FREEMAN SECURITIES LTD (previously known as Dynasty Securities Limited) v. IP PO KI

HCA 2368/2018

[2021] HKCFI 2549

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2368 OF 2018

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_____________________

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D E C I S I O N

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Introduction

1.  On 18 December 2020 I handed down judgment (“Judgment”) in respect of the appeal by the Defendant (“D”) from the decision of Master Gary C C Lam, by which the Master gave summary judgment to the Plaintiff (“P”) under RHC Order 14 r. 3 for HK$174,806,632.87, being the full amount of P’s claim.

2.  At paragraphs 25-28 of the Judgment I said as follows:

“25. This is a case where I am left with real doubt as to the veracity of the case put forward by D and my first inclination therefore was to affirm the decision of the Master and dismiss this appeal and I have been very close to doing so. In this respect it would seem unlikely that D can improve his case if the matter were to go to trial. In particular, if he has been unable to locate Zhang and Wang [potential witnesses who D had identified as being in a position to corroborate the defence which D had put forward] and obtain their assistance for the purposes of the application for summary judgment, there would appear to be no good reason to suppose that he will be able to do so for the purposes of any trial. However, in case I am wrong about this and D is able to obtain corroboration for his case…… I think it is right to give leave to D to defend these proceedings, albeit only on a conditional basis.

26. I have not heard the parties as to the conditions which it would be appropriate to impose on granting D leave to defend the proceedings and there is no evidence or other material before the court as to D's means or resources. The usual terms on which conditional leave to defend is given are to require the defendant to bring into court within a specified time a sum equivalent to the whole or part of the claim, in default of which the plaintiff is at liberty to sign final judgment. I am however conscious of the fact that the quantum of P's claim is very substantial and that I should not make a conditional order with which, in practice, it will be impossible for D to comply.

27. In the circumstances, I will make an order that D shall have leave to defend these proceedings conditional upon him paying into court the sum of HK$85 million (which is a little less than half of the amount of P's claim) within 14 days of the handing down of this judgment. If this condition is complied with the costs of P's application including the costs before the Master will be costs in the cause. However, if this condition is not complied P shall be at liberty to sign judgment for the full amount of the claim, interest and the costs of the action including the costs of this application both here and before the Master.

28. As I have not heard the parties as to the conditions which it would be appropriate to impose on granting D leave to defend the proceedings and there is no evidence or other material before the court as to D's means or resources, I will give the parties liberty to apply within 14 days of the handing down of this judgment to vary the order I have made as to the condition for granting D leave to defend these proceedings.  In the event that such an application is made within this time, the time for complying with the condition will be extended for 14 days from the determination of that application.”

3.  By summons issued on behalf of D on 31 December 2020, D applied for an order varying the condition I imposed for granting D leave to defend the proceedings by substituting HK$50,000 as the amount to be paid into court in place of the sum of HK$85 million which was specified in the Judgment (“D’s Application for Variation”).

4.  By summons issued on behalf of P on 4 January 2020, P applied for leave to appeal to the Court of Appeal from the Judgment (“P’s Application for Leave to Appeal”).

5.  On 18 January 2021 I directed that both applications be disposed of on paper and gave directions for their further conduct.

6.  On 11 June 2021, following the filing of written submissions, I dismissed both D’s Application for Variation and P’s Application for Leave to Appeal.

7.  By summons issued by D on 25 June 2021, D sought leave to appeal my decision of 11 June 2021 dismissing D’s Application for Variation on the grounds set out in the draft Notice of Appeal which was annexed to the summons (“D’s Application for Leave to Appeal”).

8.  On 12 July 2021, I directed that D’s Application for Leave to Appeal be disposed of on paper and gave directions for the filing of written submissions.  Pursuant thereto, D filed written submissions on 26 July 2021; P filed written submission on 9 August 2021 and D filed written submissions in reply on 16 August 2021.

D’s Application for Variation

9.  The basis for D’s Application for Variation was D’s alleged impecuniosity and the alleged impossibility of meeting the requirement of paying the specified payment into court as a condition of being permitted to defend these proceedings.

10.  It was common ground that in seeking the variation, the burden lay on D to adduce sufficient and proper evidence as to his means and assets; to make full and frank disclosure of his financial resources and to satisfy the court that it would be impossible for him to meet the condition.

11.  In paragraph 20 of the Judgment I handed down on 11 June 2021, I expressed concern relating to the evidence adduced by D in relation to his former holding of shares in listed companies; their sale in 2017 the question as to what had become of the proceeds of sale. In paragraph 27, I stated that (for the reasons I gave) I did not find D’s broad assertions (to the effect that the proceeds of sale were used to satisfy margin calls and to pay off unparticularisd debts) convincing and that I was not prepared to accept them as justifying the variation which D sought of the financial condition I imposed for defending these proceedings.

12.  At paragraphs 28-30 of the Judgment of 11 June 2021, I said as follows:

“28 In imposing the financial condition I did in granting D leave to defend the present proceedings I was prompted by considerations similar to those referred to by Dwight J in Bank of Leumi (UK) Plc v. Philip Robert Akrill [2014] EWHC 4341 (Ch.), viz: (a) to test the bona fides of the party against whom the condition is ordered (b) to protect the claimants to some extent and (c) to discourage the defendant from delaying the progress of the litigation. In my view, none of these purposes would be satisfied were I to accede to D’s present application and allow him to defend these proceedings by the payment of HK$50,000 into court, which is an insignificant sum compared to the amount of the claim.

29. On any basis, I am not satisfied that D has adduced sufficient or proper evidence as to his means and assets and I do not accept that he has made full and frank disclosure of his financial resources.

30. In all the circumstances, I am not prepared to accede to the application made by D’s Variation Summons.”

13.  In D’s Application for Variation, it was submitted on his behalf that, although D was obliged to adduce sufficient and proper evidence as to his means and make full and frank disclosure of his financial resources, that obligation was limited to D’s current means and resources and D was not required to provide a historical account of each and every asset he had previously owned and each dollar that he had previously earned. In other words, so it was contended, D was required to disclose his current financial state, not how that had come to pass.

14.  In paragraph 26 of my judgment of 11 June 2021, I rejected the proposition advanced by D that where a defendant seeks to argue his impecuniosity in order to avoid the imposition of a financial condition on being granted leave to defend proceedings or to limit or reduce such a condition, a defendant is not required to disclose how his current financial condition had come to pass. I there expressed the view that, where, as in this case, a defendant has in the past had substantial means or assets but asserts that he had become impecunious, he is required to disclose what has become of his means and assets and how he had become impecunious. I added that this is particularly so on the facts of the present case where it is apparent that D was once (not so long ago) a very wealthy man who had substantial shareholdings which were sold for about HK$155 million.

15.  The proposition advanced on behalf of D as summarized in paragraph 13 above is at the core of the D’s Application for Leave to Appeal.

16.  I do not consider that D’s intended appeal based on this proposition (paragraphs 1 & 2 of the draft Notice of Appeal) has a reasonable prospect of success. In this respect, it seems to me that the question as to what has become of certain assets or their proceeds of sale is directly relevant to any assessment of that Defendant’s current means and assets; to any consideration as to whether, in making an application to vary a financial condition for permitting a defendant leave to defend proceedings, that defendant has made full and frank disclosure and whether he has established to the satisfaction of the court that it was impossible for him to meet the condition. This is especially so on the particular facts of this case.

17.  The 3^rd ground of D’s intended appeal is that I erred in finding that D had failed to provide full and frank disclosure. This finding was made after considering and weighing the evidence and was made in the context of the broad discretion which the court has in considering the appropriate condition to be imposed in granting leave to defend proceedings. In my view an appeal based on this ground does not have reasonable prospects of success.

18.  The 4^th ground of D’s intended appeal is based on the proposition that the evidence clearly demonstrated that D was not capable of paying the sum of HK$85 million and that it was therefore wrong to require payment into court of that sum as a condition of being granted leave to defend the proceedings. The fact is however that no evidence as to D’s means or assets was adduced on the hearing of D’s appeal from the Master’s decision and, as I stated in paragraph 29 of my Judgment of 11 June 2021, I was not satisfied that the evidence which D subsequently adduced was sufficient to discharge the burden which was upon him to show that it was impossible for him to meet the condition. I do not believe that this is susceptible to challenge on appeal and again, in my view, an appeal based on this ground does not have reasonable prospects of success.

19.  The 5^th and last ground of appeal is to the effect that, in dismissing D’s Variation Application, I erred in taking into account the fact that the sum of HK$50,000, which D sought to substitute for the sum of HK$85 million as the sum to be paid into court as a condition for leave to defend the proceedings, was insignificant when compared to the amount of the claim. The fact is however that the conclusion I reached to the effect that D had not adduced sufficient evidence as to his means and assets; that he had not made full and frank disclosure of his financial resources and that he had therefore failed burden which was upon him on his application was fatal to and determinative of his application. In those circumstances the observation I made as to the insignificance of the amount of HK$50,000 as compared to the amount of the clam did not affect the outcome of D’s Variation Application and does not on its own justify leave being given to appeal.

20.  In all the circumstances I dismiss D’s application for leave to appeal. I make an order nisi that D shall pay P’s costs of  that application.

HCA 2368/2018

[2021] HKCFI 1564

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2368 OF 2018

________________________

________________________

________________________

J U D G M E N T

________________________

Introduction

1.  On 18 December 2020 I handed down my judgment (“Judgment”) in respect of the appeal by the Defendant (“D”) from the decision of Master Gary C C Lam, by which the Master gave summary judgment to the Plaintiff (“P”) under RHC Order 14 r. 3 for HK$174,806,632.87, being the full amount of P’s claim.

2.  At paragraphs 25-28 of my Judgment I said as follows:

“25. This is a case where I am left with real doubt as to the veracity of the case put forward by D and my first inclination therefore was to affirm the decision of the Master and dismiss this appeal and I have been very close to doing so. In this respect it would seem unlikely that D can improve his case if the matter were to go to trial. In particular, if he has been unable to locate Zhang and Wang [potential witnesses who D had identified as being in a position to corroborate the defence which D had put forward] and obtain their assistance for the purposes of the application for summary judgment, there would appear to be no good reason to suppose that he will be able to do so for the purposes of any trial. However, in case I am wrong about this and D is able to obtain corroboration for his case…… I think it is right to give leave to D to defend these proceedings, albeit only on a conditional basis.

26. I have not heard the parties as to the conditions which it would be appropriate to impose on granting D leave to defend the proceedings and there is no evidence or other material before the court as to D's means or resources. The usual terms on which conditional leave to defend is given are to require the defendant to bring into court within a specified time a sum equivalent to the whole or part of the claim, in default of which the plaintiff is at liberty to sign final judgment. I am however conscious of the fact that the quantum of P's claim is very substantial and that I should not make a conditional order with which, in practice, it will be impossible for D to comply.

27. In the circumstances, I will make an order that D shall have leave to defend these proceedings conditional upon him paying into court the sum of HK$85 million (which is a little less than half of the amount of P's claim) within 14 days of the handing down of this judgment. If this condition is complied with the costs of P's application including the costs before the Master will be costs in the cause. However, if this condition is not complied P shall be at liberty to sign judgment for the full amount of the claim, interest and the costs of the action including the costs of this application both here and before the Master.

28. As I have not heard the parties as to the conditions which it would be appropriate to impose on granting D leave to defend the proceedings and there is no evidence or other material before the court as to D's means or resources, I will give the parties liberty to apply within 14 days of the handing down of this judgment to vary the order I have made as to the condition for granting D leave to defend these proceedings.  In the event that such an application is made within this time, the time for complying with the condition will be extended for 14 days from the determination of that application.”

3.  By summons issued on behalf of D on 31 December 2020, D applied for an order varying the condition I imposed for granting D leave to defend the proceedings by substituting HK$50,000 as the amount to be paid into court in place of the sum of HK$85 million which was specified in the judgment (“D’s Variation Summons”). D’s Variation Summons was supported by D’s 2^nd Affirmation, affirmed and filed on the same day.

4.  By summons issued on behalf of P on 4 January 2020, P applied for leave to appeal to the Court of Appeal from my Judgment on the basis of the draft Notice of Appeal which was annexed to the summons (“P’s Summons for leave to appeal”).

5.  On 18 January 2021 I directed that both summonses be disposed of on paper and gave directions for their further conduct as follows:

5.1  As regards D’s Variation Summons:

(a)  That P’s evidence in opposition should be filed within 14 days;

(b)  That D’s evidence in reply should be filed within 14 days thereafter;

(c)  That D’s written submissions be filed within 7 days after the filing of D’s reply evidence, and

(d)  That P’s written submissions be filed within 14 days after the filing of D’s submissions.

5.2  As regards P’s Summons for Leave to Appeal:

(a)  That P’s written submissions be filed within 7 days, and

(b)  That D’s written submissions be filed within 14 days thereafter

6.  As regards D’s Variation Summons:

(a)  The affirmation of Leung Shun Ting Christie (“Christie Leung”) was affirmed and filed on behalf of P on 2 February 2021;

(b)  D’s 3^rd Affirmation was affirmed and filed in reply on 2 March 2021;

(c)  D’s written submissions were filed on 9 March 2021;

(d)  P’s written submissions were filed on 23 March 2021;

(e)  The 2^nd Affirmation of Christie Leung was affirmed and filed (without leave) on 23 March 2021

(f)  On 26 March 2021, D applied for leave to adduce further evidence

(g)  On 9 April 2021 I gave retrospective leave for the filing of Christie Leung’s 2^nd Affirmation; I gave D leave to file a further affirmation and I gave directions for the filing of supplemental written submissions.

(h)  D’s 4^th Affirmation was filed on 23 April 2021

(i)  On 11 May 2021 P & D each filed supplemental submissions.

7.  As regards P’s Summons for leave to appeal:

(a)  P filed skeleton submissions on 9 March 2021, and

(b)  D filed submissions on 16 March 2021.

P’s application for leave to appeal

8.  P’s application for leave to appeal can be dealt with shortly.

9.  It is not disputed that conditional leave to defend proceeding may be granted where there exists a fair or reasonable probability of the defendants having a real or bona fide defence.  Although in my judgment I expressed doubt as to the veracity of the case put forward by D and of D’s ability to adduce evidence at trial which would go to corroborate it, I implicitly accepted that it remained possible that material evidence might be forthcoming to support D’s case and on that basis I gave leave to defend the proceedings conditional upon the payment of a very substantial sum into court.

10.  P accepts that an appeal against the order I made would be an appeal against the exercise of discretion; that the Court of Appeal will not exercise that discretion afresh and will only interfere where it is shown that the discretion was exercised wrongly.

11.  In order to succeed on an application for leave to appeal, P is required to show that the intended appeal enjoys at the very least a reasonable prospect of success, i.e. that there is a reasonable prospect of the Court of Appeal interfering with the exercise of discretion. I am not satisfied that this has been shown and accordingly I dismiss P’s application for leave to appeal.

D’s Summons for variation

12.  The legal principles on the granting of conditional leave to defend proceedings under RHC Order 14 and those applicable where, as here, a defendant seeks to argue his impecuniosity, in order to avoid the imposition of a financial condition or limit or reduce such a condition, are clear and not in doubt.

13.  It is not disputed that the Court has power to impose such a financial condition and that the powers granted to the court in this respect are broad. The court is required to take all circumstances into account when imposing a condition, including the financial circumstances of the defendant and for practical purposes should not impose a condition which it is impossible for the defendant to meet as the imposition of such a condition would be tantamount to granting summary judgment to the plaintiff.

14.  Where, as here, a defendant seeks to avoid a financial condition on the basis of impecuniosity the defendant must adduce sufficient and proper evidence of his means and make full and frank disclosure of his financial resources: see Yorke Motors (a firm) v. Edwards [1982] 1 WLR 444 at 449.

15.  It is not enough for a defendant to show that meeting the condition would be onerous or difficult; he must show that it would be impossible: Yorke Motors at 449.

16.  Further it is not enough for a defendant to show that he does not personally have the means to meet the condition. In Liu Ke Mian Lorraine v. De Xin Da Trading Co Ltd (unreported), HCMP 1481/2016, 30 September 2016, the Court of Appeal said (at §28):

“A defendant seeking to avoid or limit a financial condition on account of his impecuniosity, is required to make a full and frank disclosure and to put sufficient and proper evidence before the court, including not only did he not have the money himself but that he was unable to raise it elsewhere…….”

17.  In D’s 2^nd Affirmation filed in support of his application for variation, D 2 stated as follows:

•  he was currently unemployed;

•  his trading in financial markets (which gave rise to P’s claims) ceased in 2018 following the loss of most of his assets therein;

•  his living expenses are now financed by advances of HK$40,000 per month made to him by way of loan by a close friend with whom he lives, rent free;

•  the payments of HK$40,000 per month are paid into his account at HSBC from which HK$14,1117.86 per month is paid out to pay off the amount owed on a credit card issued by Standard Chartered Bank. As at 30 November 2020, the balance standing to the credit of the HSBC account stood at HK$40,117.86

•  D had a further account at the Bank of China which he did not use;

•  he did not own any real property or any investments;

•  as well as being indebted to his friend in relation to the advances which have been made to him, he is indebted to P in the sum of HK$160,000, being costs awarded against D, which have been summarily assessed, and he is also indebted to his former solicitors for legal fees amounting to HK$222,625. He is unable to repay any of these debts.

•  His sister has lent D money from time to time; she has paid approximately $650,000 in legal fees to D’s former solicitors and has offered to lend D HK$50,000 to pay into court in the event that the condition imposed on granting D leave to defend these proceedings is varied as sought by D’s summons. 

18.  In Christy Leung’s 1^st affirmation, the assertions made by D in his 2^nd Affirmation were challenged and attention was drawn to the fact that he had not disclosed the fact that, formerly, D held very substantial shareholdings in listed companies which were sold in 2017 for very large amounts; that he had in the past been recorded as residing at various addresses other than that he said he now shared with his friend; that he holds several credit cards in addition to those which he disclosed and he is still registered as director, shareholder and company secretary of various private companies.

19.  I have carefully considered the matters raised in Christy Leung’s 1^st affirmation in the light of the responses made by D in his subsequent affirmations and I have concluded that he has satisfactorily responded to the challenges made to the assertions made in D’s 2^nd Affirmation; that notwithstanding that he has in the past been recorded as residing at various addresses, there is no evidence to show that he has ever owned real property; that whilst he does hold various credit cards, there is no reason to doubt D’s explanation that they are not currently in use and that whilst he is registered as a director, shareholder and company secretary of various private companies, there is no reason to doubt D’s explanation that these are companies owned by his friend; that he merely acts as nominee and that these positions do not give rise to any emoluments.

20.  The one matter which has given me cause for concern relates to D’s former holding of shares in listed companies and their sale in 2017. The fact of such holdings was first revealed in Christy Leung’s 2^nd Affirmation, viz:

20.1  As at 18 January 2017, D held 28,978,629 shares in Code Agriculture (Holdings ) Ltd (now known as Farnova Group Holdings Ltd)(“Code Agriculture”);

20.2  As at 17 October 2003, D held 21,180,000 shares in GR Investments International Limited  (now known as Prosperity Investment Holdings Limited) (“GR Investment”)

20.3  As at 8 March 2017, D held 33,830,000 shares in Inno-Tech Holdings Limited (“Inno-Tech”)

In Christy Leung’s 2^nd Affirmation, reference was also  made to the fact that D is shown as holding a 100% interest in Fortuna Investments Ltd, a BVI company which in turn owns 100% of Besuccess Investments Limited, a company incorporated in Hong Kong.

21.  In D’s 3^rd Affirmation, D repeated that he is does not currently hold any shares and stated that he liquidated the shares he formerly held because, at the material time he was in financial trouble. D gave the following further explanation:

21.1  D first acquired shares in Code Agriculture on 2 November 2015; his shareholding steadily reduced from initially 160,000,000 shares to 28,978,629 on 18 January 2017 which he sold in May 2018

21.2  D acquired 21,180,000 shares in GR Investments on 17 October 2003. These were sold “many years ago”

21.3  D acquired the 33,830,000 shares in Inno-Tech on 17 October 2016. These were sold in May 2018

21.4  Fortuna Investments and Besuccess Investments Ltd were shell companies with no business operations which were struck off and dissolved many years ago.

22.  D did not in his 3^rd affirmation explain what became of the proceeds of sale and he asserted that he had been unable to obtain statements from the brokers who acted for him on account of the fact that the brokerage accounts he formerly had were closed.

23.  Following the filing and service of D’s 3^rd Affirmation, a notice was served by P on D to produce the relevant brokerage account statements.  However D objected to produce the documents referred to in the notice on the ground that they were not referred to in his 3^rd Affirmation. Notwithstanding this, on the basis of D’s disclosure of interest forms, Ms. Leung was able to state that:

23.1  D’s shares in Code Agriculture were disposed of as follows:

(a)  On 30 December 2016, 44,500,000 shares were sold for HK$48,950,000;

(b)  On 6 January 2017, 45,500,000 shares were sold for HK$50,050,000

(c)  On 18 January 2017, another 50,0000 shares were sold for HK$48,500,000

23.2  On the basis of published historical prices for shares in Code Agriculture and inno-Tech:

(a)  the sale price for the 28,978,629 shares in Code Agriculture sold by D in May 2018 would have been approximately HK$2,645,748.83

(b)  the sale price for the 33,830,00 shares in Innno-Tech sold by D in May 2018 would have been approximately HK$5,110,021.50

24.  Notwithstanding D’s objection to produce the documents which were the subject of P’s Notice to Produce and the fact that, in D’s 2^nd Affirmation, D had stated that he had been unable to obtain brokerage statements, he did subsequently produce redacted copies of the brokerage statement for January 2017 and that for May 2018, copies of which were exhibited to D’s 4^th Affirmation. D gave the following further explanation:

24.1  As regards the January 2017 statement:

(a)  the proceeds of HK$48,500,000 from the sale of the 44,500,000 shares in Code Agriculture were applied to reduce D’s margin debt from HK$53,005,489.02 to HK$4,231,562.17;

(b)  the proceeds of HK$49,869,970.15 from the sale of the 45,500,000 shares in Code Agriculture were applied to pay off D’s margin debt and resulted in a credit balance of HK$638,407.98 (in D’s favour) on his brokerage account;

(c)  the proceeds of HK$48,500,000 from the sale of the 50,000,000 shares in Code Agriculture were again applied to pay off D’s margin debt and resulted in a credit balance of HK$26,884,027.35(in D’s favour) on his brokerage account;

(d)  By 27 January 2017, D was again indebted on his margin account in the amount of HK$11,307,607.11.

24.2  As regards the May 2018 statement:

(a)  On 16 May 2018, D sold 830,000 shares of Inno-Tech for HK$132,800;

(b)  On 16 May 2018, D sold 28,978,629 shares of Code Agriculture for HK$2,810,927.10

(c)  The net proceeds from these 2 transactions were immediately withdrawn by D “to pay off my debts”

(d)  The brokerage account was closed on the same day.

24.3  D had been informed by his brokers that they had no records of the sale of the remaining 33,000,000 shares in Inno-Tech, albeit that D recalls that they were sold in about May 2018 for HK$4,800,000 less commission and stamp duty.  According to D the proceeds were again used to pay off his (unspecified) debts.

25.  On behalf of D, it is submitted that, although D is obliged to adduce sufficient and proper evidence as to his means and make full and frank disclosure of his financial resources, that obligation is limited to D’s current means and resources and D is not required to provide a historical account of each and every asset he has previously owned and each dollar that he has previously earned. In other words, D is required to disclose his current financial state, not how that has come to pass.

26.  I do not accept the proposition advanced by D that where a defendant seeks to argue his impecuniosity in order to avoid the imposition of a financial condition on being granted leave to defend proceedings or to limit or reduce such a condition, a defendant is not required to disclose how his current financial condition has come to pass. In my view, where, as here, a defendant has in the past had substantial means or assets but asserts that he has become impecunious, he is required to disclose what has become of his means and assets and how he has become impecunious. This is particularly so in the present case where it is apparent that D was once a very wealthy man who had substantial shareholdings which were sold for about HK$155 million.

27.  D asserts that the proceeds of sale of the shares in question were used to satisfy margin calls and to pay off some unparticularized debts. I do not find this convincing and I am not prepared to accept on their face these broad assertions:

27.1  In the first place I regard it as being wholly unsatisfactory that, having initially stated in D’s 3^rd affirmation that he had been unable to obtain statements of his brokerage account with Satinu Markets Limited and having then objected to producing them in response to a formal Notice to Produce, D then belatedly and without explanation produced heavily redacted copies of selected statements not only  of Satinu Markets Limited but also of another brokerage by the name of Seeker Markets Limited and of HEC Securities Limited which give an incomplete account of how the proceeds of sale of the shares were applied and, because of the redactions (for which no explanation has been given), raise unanswered questions:

27.2  Apart from the issue as to margin calls, D has provided no particulars of the alleged debts which were allegedly paid off from the proceeds of sale of the shares.

28.  In imposing the financial condition I did in granting D leave to defend the present proceedings I was prompted by considerations similar to those referred to by Dwight J in Bank of Leumi (UK) Plc v. Philip Robert Akrill [2014] EWHC 4341 (Ch.), viz: (a) to test the bona fides of the party against whom the condition is ordered (b) to protect the claimants to some extent and (c) to discourage the defendant from delaying the progress of the litigation. In my view, none of these purposes would be satisfied were I to accede to D’s present application and allow him to defend these proceedings by the payment of HK$50,000 into court, which is an insignificant sum compared to the amount of the claim .

29.  On any basis, I am not satisfied that D has adduced sufficient or proper evidence as to his means and assets and I do not accept that he has made full and frank disclosure of his financial resources.

30.  In all the circumstances, I am not prepared to accede to the application made by D’s Variation Summons.

Orders

31.  Both P’s Summons for Leave to appeal and D’s Variation Summons are therefore dismissed.

32.  I will make orders nisi that costs should follow the events, so that D shall have the costs of P’s Summons for leave to appeal whilst P shall have the costs of D’s Variation Summons.

Written submission by Mr Michael Lok, instructed by Winston & Strawn, for the Plaintiff 

Written submission by Mr Toby Brown, instructed by Lee Law Firm, for the Defendant 

HCA 2368/2018

[2020] HKCFI 2994

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2368 OF 2018

_____________

_____________

____________________

JUDGMENT

____________________

Introduction

1.  This is an appeal by the Defendant ("D") from the decision of Master Gary C C Lam ("the Master") giving summary judgment to the Plaintiff ("P") under RHC Order 14 rule 3.

2.  P's claim in this action, as per its Statement of Claim, is for moneys due on a margin trading securities account ("D's Account").

3.  It is common ground that the indebtedness on D's Account arose principally by reason of a loan of HK$250,000,000 granted by P to D ("the Loan") to enable D to purchase or procure the transfer to D's Account of 700m shares in P's parent company, Freeman FinTech Corp Ltd ("FFCL"), which sum was paid to Enerchina Securities Limited, as a consequence of which the 700m shares in FFCL ("the 700m Shares") were transferred from D's account with Enerchina to D's Account.

4.  In defence of this claim, D relies on an alleged oral agreement ("the Alleged Oral Agreement"), allegedly made between Zhang Yong Dong ("Zhang") and Wang Ziaodong ("Wang"), both purportedly acting on behalf of P, on the one hand, and D on the other, whereby it was allegedly agreed that, D would only be permitted to sell 700m Shares or any part thereof if the value of the shares appreciated but if the value of the 700m Shares fell, D would not be permitted to sell the shares and, in return, P would not make any margin calls on D's Account and would not seek repayment of the Loan.

5.  As regards the Alleged Oral Agreement, it is D's case that:

5.1     In early 2017, D was informed by an acquaintance, who was also an executive director of FFCL (and who knew that D had previously held a substantial number of FFCL shares in the Account - as D indeed had done), that Zhang, who was the then chairman of FFCL, (but not a director of P) was looking for an investor to purchase a significant block of FFCL shares and hold them as a long term investment and that, for this purpose, FFCL would arrange financing.

5.2     D then met with Zhang and also Wang, who was then an executive director and the CFO of FFCL and also a director of P and it was at this alleged meeting when the Alleged Oral Agreement was made.

6.  In paragraph 4.1 of P's Reply and Defence to Counterclaim the existence of the Alleged Oral Agreement is not admitted and D is put to strict proof thereof.  In this connection it is explained that neither Zhang nor Wang can be contacted by P.  However, in other paragraphs of the Reply the existence of the Alleged Oral Agreement is denied.

7.  It is further pleaded in the Reply that:

7.1     The Alleged Oral Agreement is not in any event binding on P, in particular for want of authority and that, even if Zhang or Wang did have any apparent and/or ostensible authority to enter into it (which is denied), D did not rely on the authority and/or that such reliance was not justified and was either irrational and/or dishonest [§4.3.3], and

7.2     The Alleged Oral Agreement gives rise to offences of false trading, price rigging and stock market manipulation under the SFO; has the effect of misleading and manipulating markets; it is illegal both as to its formation and performance and, accordingly, D is debarred from relying on it or enforcing it [§4.4].

JURISDICTION AND THE FRAUD EXCEPTION

8.  As a consequence of P's averments in the Reply, D argues that this case comes within "the fraud exception" contained in RHC Order 14 rule 1(2)(b) and, consequently, the court has no jurisdiction to grant summary judgment.

9.  RHC Order 14 rule 1(2)(b) excludes from the O. 14 summary judgment process "an action which includes a claim by the plaintiff based on an allegation of fraud".

10.  The scope of the "fraud exception" was explained in the judgment of Yuen JA in Zimmer Sweden AB v. KPN Hong Kong Limited and another [2016] 1 HKLRD 1016, per Yuen JA at §18 (with which Lam VP and Kwan JA agreed):

“(1)     The court should determine whether “the fraud exception” applies at the time when the application for summary judgment is heard. Therefore the court should not be restricted to a consideration of the statement of claim only, but should examine all relevant materials existing at the time of the hearing, including subsequent pleadings and the affidavits. (It would be noted that in Pacific Wire, the court even took into account the skeleton argument of the plaintiff’s counsel at first instance. With respect I tend to the view that given the nature of skeleton submissions, they should be considered only where they serve to clarify an ambiguity in the plaintiff’s case).  

(2)     Having regard to all the relevant materials, the question to be asked by the court is “does this action include a claim for which an allegation of fraud would have to be made by the plaintiff in order to establish or maintain that claim?”¹  If the answer is affirmative, “the fraud exception” is engaged and the court has no jurisdiction to hear the summary judgment application, even if the plaintiff seeks to hive off that claim from another claim (eg for dishonoured cheque) for which summary judgment would have been available.  That consequence follows from the wording of “the fraud exception” (Pacific Wire para. 19).

(3)     In considering whether an allegation of fraud would have to be made to establish or maintain a claim, one must look at the substance, and not the mere form, of the plaintiff’s case.  If all the factual constituents of fraud are alleged and relied upon, it does not matter whether the actual word “fraud” has or has not been used (Newton p.1301).  

(4)     The court must consider whether those factual constituents of fraud are relied upon in order to establish or maintain a claim.  In Newton, the court accepted that the factual constituents of a Derry v Peek fraud had been set out in the pleadings.  However in order to establish the plaintiff’s claims of breach of contract, breach of fiduciary duty and negligence, it did not need to make any allegations of fraud.  On the facts of that case, the breach of contract, breach of fiduciary duty and negligence would still be established, even if the defendant had been completely honest, and was only mistaken (p.1302).  It would appear from the report that the defendant had not pleaded a defence which the plaintiff needed to reply to by alleging fraud on the part of the defendant.  This may be contrasted with A-1 discussed below.

(5)     It may be that originally a claim (eg breach of fiduciary duty) may be established without the plaintiff having to make an allegation of fraud (as in Newton). But the nature of the defence (whether disclosed in a pleading or an affidavit) may be such that in rebuttal (whether in a Reply or in an affidavit in reply), the plaintiff would have to allege fraud, in which case, “the fraud exception” would be engaged.  So for example, in A-1 the defence was that there was no breach of fiduciary duty because the receipt of money was pursuant to a declaration of dividend.  In reply to this defence, the plaintiff alleged that the declaration was an ex post facto fabrication.  Consequently, by the time of the hearing of the summary judgment application, the plaintiff would have to make out an allegation of fraud by the defendant in order to maintain the claim for breach of fiduciary duty.

(6)     Finally, as to what is an allegation of fraud for the purpose of “the fraud exception”, this court is bound by the judgment in Pacific Wire to adopt the wide/liberal meaning.  The rationale for adopting a wide meaning had been suggested by Kaplan J in Skink and adopted by this court in the Pacific Wire judgment.  That judgment cannot be said to be plainly wrong.  Further if the narrow meaning is adopted, the anomaly observed in Newton would arise, viz summary judgment would not be available for only one type of dishonest conduct, but available for all other types of dishonest conduct.  To conclude, “the fraud exception” would be engaged where what is alleged is an intentional or reckless dishonest act (or omission) done with the purpose of deceiving.”

11.  In Zimmer v. KPN (supra):

11.1   The plaintiff brought proceedings against the defendants alleging that it had been deceived into transferring funds to a bank account of a company, K, in Lithuania as a result of a fraudulent misrepresentation as to the recipient's identity.  The funds were then transferred to the 1st Defendant's Hong Kong bank account and the 1st Defendant then transferred part of the funds to the Hong Kong bank account of the 2nd Defendant.  The Plaintiff claimed restitution of the funds on the basis that the defendants had provided no consideration for the transfers and had no legitimate reason to benefit from or retain the moneys transferred.

11.2   The defendants' case was that the funds had been received by the 1st Defendant as payment of an invoice it issued for an allegedly bona fide transaction for goods that it had sourced from suppliers and on sold to K and that accordingly full consideration was provided for the payment.

11.3   In paragraph 19 of the judgment of Yuen JA, the learned Judge stated:

“19.1.    Applying the above principles to the present case, it seems to me that the judge was clearly right when he held that “the fraud exception” was engaged. 

19.2.    It did not matter that the statement of claim did not contain a claim for damages for fraud, or that the claim against each defendant was confined to the money it had received or remaining in its hands, because one cannot stop there.  One has to consider the subsequent pleadings and affidavits to see the substance of the plaintiff’s case at the time of the hearing of the summary judgment application.  The defence was that the defendants had received the money as proceeds of sale in a bona fide transaction where it had sourced goods from the three suppliers and on-sold them to Kosona.  Such a defence would provide a complete defence to the plaintiff’s claims.  In order to maintain its claims, the plaintiff has alleged that the 1^st defendant had not in fact sourced goods from two of the three suppliers at all, that the third supplier did not exist, and that one of the suppliers had declared that an invoice (purporting to be from that supplier and exhibited by the 1^st defendant in support of its defence) was “fake”; in other words, the plaintiff has alleged that the transaction was a sham. 

19.3.    As was rightly pointed out by Mr Jonathan Chang counsel for the defendants, even if the plaintiff has not asserted that the defendants were parties to the fraud practised in Sweden to obtain the money, it has clearly asserted that the defendants are parties to a fraud to keep the money transferred to them, which is the subject-matter of its claims.”

12.  In Universal Capital Bank v. Hong Kong Heya Co Ltd [2016] 2 HKLRD 757, the plaintiff was deceived by a fraudulent email into making a transfer to a company in Hong Kong part of which was then transferred to the defendant and then onto a third party in the PRC.  The plaintiff brought proceedings for unjust enrichment against the defendant without making any allegation of fraud or dishonesty as against the defendant.  In deciding that the "fraud exception" did not apply on the facts of that case, Deputy High Court Judge Burrell stated as follows, at §18:

" The following points may be validly made:

(1)     The underlying reason for the fraud exception is to prevent summary judgment in a case where serious allegations of dishonesty are made or implied against a party to the proceedings so that such a party may have an opportunity to answer the allegations, or put in a more familiar way, “have his day in court”.

(2)     The defendant company here has no need of such protection.  First, it is a “paper” company but secondly and more importantly, no allegations of dishonesty/fraud are made against it.  Further, no similar allegations are made against its “operator” Yang.

(3)     Although, as agreed by the plaintiff and conceded by counsel for the defendant, the movement of the money out of Montenegro and into the PRC is a plain and obvious scam, the legal route being taken by the plaintiff to recover its money does not necessarily involve any party to that scam.  The plaintiff seeks recovery from the defendant, not Yang.

(4)     Whilst it is true that the Hong Kong courts have adopted a fairly wide and liberal interpretation of “fraud” when considering the application of Order 14, rule 1(2)(b), it should not be applied automatically merely because there are allegations of fraud or dishonesty in the bigger picture. The question remains, does the underlying allegation of fraud (which does exist here) on which the claim is based (which it is not in this case) constitute an allegation of fraud against the defendant?  It seems that the answer to this question in this case is in the negative.

(5)     To say otherwise would take away from a plaintiff an opportunity to utilize the Order 14 procedure in cases where it might be clearly merited."

13.  In Xiao Long v. Great Wall Securities Limited[2019] HKCFI 2769 at §166, Marlene Ng said as follows:

“ I bear in mind the guidance by the Court of Appeal discussed in paragraphs 118-120 above, and in considering the substance and not merely the form of P’s claim as well as all the pleadings and affirmation evidence, I am not persuaded the fraud exception was applicable. Whilst D’s defence might elicit issues of falsity/forgery in response when read in light of P’s Reply and affirmation evidence, as Mr Lam explained, an allegation of fraud by D was not required to establish or maintain P’s claim. There might well be some falsity or fraud, but quite simply, there was no need for P to assert D was the fraudster in order to establish or maintain his claim. In such circumstances, the fraud exception was not applicable.”

14.  In DBS Bank (Hong Kong) Limited v. Happy Grace International Limited[2019] HKCFI 2864 at §6, Deputy High Court Judge MK Liu held as follows:

“ P does not allege that D, or indeed any of the second-level recipients, were directly involved in the fraud practised on it. P is relying on unjust enrichment as a cause of action against D, which does not require any allegation of fraud[1]. That being the case, the fraud exception in Order 14 which bars summary judgment is not triggered[2]. In this Order 14 application, P is pursuing a personal claim for the value of the fund received by D, ie USD230,000, on the basis of unjust enrichment.”

“ D is precluded from relying on the 2 defences since its use of underground banking involved illegality under Mainland Chinese law.”

15.  In my view the observations made in Universal Capital Bank, Xiao Long v. Great Wall Securities Limited and DBS as set out above, correctly state the approach of the court in applying the fraud exception and are consistent with the observations of Yuen JA in Zimmer v. KPN. In this respect, the critical question is whether or not allegations of fraud are required to establish the plaintiff's claim.  If they are (as in Zimmer v. KPN, the fraud exception is engaged but if they are not (as in Universal Capital Bank, Xiao Long v. Great Wall Securities Limited and DBS), then the fraud exception does not apply.

16.  In the present case the allegations in the Reply to which I have referred in paragraph 7 above are clearly not required to establish P's claim in the action and in my view the fraud exception is not engaged.  Mr Toby Brown, counsel for D argued that the fact that the Reply contained denials as regards the existence of the Alleged Oral Agreement is tantamount to an allegation of sham and that the fraud exception is thereby engaged.  I do not accept this.  However even if it were correct to regard the denial of the existence of the Alleged Oral Agreement as an allegation of sham (which I do not accept it is), the fact remains that such an allegation is not required in order to establish P's claim in the action which is, simply, for monies due on D's margin trading account.  P does not need to advance any positive case in relation to the Alleged Oral Agreement.

17.  I therefore conclude that, in this case, the fraud exception is not engaged.  That being the case it is not necessary for me to address the question as to whether or not, in order for the fraud exception to apply, the allegations of fraud on which the claim is based must be made against the defendant or the argument that it is not engaged if the allegations are made solely against third parties.  Whilst the judgments in such cases as Universal Capital Bank (supra), DBS (supra) and Ferrari North America Inc v. Changhon International Energy Co Ltd[2019] HKCFI 2864, [2029] HKEC 3809 suggest that this is the case, the soundness of these decisions is doubted in obiter observations made by Deputy High Court Judge Hall-Jones in R. Stahl Inc. v. AJ Development Ltd[2020] HKCFI 816.  As it is not necessary for me to resolve this issue on the present application, I will refrain from expressing any views on it.

THE ALLEGED ORAL AGREEMENT

18.  D's case on the Alleged Oral Agreement is not supported by any documentary evidence.  This is all the more remarkable, given the size of the transaction and the very large sum involved.  The absence of any documentary evidence casts considerable doubt on the veracity of D's case.

19.  Moreover, D's case is not corroborated by the evidence of either of the other parties to the Alleged Oral Agreement, namely Zhang and Wang, who, D says, he has been unable to contact, albeit that D does not explain what steps he has taken to locate them.

20.  Further, it seems to me that the terms of the Alleged Oral Agreement are contrary to all common and commercial sense - the notion that, on the one hand, a stockbroker would agree to advance a loan of this magnitude with restricted rights to seek repayment or to call for margin payments in the event of a fall in value of the shares provided as security and, on the other hand, that a professional investor, like D, would agree not to sell the shares in question unless they increased in value seems to me to be inherently unlikely.

21.  Then there is the lack of response to D's repeated demands for payment of the sum due on the account for which there is no satisfactory explanation.

22.  D has also not provided a satisfactory, convincing or credible reason for the payment by him of HK$70 million to P in February 2018 which was credited to the Margin Account.  The evidence shows that this sum was borrowed by D from a moneylender.  D sought to explain this by saying that it was a loan by him to P to assist in relieving alleged financial difficulties then allegedly being suffered by P.  There is however no evidence of any such financial difficulties and no evidence supporting the case put forward by D in respect of this payment.  I find that D's explanation for the payment is inherently incredible and is inconsistent with D's case on the Alleged Oral Agreement.

DECISION

23.  Summary judgment is of course only appropriate in clear cases when the court is satisfied not only that there is no defence but no fairly arguable point to be argued on behalf of the defendant.

24.  On the other hand, to adopt the words of Deputy High Court Judge Lisa Wong SC (as she then was) in Ontone Co. Ltd v. Leung Siu Kee (unreported), HCA 408/2011, 28 February 2012, at §23:

" In assessing the credibility of the defendants' factual case, while the court will not embark on a mini-trial on affidavit evidence, the court is not obliged to suspend its critical faculties and assume that the defendant's defence is accurate.  If having regards to inherent plausibility, inconsistency and contemporaneous documents and other compelling evidence, the defence is not credible, the court must say so.  If the defendant's defence is incredible in any material respect, it cannot be said that there is a fair or reasonable probability that the defendant has a real or bona fide defence."

25.  This is a case where I am left with real doubt as to the veracity of the case put forward by D and my first inclination therefore was to affirm the decision of the Master and dismiss this appeal and I have been very close to doing so.  In this respect, it would seem unlikely that D can improve his case if the matter were to go to trial.  In particular, if he has been unable to locate Zhang and Wang and obtain their assistance for the purposes of the application for summary judgment, there would appear to be no good reason to suppose that he will be able to do so for the purposes of any trial.  However, in case I am wrong about this and D is able to obtain corroboration for his case on the Alleged Oral Agreement, I think it is right to give leave to D to defend these proceedings, albeit only on a conditional basis.

26.  I have not heard the parties as to the conditions which it would be appropriate to impose on granting D leave to defend the proceedings and there is no evidence or other material before the court as to D's means or resources.  The usual terms on which conditional leave to defend is given are to require the defendant to bring into court within a specified time a sum equivalent to the whole or part of the claim, in default of which the plaintiff is at liberty to sign final judgment.  I am however conscious of the fact that the quantum of P's claim is very substantial and that I should not make a conditional order with which, in practice, it will be impossible for D to comply.

27.  In the circumstances, I will make an order that D shall have leave to defend these proceedings conditional upon him paying into court the sum of HK$85 million (which is a little less than half of the amount of P's claim) within 14 days of the handing down of this judgment.  If this condition is complied with the costs of P's application including the costs before the Master will be costs in the cause.  However, if this condition is not complied P shall be at liberty to sign judgment for the full amount of the claim, interest and the costs of the action including the costs of this application both here and before the Master.

28.  As I have not heard the parties as to the conditions which it would be appropriate to impose on granting D leave to defend the proceedings and there is no evidence or other material before the court as to D's means or resources, I will give the parties liberty to apply within 14 days of the handing down of this judgment to vary the order I have made as to the condition for granting D leave to defend these proceedings. In the event that such an application is made within this time, the time for complying with the condition will be extended for 14 days from the determination of that application.

HCA 2368/2018

[2020] HKCFI 1048]

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2368 OF 2018

________________________

________________________

_________________________________

DECISION

_________________________________

INTRODUCTION

1.  The Plaintiff, carrying on business to provide brokerage services, applies for a summary judgment against the Defendant, its customer, for the sum of HK$174,806,632.87 together with interest at contractual rate of HSBC prime rate plus 10% per annum compounded monthly from 26 October 2018 to the date of judgment and thereafter at judgment rate.  The Plaintiff’s claim is a claim for repayment of loan advanced to the Defendant on margin facility. 

PLAINTIFF’S CLAIM

2.  On 19 July 2010, the Plaintiff and the Defendant entered into a Customer Agreement for the purpose of opening and maintaining a securities account for the Defendant.  Clause 25 of the Customer Agreement provided that the Defendant shall be liable to pay the Plaintiff any amount due to the Plaintiff and any debit balance or deficiency outstanding in the account to the Plaintiff.  On the same day, the Plaintiff and the Defendant also entered into a Margin Addendum to Customer Agreement (the “Addendum”) for margin facility in favour of the Defendant.  A margin account (the “Margin Account”) was opened thereupon. 

3.  On 20 June 2017, the Defendant gave settlement instructions to the Plaintiff to receive 700,000,000 shares in Freeman FinTech Corp Ltd (“FFCL”) (HK Stock No 279) against payment of HK$250,000,000.  In the same month, the shares were deposited into the Margin Account.  

4.  On 20 November 2017, the Plaintiff sent a notification by SMS to the Defendant that the margin call amount of HK$47,882,258.24 was outstanding in the Margin Account and suggested that further funds be deposited into the Margin Account.  The next day, 21 November 2017, the Plaintiff sent a demand letter by post as well as by email to the Defendant stating that a total amount of HK$266,041,545.47 was outstanding as at close of 20 November 2017.  Of that outstanding amount, HK$50,441,545.47 was the margin call amount.  The Plaintiff demanded the Defendant to deposit funds or provide collateral by 3pm of the same day. 

5.  On 29 November 2017, the Plaintiff notified the Defendant by SMS that margin call amount of HK$46,417,326.61 was outstanding and that further funds should be deposited into the Margin Account.  Having received no response from the Defendant, the Plaintiff, having informed the Defendant of its intention to forcibly liquidate, liquidated 8,000,000 of the shares between 30 November 2017 and 12 December 2017. 

6.  In February 2018, the Defendant deposited HK$70,000,000 into the Margin Account by way of cheque. 

7.  On 16 May 2018, a margin call notification by SMS and by email was sent to the Defendant staging an outstanding balance of HK$207,933,389.77 in the Margin Account, of which there was an outstanding margin call amount of HK$121,710,189.77.  The Plaintiff demanded the Defendant to deposit further funds into the Margin Account by 330pm; otherwise it would liquidate the position in the Margin Account. Having received no response from the Defendant, the Plaintiff liquidated 20,000,000 shares on 16 May 2018.  

8.  On 17 May 2018, the Plaintiff issued a demand letter to the Defendant demanding the latter to settle the outstanding amount of HK$205,350,873.58 and threatening bankruptcy proceeding against the Defendant.  Having received no response from the Defendant, the Plaintiff issued two demand letters respectively on 5 and 10 September 2018 demanding the Defendant to settle the outstanding amount of HK$214,932,580.85.  

9.  Having received no response from the Defendant, the Plaintiff liquidated all the position in the Margin Account.  As at 25 October 2018, a total amount outstanding is HK$174,806,632.87.  This is the principal amount being claimed by the Plaintiff here.  The Plaintiff also claims contractual interest according to the aforesaid documents subsequently adjusted to be HSBC prime rate plus 10% per annum compounded monthly. 

DEFENDANT’S CASE

10.  The Defendant’s defence is that in the first quarter of 2017, Zhang Yong Dong (“Zhang”), a non-executive director and the chairman of the board of directors of FFCL, a subsidiary of the Plaintiff, and one Wang Xiaodong (“Wang”) (an executive director and the CFO of FFCL as well as a director of the Plaintiff from 29 September 2016 to 18 May 2018) agreed orally with the Defendant in respect of the 700,000,000 shares in FFCL in the Margin Account that: -

(1)  If the share price of FFCL appreciates, the Defendant could liquidate his 700,000,000 shares in FFCL; and

(2)  If the share price of FFCL fell, the Plaintiff would not make any margin call of the Defendant and would not dispose of any of the 700,000,000 shares in FFCL, to be held by the Defendant indefinitely until the share price of FFCL would appreciate again. 

11.  The Defendant further contends that this oral agreement contained various implied terms, which in essence were that the Plaintiff should not sell the FFCL shares except with the Defendant’s consent. 

12.  The Defendant, in reliance on the oral agreement and the implied terms, argues that the Plaintiff could not make any margin call. 

13.  In respect of the HK$70,000,000 deposited into the Margin Account in February 2018, the Defendant says that it was a loan advanced by the Defendant to the Plaintiff at the request of Zhang and Wang on behalf of the Plaintiff.  There is no documentation of such loan. 

JURISDICTIONAL ISSUE – FRAUD EXCEPTION

14.  Before I proceed to analyse whether the Defendant has failed to raise any bona fide arguable defence or triable issue, the Defendant raises a jurisdictional issue to urge me to dismiss the present application.  In particular, the Defendant relies on the fraud exception in Order 14 rule 1(2), whereby the Plaintiff cannot apply for summary judgment because the Plaintiff, in its Reply, made certain allegation of fraud, namely, (1) that the oral agreement was a plot designed by Zhang and Wang dishonestly to circumvent the disclosure requirement under the Securities and Futures Ordinance (Cap 571) (the “SFO”); and (2) that the oral agreement constitutes offences contrary to sections 274, 275, 278, 295, 296 and/or 299 of the Ordinance (that is, false trading, price rigging and stock market manipulation). 

15.  When reading the Reply closely, what the Plaintiff pleads about the circumvention of disclosure is that Zhang and Wang designed this plot for their own dishonest purpose.  As regards the offences contrary to the various sections of the SFO, there is no allegation that the Defendant had knowledge of the purposes of the oral agreement, namely, to false trade, to rig the price and/or to manipulate the stock market.  The Plaintiff could establish its claim (even the allegation of such offences pleaded in the Reply taken into account) without the need to establish any allegation of fraud against the Defendant.  In Universal Capital Bank v Hongkong Heya Co Ltd [2016] 2 HKLRD 75 at paragraph 18, DHCJ Burrell held, as part of his ratio, that this fraud exception is not applicable to allegations of fraud made against non-party to the proceedings, having been referred to Pacific Electric Wire & Cable Co Ltd v Harmutty Ltd [2009] 3 HKLRD 94, where the Court of Appeal held, in essence, that when the plaintiff’s claim involves an allegation of fraud, Order 14 application is not applicable.  It is worth noting that the issue before the Court of Appeal was not whether the fraud exception applies to allegation against a party or a non-party to the proceeding, while that before DHCJ Burrell was. 

16.  Mr Toby Brown, counsel for the Defendant, refers me to a very recent decision of DHCJ Hall-Jones in R Stahl Inc v AJ Development Ltd[2020] HKCFI 816 handed down just 11 days ago, on 20 May 2020, where his Lordship, having ruled at paragraphs 35 that the case before him was a case involving an allegation of fraud against the defendant and at paragraph 37 that it was “unnecessary” for him to address [inter alia, Universal Capital], expressed his comments by way of obiter that the Court of Appeal in Pacific Electric did not make any distinction between a party and a non-party to the proceeding and so did not the wording of Order 14 rule 1(2)(b).  His lordship then made his discomfort known in the following terms at paragraph 38: -

“I do not believe that this observation as to the underlying reason for the fraud exception [in Universal Capital] sits comfortably with the wording of the rule itself. Nor do I believe that reading the word ‘fraud’ in the rule as if it were to read “fraud against the defendant” sits comfortably with Pacific Electric.”

17.  I can see the force of the reasoning of these two conflicting lines of authorities.  However, at this level, I am bound by the ratio in Universal Capital, while the obiter in R Stahl Inc remains an obiter.  I therefore hold that Order 14 is applicable to the Plaintiff’s claim because the allegation of fraud is made against non-parties only. 

18.  Mr Brown further submits that the conflicting decisions on this jurisdictional issue alone should be a reason for refusing Order 14 judgment, referring me to the trite authorities that where there are conflicting legal decisions or the legal principles in the subject area are unclear, the Court should not give summary judgment.  However, those authorities are concerning the conflicting decisions or unclear law in the substantive matter of the Order 14, not the preliminary jurisdictional issue of whether Order 14 is applicable like here.  Having come to the conclusion that this Court has the jurisdiction under Order 14 rule 1(2), I see no reason why I should refuse summary judgment simply on this ground.  I shall now consider the merits of the Order 14 application substantively. 

ARGUABLE DEFENCE AND/OR TRIABLE ISSUES

19.  The evidence, notably documentary, namely, the agreements between the Plaintiff and the Defendant mentioned above as well as the correspondence, is sufficient to establish the Plaintiff’s claim.  The question is whether the Defendant raises any arguable defence and/or triable issue.  

20.  First, I agree with counsel for the Plaintiff, Mr Michael Lok’s submission that the oral agreement per se is unbelievable at all.  The oral agreement would mean that the Plaintiff would not be able meaningfully to exercise any rights of security over the FFCL shares.  This would not only go contrary to the terms of the agreement between the parties, but also go contrary to any commercial sense. By the oral agreement, the Plaintiff would benefit little, if any, but would only increase its risk of loss.  If there were really such an unusual oral agreement, it would be inherently improbable that there is no contemporaneous record at all.  It would also be inherently improbable that the Defendant still did not respond meaningfully to the Plaintiff despite the Plaintiff’s various demands, especially the one issued on 17 May 2018 when the Plaintiff threatened bankruptcy proceedings against the Defendant.  Therefore, I find this allegation of oral agreement unbelievable. 

21.  Second, the implied terms also do not make sense at all.  I only need to refer to Societe Generale Bank & Trust Hong Kong Branch v Mike Panjwani, HCA 725/2009, 25 November 2010 at §35, where To J (as he then was) said: -

“Reasonable notice to comply with margin call is simply impossible in the margin trading context. The market moves without notice, let alone reasonable notice. This term which is sought to be implied runs contrary to the theme of the contract documents. As I have already mentioned before, the Plaintiff is not the borrower’s margin trading consultant. It only provides facility and a trading platform. The terms in the contract documents are to provide for loans to be advanced to the Defendant and to ensure that the loans so advanced are secured and safe. This theme is amply clear from clause 8.8 of the General Terms which provides that when the margin level falls below Close-out Level, the Plaintiff shall in order to protect its position, be entitled to take whatever action including closing-out of all or any of the Defendant’s open positions. For that reason and for that purpose, the Plaintiff has to act quickly to protect its loan. Once the Close-out Level is breached, reasonable notice is out of the window. The Plaintiff’s has to act quickly to cut loss for the Defendant so that its loan is safe. If the Plaintiff may not close-out the Defendant’s open positions and has to wait for reasonable time for the Defendant to put in funds, the remaining margin may be swept away to negative margin level. The Plaintiff would be left with an unsecured loan while waiting for reasonable time to come. Furthermore, there can be no guarantee that the borrower would put in funds to answer the margin call. In that situation, reasonable time would never come. Reasonable notice or reasonable time for the borrower to comply with margin call is so illusory in the margin trading context that the obligation to give reasonable notice or reasonable time to comply with margin call could not have been in the contemplation of the parties once Close-out Level is triggered.” (emphases added)

22.  In the present case, the Defendant’s defence even goes further than a reasonable notice. Essentially, the Defendant is saying that without his consent, the FCCL shares could not be sold.  This is unbelievable. 

23.  Third, in respect of the HK$70,000,000 deposited in the Margin Account, the Defendant’s allegation that this was a loan advanced to the Plaintiff is again unbelievable.  If this were a loan to the Plaintiff, I see no reason why this “loan” would be deposited in this unusual manner, namely, into the Margin Account but not into a bank account maintained in the name of the Plaintiff itself.  It remains for me to add that my finding concerning this HK$70,000,000 deposit only reinforces my finding concerning the oral agreement above. 

24.  Given my conclusion above, it is unnecessary for me to consider the Defendant’s allegation that Zhang and Wang had the authority, actual or apparent, to represent the Plaintiff to enter into the oral agreement with the Defendant and sought the loan from the Defendant.  Suffice to say that there is no evidence raised to explain why Zhang, not being director of the Plaintiff, would have the authority to represent the Plaintiff to enter into a contract with the Defendant.  As regards Wang, while he was a director of the Plaintiff at the material times, and he had been dealing with the Plaintiff in respect of the account, given the unusual terms of the oral agreement and the unusual manner of the advancement of the loan which would prima facie go outside the normal scope of a director, the mere allegation that Wang was a director is insufficient to establish even apparent authority.  

25.  In conclusion, I find that the Defendant has failed to raise any arguable defence and triable issue, and therefore the Plaintiff is entitled to summary judgment. 

26.  As regards the Plaintiff’s claim for pre-judgment interest rate at the contractual rate of HSBC prime rate plus 10% per annum compounded monthly from 26 October 2018 to today, since it is a commercially agreed rate and the Defendant has raised nothing in evidence to oppose this rate, I shall award pre-judgment interest at this rate. 

ORDER

27.  In the premises, I make the following order: - 

(1)  The Defendant shall pay HK$174,806,632.87 to the Plaintiff.

(2)  There shall be pre-judgment interest at the rate of HSBC prime rate plus 10% per annum compounded monthly from 26 October 2018 to today.

(3)  There shall be post-judgment interest on the sums of (1) and (2) above from today until payment of judgment.

(4)  The Defendant shall pay the costs of the Plaintiff’s action (including the present application) with certificate for counsel, to be taxed if not agreed.