuang and Mr Chan simply assert that Mr Lee and Mr Lo did not expect that CUCF would lend money to Tack Fat Group and that they were aware that the alleged representation would be repeated to potential lenders, without establishing the evidential basis for such an assertion. Apart from asking me to draw the inference referred to above concerning the funding gap, there is no direct evidence from either Mr Chuang or Mr Chan, and no material fact was pleaded, as to how it was that either Mr Lee or Mr Lo came to know, either directly or inferentially, that the representation would be repeated to potential lenders in order to obtain bridging loans.

108. I do not place any weight on Mr Chan’s answer in cross‑examination. First, I consider it was an attempt to provide an answer to the particular question, rather than a recollection of the conversation on 2 June 2008. Second, it carries with it the implication that Mr Lee and Mr Lo had engaged in a discussion for the purpose of obtaining bridging loans from third parties but there was no reason for Mr Lee or Mr Lo to engage in such a discussion, given that the DMCC was due to consider the proposed loan the following day, with a projected drawdown date at the end of the week of 2 June 2008.

109. I do not find clear and cogent evidence that either Mr Lee or Mr Lo was made aware, either actually or inferentially, that Mr Chuang was relying upon their statements to form a view on whether the plaintiffs should lend to Tack Fat Group. The plaintiffs have not established the necessary relationship to give rise to a duty of care in this case.

RELIANCE

110. Reliance has to be reasonable and I find that the plaintiffs’ reliance upon Mr Chuang’s representations was unreasonable for the following reasons.

111. The plaintiffs knew that the draft facility agreement had not been signed but did not undertake any independent inquiry as to the status of the proposed loan and did not ask for a copy of the draft facility agreement. The plaintiffs’ witnesses said that they knew nothing about the terms of the proposed loan, other than that it was for HK$200,000,000. After reviewing publically available material, the plaintiffs’ former directors had little confidence in Tack Fat Group’s financial position and they simply relied upon Mr Chuang. The plaintiffs’ representatives understood that the proposed loan was subject to “internal processes” but they made no inquiry as to the nature of those processes.

CONCLUSION

112. The plaintiffs have failed to prove on the balance of probabilities that either Mr Lee or Mr Lo made the alleged representation. I find that the plaintiffs have failed to establish the necessary relationship between the defendants and themselves to give rise to a duty of care on the part of the defendants. I find that the plaintiffs’ reliance solely upon Mr Chuang’s representation was unreasonable.

113. I dismiss the plaintiffs’ claims. As to costs, costs should follow the event and I make an order that the plaintiffs pay the defendants’ costs. The defendants have indicated that they wish to apply for indemnity costs. I direct that the defendants file submissions as to the basis of costs within 14 days of the date of handing down this judgment and the plaintiffs file any response within 14 days thereafter.

	(Nicholas Cooney SC)
	Deputy High Court Judge

Mr Kevin Barry Egan and Mr Minju Kim, instructed by Lam & Co, for the plaintiffs

Mr Douglas Lam SC, leading Ms Rachel Lam, instructed by Clifford Chance, for the defendants