HCA1257/2013 PACIFIC HARBOR ADVISORS PTE LTD AND ANOTHER v. WINSON FEDERAL LTD AND OTHERS - LawHero
HCA1257/2013
高等法院（民事訴訟）Deputy High Court Judge R Ismail SC18/11/2015
HCA1257/2013
A A
HCA 1257/2013
B B
IN THE HIGH COURT OF THE
C C
HONG KONG SPECIAL ADMINISTRATIVE REGION
D
COURT OF FIRST INSTANCE D
HIGH COURT ACTION NO 1257 OF 2013
E ____________________ E
F BETWEEN F
G
PACIFIC HARBOR ADVISORS PTE LTD 1st Plaintiff G
PACIFIC HARBOUR SPECIAL 2nd Plaintiff
H HOLDINGS LIMITED H
I and I
J WINSON FEDERAL LIMITED 1st Defendant J
FREDERICK, KAN KA CHONG 2nd Defendant
K (in his capacity as the executor of the K
Estate of Cho Yuk Kei Carlos)
L L
CHO WOON MING VINCENT 3rd Defendant
M INTERNATIONAL HOTELIERS & 4th Defendant M
ASSOCIATES LIMITED
N N
UP SPEED INVESTMENTS LIMITED 5th Defendant
O O
RANMARK INVESTMENTS LIMITED 6th Defendant
P FURAMA (SHENYANG) COMPANY 7th Defendant P
LIMITED
Q
____________________ Q
R R
Before: Deputy High Court Judge R Ismail SC in Chambers
S Date of Hearing: 11 November 2015 S
Date of Decision: 19 November 2015
T T
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A A
B B
DECISION
C C
INTRODUCTION
D D
1. This is the plaintiffs’ second summary judgment application
E E
in this action (“the 2nd Summary Judgment Summons”).
F F
2. The plaintiffs (“Ps”), by this action, seek to make recovery in
G G
respect of two loans made in 2008, whether by way of repayment from the
H borrower (D1), or pursuant to security provided by D2 to D7. H
I I
3. As to the parties, at the material times:
J J
(1) Ps are a Singapore company and BVI company respectively,
each carrying on business as an investment fund. P1 made
K K
the relevant loans to D1 in 2008, and P2 agreed to
L sub-participate in part of the 2nd loan in about 2011. L
M
(2) D1 is a Hong Kong company to which P1 made the loans. M
At the time of the loans being made, the shareholders of D1
N were Carlos Cho (“Carlos”) and D5. Carlos was a director N
of D1 until his death on 14 November 2008.
O O
(3) Probate in respect of Carlos’ estate has been granted to D2,
P who is sued in his capacity as executor of Carlos’ estate. P
Q
(4) D3, Vincent Cho (“Vincent”), is the son of Carlos. Vincent Q
was director of D1 until 19 June 2013.
R R
(5) D4 (“IHAL”) is a Hong Kong company whose registered
S shareholders were Carlos as to 95% and Vincent as to 5%. S
IHAL has a 79% stake in D7 (“FSCL”), which indirectly
T owns the Shenyang Property. T
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A A
B B
(6) D5 is a BVI company 100% owned by Carlos. It was a
C
shareholder in D1 and D6. C
(7) D6 (“RIL”) is a Hong Kong investment holding company of
D D
which Carlos and D5 were equal shareholders. RIL owns
E
90% of a PRC company, Shanghai Bund Park Lane Shoppers’ E
Plaza Co Ltd (“Shanghai Bund”).
F F
(8) D7 (FSCL) is a BVI investment holding company of which
G Carlos and IHAL were shareholders as to 21% and 79% G
respectively. FSCL owns 100% of a PRC company which
H holds the Shenyang Property. H
I I
4. The first summary judgment application was for monetary
J judgment and was heard and decided in Ps’ favour by DHCJ B. Chu (as J
she then was) on 10 June 2014 (“the 1st Summary Judgment”). The
K K
substance of the order made at that time was for D1 and D2 to pay
L US$38 million plus interest. No order was sought against Vincent at the L
1st Summary Judgment application, but he was served with the summons,
M M
he filed evidence on his own behalf and he participated in the hearing with
N legal representation. N
O O
5. On 26 May 2015, Vincent took out a summons for leave to
P appeal the 1st Summary Judgment out of time. Extension of time was P
sought on the basis of fresh evidence in the form of a taped telephone
Q Q
conversation on 4 May 2015. The application was dismissed by the
R Court of Appeal by its judgment dated 21 August 2015 (the “Leave R
Judgment”).
S S
T 6. This 2nd Summary Judgment Summons was taken out by Ps T
on 9 February 2015 against Vincent, D4 (IHAL) and D6 (RIL).
U U
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A A
B B
(1) The 2nd Summary Judgment Summons seeks final judgment
C
for the relief claimed in the Amended Statement of Claim and C
st
costs, save for the relief already granted in the 1 Summary
D Judgment. D
E
(2) However, on this application I was informed that the only E
relief being presently pursued were the following orders for
F specific performance: F
G (i) against Vincent, of the two letters of undertaking dated G
2 June 2008 (“LOUs”), and the two IHAL share pledge
H agreements dated 2 June 2008; H
I (ii) against D4, of the FSCL share pledge agreements dated I
2 June 2008; and
J J
(iii) against D6, of the two Shanghai Bund share pledge
K agreements. (These agreements will be considered K
further below.)
L L
RELEVANT BACKGROUND AND DOCUMENTS
M M
7. The background to this matter, and the defences raised in the
N N
1st Summary Judgment Application, are thoroughly addressed in the
O 1st Summary Judgment. However, I will briefly address the relevant O
background facts and documents for the purposes of this application
P P
below.
Q Q
8. On 2 June 2008, Ps and/or one or more of the Ds executed
R R
documentation relating to loan facilities totalling US$40 million,
S including. S
T T
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A A
B B
(1) Loan Agreement for a loan facility of US$10 million by P1 to
C
D1, with a repayment date of 2 June 2009 (“1st Loan C
Agreement”).
D D
(2) Loan Agreement for a loan facility f US$30 million by P1 to
E
D1, with a repayment date of 2 June 2009 (“2nd Loan E
Agreement”).
F F
(3) Two letters of undertaking (“LOUs”) (in respect of each of the
G 1st and 2nd Loan Agreements). Each LOU was given by both G
Carlos and Vincent, and promised (in certain circumstances)
H to sell a property they owned (“the Guangzhou Property”) and H
apply the net proceeds of sale to satisfy the loans.
I I
(4) Eight share pledge agreements, including:
J J
(i) Two agreements by Carlos and Vincent to pledge the
K shares of D4 (IHAL) as security for the 1 st and 2nd Loan K
Agreements (“the IHAL Share Pledge Agreements”);
L L
(ii) Two agreements by D4 (IHAL) to pledge the shares of
M D7 (“FSCL”) as security for the 1st and 2nd Loan M
Agreements (“the FSCL Share Pledge Agreements”);
N N
and
O (iii) Two agreements by D6 (RIL) to pledge the shares of O
st nd
Shanghai Bund as security for the 1 and 2 Loan
P P
Agreements (“the Shanghai Bund Share Pledge
Agreements”).
Q Q
(5) Two personal guarantees by Carlos.
R R
(6) Two corporate guarantees by D7.
S S
9. Carlos died on 14 November 2008.
T T
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A A
B 10. D1 was unable to make repayment of the outstanding loan B
debt of US$38 million pursuant to the 1st and 2nd Loan Agreements. By
C C
two agreements dated 2 June 2009 (albeit signed thereafter), P1 and D1
D agreed to amend the terms of the 1st and 2nd Loan Agreements to (1) extend D
the repayment date (2) vary the interest terms (“the 1st and 2nd Amendment
E E
st nd
Agreements” respectively). D1 entered the 1 and 2 Amendment
F F
Agreements by its director, Vincent.
G G
11. By solicitors’ letter dated 31 May 2013, Ps stated that an
H event of default under Clause 7.1 of the Loan Agreements had occurred, H
demanding immediate repayment of the loans, interest and other amounts
I I
apparently accrued under the Loan Agreements. I am not aware of any
J J
earlier notice of event of default under Clause 7.2 of the Loan Agreements
K
(in particular, any Clause 7.2 notice prior to the Amendment Agreements). K
L SUMMARY JUDGMENT — RELEVANT PRINCIPLES L
M 12. There was no dispute as to the applicable legal principles. M
N (1) Leave to defend should be given where the defendant raises N
any substantial question of fact which ought to be tried, or
O O
there is a fair dispute to be tried as to the meaning of the
P document on which the claim is based: Hong Kong Civil P
Procedure 2016, para 14/4/11, pp 272.
Q Q
(2) Leave to defend should be given where a difficult question of
R law is raised: Hong Kong Civil Procedure 2016, para 14/4/12, R
pp 272.
S S
(3) “House of Lords points” should be left to mature
T consideration at trial: Citic Ka Wah Bank Ltd v Lau Kam Luen T
[2008] 2 HKLRD 167.
U U
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A A
B D4 AND D6 B
C 13. I can dispose of the applications against D4 and D6 briefly. C
Each of D4 and D6 have by letters dated 27 August 2015 addressed to the
D D
court stated, by reference to the 2 nd Summary Judgment Summons, that
E they do not object to summary judgment and the relief sought against them E
in the ASOC (which is the relief claimed today). Accordingly, those
F F
orders for specific performance will be granted.
G G
D3/VINCENT
H H
14. The plaintiffs made an application to amend the prayer of
I I
their Amended Statement of Claim, in order to claim specific performance
J of the IHAL Share Pledge Agreements against Vincent. Although the J
plaintiffs had pleaded the facts they claimed to be necessary to make a
K K
claim against Vincent for specific performance of the IHAL Share Pledges,
L such a claim was omitted from the prayer. I agree with L
Mr Edward Chan SC for the plaintiffs, leading Hugh Kam, that this is a
M M
technical matter. Counsel for Vincent, Mr Earl Deng leading Au Lut Chi,
N did not object to the amendment. I accordingly allow an amendment to N
the prayer as proposed by Mr Chan SC in oral submissions (without a draft
O O
amendment being produced) to add the following words to the prayer
P “AGAINST CARLOS AND/OR VINCENT” before “(2) Specific P
Q
performance of the IHAL Share Pledge Agreements”. The plaintiffs’ Q
solicitors are directed to effect such amendment. The costs of and
R R
incidental to the amendment are to Vincent, to be taxed if not agreed.
S S
nd
15. The evidence filed in support of the 2 Summary Judgment
T Summons is the 7th affidavit of Warren Allderige on behalf of the plaintiffs, T
U U
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A A
B the 5th affidavit of Vincent in opposition, and the 12th affidavit of B
Warren Allderige in reply. The evidence suggests that Vincent would be
C C
disputing the indebtedness of D1 as primary debtor in order to defend the
D claims made against him. Such evidence was filed before the Leave D
Judgment. By the time of the service of the skeleton arguments, it was
E E
clear that (in my view, sensibly), Vincent was not disputing the
F F
indebtedness of D1 for present purposes.
G G
st
16. I am satisfied, by virtue of the 1 Summary Judgment, that D1
H is indebted to Ps. H
I I
17. I am satisfied that Carlos and Vincent provided the LOUs to
J P1: J
K (1) The LOU in respect of the 1st Loan Agreement (“the 1st LOU”) K
provides:
L L
“We, [Carlos] and [Vincent], refer to:
M M
(a) [the 1st Loan Agreement].
N (b) All related agreements, undertakings, and understandings to N
the [1st] Loan Agreement.
O … O
By virtue of this Letter and in consideration of Lender’s [P1’s]
P entry of the [1st] Loan Agreement with Borrower [D1], the P
undersigned hereby:
Q Q
(1) confirm that we are the owners of … (“the Guangzhou
Property”)…
R R
(2) undertake with you that should you exercise your right
under Clause 7.2 of the above [1 st] Loan Agreement and that
S the Borrower fails to repay all monies outstanding under the S
terms of the above [1 st] Loan Agreement within 15 days of
T the receipt of the notice mentioned in the said Clause 7.2, T
we shall sell the Guangzhou Property in accordance with the
terms of the above [1 st] Loan Agreement and pay the net
U U
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A A
B proceeds of sale to you to satisfy the monies outstanding by B
the Borrower [D1] as aforesaid.”
C C
(2) The 2nd LOU is in identical terms save that it refers to the
2nd Loan Agreement.
D D
E 18. I am also satisfied that the IHAL Share Pledge Agreements E
were provided to P1 by Carlos and Vincent as pledgors:
F F
(1) The 1st IHAL Share Pledge Agreement (in respect of the
G G
1st Loan Agreement) provides:
H (i) Carlos owns 95% and Vincent owes 5% of the issued H
shares of IHAL.
I I
(ii) Carlos and Vincent pledge the IHAL shares in favour of
J P1 as security for all moneys from time to time owing J
to P1 under the 1st Loan Agreement.
K K
(iii) Carlos and Vincent shall, immediately upon demand by
L P1, do all acts necessary or desirable to ensure the L
perfection of the pledge.
M M
(iv) In the Event of Default (including any default under the
N 1st Loan Agreement) and at the request of P1, the IHAL N
shares shall be sold by Carlos and Vincent in the open
O O
market at the then current market value or higher to
P settle D1’s obligations and duties under the 1st Loan P
Agreement.
Q Q
(2) The 2nd IHAL Share Pledge Agreement is in identical terms
R save that it refers to the 2nd Loan Agreement. R
S S
19. Ps, having established the outstanding primary indebtedness
T of D1, and the obligations of Vincent under the LOUs and the IHAL Share T
Pledge Agreements (there being no dispute that the relevant demands have
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A A
B been made and notices given), are prima facie entitled to the relief they B
seek against Vincent. The burden shifts to Vincent to establish an
C C
arguable defence.
D D
20. Vincent argues that there should be no specific performance
E E
of the LOUs on the following grounds:
F F
(1) Vincent’s liability as a guarantor under the LOUs has been
G discharged. G
(2) In any event, specific performance is not an appropriate
H H
remedy.
I I
21. Vincent argues that there should be no specific performance
J J
of the IHAL Share Pledge Agreements on the basis that specific
K performance is not an appropriate remedy in the circumstances. K
L L
DISCHARGE OF VINCENT AS GUARANTOR
M M
(a) Arguments
N N
22. It is argued on behalf of Vincent that:
O O
(1) The 1st and 2nd Loan Agreements were amended by the
Amendment Agreements after Carlos died, and without the
P P
consent of, or on behalf of, Carlos.
Q Q
(2) Carlos was therefore discharged from his guarantee liability
under the LOUs.
R R
(3) Vincent, as co-surety with Carlos under the LOUs, is
S S
discharged from his liability thereunder by virtue of
T
Carlos’discharge. T
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A A
B 23. It is argued on behalf of Ps: B
C (1) It is for Vincent to establish a defence. Although Vincent C
pleaded the discharge of the LOUs’ liabilities by reason of
D D
variation to the 1st and 2nd Loan Agreements, D2 simply
E denied liability without raising the express defence. (I am at E
a loss to understand why D2’s pleaded position should impact
F on Vincent’s case and I say no more about this.) F
G (2) Clause 4 of the Amendment Agreements (as construed by Ps) G
provides for the continuation of the security agreements
H H
provided by D1 in respect of the 1st and 2nd Loan Agreements,
so that there is consent to variation of the 1st and 2nd Loan
I I
Agreements and/or a reservation of rights under the security
J agreements. J
(3) In the absence of evidence as to ownership of the Guangzhou
K K
Property:
L L
(i) If the Guangzhou Property was jointly owned, if one
M
owner dies, then the whole property will be vested in M
the other. Whether or not Carlos’ liability under the
N LOUs was discharged, that will not prejudice Vincent N
because Carlos had nothing to sell. 1
O O
(ii) If the Guangzhou Property was severally owned, as
P tenants in common, and if Ps are right in their P
construction of Clause 4 of the Amendment Agreement,
Q Q
then neither co-surety is discharged, so the co-surety
R point does not arise.2 R
1
This submission does not sit easily with Mr Chan’s submission (correct as it seems to me) that the
S LOU only creates a limited liability to apply the sale proceeds of the Guangzhou Property to D1’s S
debt, rather than a complete guarantee of D1’s liability — if Vincent owned the whole of the
Guangzhou Property, he would be paying 100% of the sale proceeds rather than his share.
T 2
T
Implicit in this submission is the acceptance that Vincent would be prejudiced if the successor to
Carlos’ several interest was discharged from liability under the LOUs.
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A A
B B
(4) If Ps are wrong on the construction of Clause 4 of the
C
Amendment Agreement, then Vincent is also estopped from C
claiming that he is discharged as guarantor because of his loss
D of rights against the principal debtor or co-sureties. That is D
(it is said) on the basis that Vincent engineered the change of
E E
position of the principal debtor, he knew Carlos was dead and
F no one represented Carlos’ interest, so he cannot claim the F
benefit of what he has engineered.
G G
(b) Relevant legal principles
H H
24. Mr Chan SC and Mr Deng were largely agreed as to the
I I
applicable legal principles.
J J
25. If obligations under a contract are guaranteed, any variation to
K K
the contract must be agreed by the guarantor, or the creditor must reserve
L his rights against the surety when making the variation agreement, L
otherwise the guarantor will be discharged: Holme v Brunskill (1878) 3
M M
QBD 495 at 505.
N N
26. The rationale for the general rule as to discharge of the surety
O O
is that a variation of the principal contract, for example by way of
P extension of time or release, interferes with the surety’s right to pay off the P
debt and sue the principal debtor: Holme v Brunskill at 505.
Q Q
R 27. The rationale for the exceptions is as follows: R
S (1) If a guarantor agrees to the variation, he has of course agreed S
to the variation of his own rights.
T T
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A A
B B
(2) If the creditor (in agreeing a variation with the principal
C
debtor) reserves his rights against the surety, then the C
principal debtor impliedly consents to the surety’s rights
D against him remaining on foot notwithstanding the variation. D
The surety’s rights to pay off the debt and sue the principal
E E
debtor remain intact. Mahant Singh v U Ba Yi [1939]
F AC 601 at 609; Greene King plc v Stanley [2001] EWCA F
Civ 1966 at para 80.
G G
28. The burden of proof is on the creditor seeking to enforce the
H H
guarantee that the guarantor has given consent: O’Donovan & Phillips
I “The Modern Contract of Guarantee” (English edn) at paras 7-56. I
J J
29. Consent to the variations need not be express; it may be
K implied eg where the guarantor requests or instigates the variation and/or K
where the guarantor is a director of the principal debtor company and
L L
negotiates with the creditor for the variation: O’Donovan & Phillips at
M paras 7-59-7-60. M
N N
30. Mere knowledge of the variation is an insufficient basis from
O which to infer consent: O’Donovan & Phillips at para 7-58. O
P P
31. Polak v Everett (1876) 1 QBD 669 at 673 makes clear that if a
Q surety is aware of a proposed variation of the principal contract which Q
might discharge his liability as guarantor, there is no authority for the
R R
proposition that he is under a duty to warn the creditor. Mere knowledge
S of the variation by the surety does not amount to consent to the variation. S
T T
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A A
B 32. Where the guarantor is the director of the debtor company B
negotiating for the variations, it would be unrealistic to make an artificial
C C
distinction in terms of his knowledge and consent between the two
D capacities of guarantor and director of the debtor: Beck Interiors Ltd v D
Russo [2009] EWHC 3861 (QB) at para 34; Winstone Ltd v Bourne [1978]
E E
1 NZLR 94 at 96 lines 23-43; German Trade House International Ltd v
F F
Lau Wai Ki [1996] 3 HKC 406 at 411H-412E.
G G
33. As to the impact on a guarantor of the release of a
H co-guarantor, Andrews & Millett “The Law of Guarantees” (7th edn), H
para 9-040 states that:
I I
(1) The rationale underlying the discharge of the surety where the
J J
principal is no longer liable is that the creditor cannot do
K anything to put the rights of the surety in danger. K
Accordingly, where the creditor releases a co-surety who is
L L
jointly or jointly and severally liable, the surety’s rights of
M
contribution and marshalling of securities are prejudiced, and M
the release will discharge the surety in toto, unless remedies
N have been reserved against him. N
O (2) Where one of a number of jointly liable co-sureties is released, O
the remaining co-sureties are wholly discharged. The
P analysis is that since they are jointly liable, release of one is P
release of all. However, the rule that this applies to jointly
Q Q
and severally liable sureties has been doubted by the Court of
R Appeal and must be treated with caution (referring to R
Commercial Bank of Australia v Wilson & Co’s Estate
S S
(Official Assignee) [1893] AC 181).
T T
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A A
B 34. I was not referred to Commercial Bank of Australia, nor did B
I hear argument on this area of apparent uncertainty in the law. I do not
C C
begin to consider whether the discharge rule does apply in the joint and
D several liability situation. For present purposes, I assume that there may D
be discharge in the context of joint and several liabilities and that is not a
E E
matter for summary judgment.
F F
(c) Discussion
G G
35. It seems to me that the Amendment Agreements would serve
H H
to discharge the LOUs unless either of the exceptions are established ie:
I I
(1) consent of the guarantor, or
J J
(2) reservation of the creditor’s rights against the guarantor.
K K
36. Vincent, as director of D1 who procured the Amendment
L Agreements, must be taken to have consented to the variations. Mr Deng L
sensibly did not dispute this.
M M
N 37. I have no doubt that if the LOU contained a surety obligation N
of Vincent alone, then Vincent’s liability as surety would remain intact
O O
notwithstanding the Amendment Agreements.
P P
38. Ps rely on Clause 4 of the Amendment Agreements to argue
Q Q
that the LOUs, and the liability of Carlos and Vincent thereunder, remain
R intact. R
S S
39. Clause 4 of the 1st Amendment Agreement provides:
T T
“The Borrower [D1] hereby confirms that any security
agreements it has entered into pursuant to the [1 st] Loan
U U
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A A
B Agreement will continue to secure its obligations under the B
[1st] Loan Agreement”.3
C C
40. Mr Deng on behalf of Vincent argues that the said Clause 4
D D
only applies to security agreements entered into by D1. That certainly
E seems to be the literal meaning of Clause 4. In other words, Mr Deng E
argues that Clause 4 of the Amendment Agreement does not apply to the
F F
LOUs and need not be considered.
G G
41. Mr Chan SC on behalf of Ps responds that Clause 4 cannot
H H
properly be read literally, as to do so robs it of any meaning whatsoever.
I That is because if one considers the security agreements to be provided I
under the 1st and 2nd Loan Agreements, none of them were to be entered
J J
into by D1, but D1 was obliged to procure that they all be provided.
K Significantly, Mr Chan SC submits that Clause 4 should be read as K
substituting the words “entered into” with “provided”.
L L
M 42. I now consider it necessary to address Ps’ pleaded case and M
the notice given to Vincent as to Ps’ case on the question of discharge of
N N
liability under the LOUs.
O O
43. Contrary to Ps’ submissions, the burden is on the creditor, Ps,
P P
to establish an exception to the general rule of discharge upon variation of
Q the principal contract. I note that Ps do not appear to have adequately Q
pleaded their case.
R R
S S
T T
3
Clause 4 of the 2nd Amendment Agreement is in identical terms save that it refers to the 2 nd Loan
Agreement.
U U
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A A
B B
(1) Although Vincent had expressly pleaded the discharge of the
C
LOUs by reason of the Amendment Agreements, Ps had not C
sought to make any positive plea in reply.
D D
(2) Ps had indeed pleaded the Amendment Agreements in their
E
Amended Statement of Claim including Clause 4 thereof, but: E
(i) they have not pleaded that Clause 4 should be rectified or
F F
construed in a manner other than its literal or natural
G meaning, G
(ii) nor have Ps pleaded that by Clause 4 of the Amendment
H H
Agreements, either (i) Carlos and Vincent had agreed to
I the amendments or (ii) Ps had reserved their rights I
against Carlos and Vincent as guarantors.
J J
(3) Warren Allderige’s 12th affidavit (ie Ps’ reply evidence on the
K 2nd Summary Judgment Summons) stated at para 32 that the K
LOUs were not discharged because of Clause 4 of the
L L
Amendment Agreements4.
M (4) Mr Chan’s skeleton argument submitted that Clause 4 of each M
Amendment Agreement operated as a reservation of rights of
N N
P1 against Carlos and Vincent as guarantors, which would
prevent the Amendment Agreement from operating to
O O
discharge either guarantor.
P P
(5) The express argument that Clause 4 should be construed in a
manner other than its literal meaning only arose in Ps’ oral
Q Q
argument at the hearing. The “construction” argument really
R requires certain words of Clause 4 to be replaced by others. R
S S
4
Warren Allderige’s 12th affidavit para 32 incorrectly set out Clause 4 of the Amendment Agreements,
T transposing the words “security arrangements” for the correct words “security agreements”. Ps’ T
construction argument would be more attractive had the correct wording of Clause 4 been “security
arrangements”.
U U
V V
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A A
B B
It might more accurately be described as a rectification
C
argument. C
(6) Whilst Mr Deng did not complain about the lack of notice of
D D
these arguments, it would seem to me to be unsatisfactory for
E
the court to be determining matters on a summary basis that E
have not been properly pleaded or notified, with the resulting
F lack of argument on important matters. F
G (7) If I had thought that the construction argument might arguably G
have got Ps home in their claim under the LOUs, I would
H have been most reluctant to allow it at this stage in light of the H
state of pleadings and inadequate evidence and analysis.
I I
J 44. However, I do not consider it necessary to decide the J
construction point because it does not assist me in deciding whether it is
K K
arguable that either of the two exceptions to the guarantee discharge rule
L apply. L
M M
45. Firstly, on the consent issue, as Mr Deng argued, Clause 4 of
N each Amendment Agreement is effective only between those parties who N
have agreed to it. That must be right.
O O
(1) Vincent did consent to the variations.
P P
(2) There is no question that Carlos did not agree to Clause 4 or
Q any part of the Amendment Agreement, as he had died by that Q
time.
R R
S
46. Also on the consent issue, Mr Deng argued that, unlike other S
documents within the suite of security documentation executed in support
T T
of the 1st and 2nd Loan Agreements, the LOUs did not permit Ps and D1 to
U U
V V
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A A
B make any variations to the principal contract without further consent from B
Carlos and Vincent. Mr Deng referred to Clause 6 of the IHAL Share
C C
5 6
Pledge Agreements and Clause 2.5 of Carlos’ personal guarantee to
D make this point good. D
E (1) So, Mr Deng argued, if the parties had intended that the LOUs E
remain intact and enforceable notwithstanding a variation to
F F
the 1st or 2nd Loan Agreements, there would have been an
G equivalent provision in the LOUs. G
(2) I accept that, as far as it goes. The effect of Clause 6 of the
H H
IHAL Share Pledge Agreements, and Clause 2.5 of Carlos’
I personal guarantee, is that the terms of the loans could be I
varied without discharging the IHAL share pledge or Carlos’
J J
personal guarantee, without need for any further agreement
K
from IHAL or Carlos. K
(3) However, what we are concerned with is whether, where there
L L
is no prior consent in the LOUs, Clause 4 serves as consent by
M
the guarantors that the LOUs remain in place notwithstanding M
the variation.
N N
(4) So, although Mr Deng’s observation is correct, it does not
O
advance matters for present purposes. O
P 47. Secondly, on the issue of reservation of rights: Ps have not P
persuaded me that Clause 4 of the Amendment Agreement would operate
Q Q
R
5
Clause 6 provides: “Pledgee’s Unfettered Rights. The Pledgee shall have complete liberty to vary R
the Loan or any related documents, to enforce or refrain from enforcing any of its rights thereunder,
to release or compromise with the Pledgors thereunder, to take additional security and otherwise to
S do anything under or in connection with the Loan or related documents without affecting or S
prejudicing any of its rights hereunder.”
6
Clause 2.5 provides: “The liabilities of the Guarantor under this Guarantee shall not be affected or
T discharged by: (i) the granting of any time or indulgence to the Borrower by the Lender; or (ii) any T
variation to or modification of the Loan Agreement, Loan Documents or any other document
referred to therein.”
U U
V V
- 20 -
A A
B as a reservation of Ps’ rights as against Carlos and Vincent under the B
LOUs, so as to amount to an exception to the general rule of discharge of
C C
the sureties. Indeed there was really only a bare submission on the point,
D without developed argument. D
E (1) As I understand the rationale for the exception, the reservation E
must operate so that the creditor could enforce any existing
F F
rights under the guarantee, allowing the guarantor to sue the
G principal debtor. G
(2) In this case, Clause 4 of the Amendment Agreements, even on
H H
the Ps’ construction, provides for the continuation of the
I LOUs, where liability thereunder is only triggered by an I
exercise of the right under Clause 7.2 of the Loan Agreements
J J
to give notice of default and a failure by D1 to pay within
K
15 days thereafter. If the variation of the Loan Agreements K
means that there is no notice of event of default, then there are
L no rights against the sureties which have been reserved. L
M
(3) This is to be contrasted with the hypothetical situation of the M
variation agreement effectively providing that the creditor can
N immediately pursue the surety as if there were no variation of N
the principal contract.
O O
P 48. Accordingly, it seems to me to be at least arguable that Carlos P
was discharged from liability under the LOUs by the Amendment
Q Q
Agreements.
R R
49. What then is the impact on Vincent’s liability under the
S S
LOUs?
T T
U U
V V
- 21 -
A A
B 50. It seems clear that if Carlos and Vincent are jointly liable B
under the LOUs, then discharge of Carlos’ liability would affect Vincent’s
C C
ability to seek a contribution from Carlos and accordingly also discharge
D Vincent as co-surety. D
E E
51. Mr Chan SC did not suggest that I was in a position to
F determine whether the LOUs gave rise to joint or joint and several F
liabilities of Carlos and Vincent. He gamely attempted a hypothetical
G G
analysis of the potential ownership structure of the Guangzhou Property by
H reference to Hong Kong law principles of succession and property law, but H
I do not find that to be of assistance.
I I
J 52. It therefore seems to me to be a triable issue as to whether the J
liabilities of Carlos and Vincent under the LOUs were joint (in which case,
K K
the discharge of Carlos would serve to discharge Vincent), or joint and
L several (in which case, there is an issue of law to be considered as to L
Vincent’s liability).
M M
N 53. Mr Chan submitted that it would be wrong for Vincent to N
benefit from the discharge of Carlos when Vincent consented to the
O O
variations on his own behalf and knew that Carlos’ interest was
P unrepresented. Mr Chan did not cite any authority in support. Indeed P
Q
his submission seems to run contrary to Polak v Everett. Although Q
Vincent consented on his own behalf, Vincent did not represent Carlos’
R R
interest and it was not Vincent’s duty to warn P1 that without obtaining
S
Carlos’ consent, there was a risk of discharge of the LOUs. S
T T
U U
V V
- 22 -
A A
B 54. Accordingly, I find that Vincent has an arguable defence to Ps’ B
claim under the LOUs. Insofar as I deal with the availability of specific
C C
performance of the LOUs below, I do so for completeness’ sake only.
D D
SPECIFIC PERFORMANCE
E E
55. The elements for the relief of specific performance are (1) that
F F
there is a complete, binding and valid contract (2) that the contractual
G terms are sufficiently certain and (3) that damages are not an adequate G
remedy. See Ma, Equity and Trusts Law in Hong Kong (2014) at
H H
para 23-4.
I I
56. I understood Mr Deng to dispute Ps’ entitlement to specific
J J
performance on the basis that damages would be an adequate remedy. In
K the context of the IHAL Share Pledge Agreements, Mr Deng also argued K
that there was no need for an order of specific performance in light of the
L L
factual circumstances (considered further below).
M M
57. There has been a growing tendency by the courts not to treat
N N
the adequacy of damages as a necessary threshold to surpass, but rather to
O ask the ultimate question of whether it would be more just to grant specific O
performance than to award damages. See Spry, The Principles of Equitable
P P
Remedies (2014) at 62-63.
Q Q
58. If the subject-matter of the contract is shares of a company,
R R
and if it would be problematic and difficult to assess the value of the shares
S at the present stage, and thus the damages which might be awarded, then S
damages would not be an adequate remedy and specific performance
T T
should be ordered. See Advertasia Street Furniture Ltd v China Outdoor
U U
V V
- 23 -
A A
B Media Investment (Hong Kong) Co Ltd (HCCL 145/1999, 8 October 2004) B
at paras 57-58 (Stone J); and Evans Marshall & Co Ltd v Bertola SA
C C
[1973] 1 WLR 349 (EWCA) at 380C (Sachs LJ).
D D
59. Where there is a risk that the defendant will be unable to
E E
satisfy an order for damages (eg the defendant has an unknown financial
F status), that would in and of itself be enough to justify the conclusion that F
damages are inadequate. See Evans Marshall & Co Ltd v Bertola
G G
SA (1973) at 380H-381B (Sachs LJ).
H H
60. As to the LOUs, there is at present no evidence of the value or
I I
nature of the Guangzhou Property. Ps’ written submissions asserted that
J Vincent, inter alia, would not be able to repay the loan debts, so that he J
would not be good for damages. Mr Deng did not, I think, dispute this.
K K
L 61. As to the IHAL Share Pledge Agreements, Mr Deng argued L
that the court should not make an order that would serve no purpose. He
M M
submitted that where D2 owned 95% of the IHAL shares, and Vincent
N owned 5%, and receivers had been appointed to manage D2’s IHAL N
shares, then Ps could recover their debt from the 95% interest, and specific
O O
performance of the pledge over Vincent’s 5% would only be more trouble
P for the court (in terms of directions and supervision), and be superfluous. P
Q
I am unable to accept that submission. As Mr Chan SC responded, the Q
5% interest must necessarily have value of its own. Indeed, one can see
R R
that a realisation of 100% of a private company may well be more
S
attractive than the 95% stake, with a sitting 5% minority shareholder. S
T T
U U
V V
- 24 -
A A
B 62. I see no reason why there should not be an order for specific B
performance of the IHAL Share Pledge Agreements.
C C
D ORDER D
E 63. Accordingly, I order as follows: E
F (1) leave to Ps to amend the prayer of the ASOC to claim specific F
performance of the IHAL Share Pledge Agreements against
G G
Vincent, with costs of and incidental to the amendment to
H
Vincent; H
(2) as against D4, specific performance of the FSCL Share Pledge
I I
Agreements with costs to Ps;
J (3) as against D6, specific performance of the Shanghai Bund J
Share Pledge Agreements with costs to Ps;
K K
(4) as against Vincent, specific performance of the IHAL Share
L Pledge Agreements; L
M
(5) leave to Vincent to defend the claim for specific performance M
of the LOUs; and
N N
(6) liberty to the Plaintiffs to apply for directions in respect of the
O
specific performance ordered under paras (2), (3) and (4) O
above.
P P
64. As to costs:
Q Q
(1) The costs orders made above are nisi.
R R
(2) The costs of the claims in respect of the LOUs and IHAL
S Share Pledge Agreements are to be determined following S
written submissions. I note that the evidence filed in support
T T
of the 2nd Summary Judgment Summons was largely
U U
V V
- 25 -
A A
B B
irrelevant by the time of the hearing because the initial dispute
C
apparently related to the indebtedness of D1, which was not C
argued at the hearing. However, the bulk of the hearing was
D concerned with the issue of discharge of the guarantee D
liabilities under the LOUs, in which the Ps were unsuccessful.
E E
(3) Insofar as the parties to seek to challenge the orders nisi, or
F make submissions as to the balance of the costs on the F
2nd Summary Judgment Summons, then they should provide
G G
brief written submissions within 14 days, with submissions in
H answer 14 days thereafter. H
(4) Certificate for two counsel is granted in any event.
I I
J J
K K
L (R Ismail) L
Deputy High Court Judge
M M
Mr Edward Chan SC and Mr Hugh Kam, instructed by Oldham Li & Nie,
N N
for the 1st and 2nd plaintiffs
O Mr Earl Deng and Mr Au Lut Chi, instructed by Tsang, Chan & Woo, O
for the 3rd defendant
P P
th
The 4 defendant was not represented and did not appear
Q Q
The 6th defendant was not represented and did not appear
R R
S S
T T
U U
V V
PACIFIC HARBOR ADVISORS PTE LTD AND ANOTHER v. WINSON FEDERAL LTD AND OTHERS
A A
HCA 1257/2013
B B
IN THE HIGH COURT OF THE
C C
HONG KONG SPECIAL ADMINISTRATIVE REGION
D
COURT OF FIRST INSTANCE D
HIGH COURT ACTION NO 1257 OF 2013
E ____________________ E
F BETWEEN F
G
PACIFIC HARBOR ADVISORS PTE LTD 1st Plaintiff G
PACIFIC HARBOUR SPECIAL 2nd Plaintiff
H HOLDINGS LIMITED H
I and I
J WINSON FEDERAL LIMITED 1st Defendant J
FREDERICK, KAN KA CHONG 2nd Defendant
K (in his capacity as the executor of the K
Estate of Cho Yuk Kei Carlos)
L L
CHO WOON MING VINCENT 3rd Defendant
M INTERNATIONAL HOTELIERS & 4th Defendant M
ASSOCIATES LIMITED
N N
UP SPEED INVESTMENTS LIMITED 5th Defendant
O O
RANMARK INVESTMENTS LIMITED 6th Defendant
P FURAMA (SHENYANG) COMPANY 7th Defendant P
LIMITED
Q
____________________ Q
R R
Before: Deputy High Court Judge R Ismail SC in Chambers
S Date of Hearing: 11 November 2015 S
Date of Decision: 19 November 2015
T T
U U
V V
- 2 -
A A
B B
DECISION
C C
INTRODUCTION
D D
1. This is the plaintiffs’ second summary judgment application
E E
in this action (“the 2nd Summary Judgment Summons”).
F F
2. The plaintiffs (“Ps”), by this action, seek to make recovery in
G G
respect of two loans made in 2008, whether by way of repayment from the
H borrower (D1), or pursuant to security provided by D2 to D7. H
I I
3. As to the parties, at the material times:
J J
(1) Ps are a Singapore company and BVI company respectively,
each carrying on business as an investment fund. P1 made
K K
the relevant loans to D1 in 2008, and P2 agreed to
L sub-participate in part of the 2nd loan in about 2011. L
M
(2) D1 is a Hong Kong company to which P1 made the loans. M
At the time of the loans being made, the shareholders of D1
N were Carlos Cho (“Carlos”) and D5. Carlos was a director N
of D1 until his death on 14 November 2008.
O O
(3) Probate in respect of Carlos’ estate has been granted to D2,
P who is sued in his capacity as executor of Carlos’ estate. P
Q
(4) D3, Vincent Cho (“Vincent”), is the son of Carlos. Vincent Q
was director of D1 until 19 June 2013.
R R
(5) D4 (“IHAL”) is a Hong Kong company whose registered
S shareholders were Carlos as to 95% and Vincent as to 5%. S
IHAL has a 79% stake in D7 (“FSCL”), which indirectly
T owns the Shenyang Property. T
U U
V V
- 3 -
A A
B B
(6) D5 is a BVI company 100% owned by Carlos. It was a
C
shareholder in D1 and D6. C
(7) D6 (“RIL”) is a Hong Kong investment holding company of
D D
which Carlos and D5 were equal shareholders. RIL owns
E
90% of a PRC company, Shanghai Bund Park Lane Shoppers’ E
Plaza Co Ltd (“Shanghai Bund”).
F F
(8) D7 (FSCL) is a BVI investment holding company of which
G Carlos and IHAL were shareholders as to 21% and 79% G
respectively. FSCL owns 100% of a PRC company which
H holds the Shenyang Property. H
I I
4. The first summary judgment application was for monetary
J judgment and was heard and decided in Ps’ favour by DHCJ B. Chu (as J
she then was) on 10 June 2014 (“the 1st Summary Judgment”). The
K K
substance of the order made at that time was for D1 and D2 to pay
L US$38 million plus interest. No order was sought against Vincent at the L
1st Summary Judgment application, but he was served with the summons,
M M
he filed evidence on his own behalf and he participated in the hearing with
N legal representation. N
O O
5. On 26 May 2015, Vincent took out a summons for leave to
P appeal the 1st Summary Judgment out of time. Extension of time was P
sought on the basis of fresh evidence in the form of a taped telephone
Q Q
conversation on 4 May 2015. The application was dismissed by the
R Court of Appeal by its judgment dated 21 August 2015 (the “Leave R
Judgment”).
S S
T 6. This 2nd Summary Judgment Summons was taken out by Ps T
on 9 February 2015 against Vincent, D4 (IHAL) and D6 (RIL).
U U
V V
- 4 -
A A
B B
(1) The 2nd Summary Judgment Summons seeks final judgment
C
for the relief claimed in the Amended Statement of Claim and C
st
costs, save for the relief already granted in the 1 Summary
D Judgment. D
E
(2) However, on this application I was informed that the only E
relief being presently pursued were the following orders for
F specific performance: F
G (i) against Vincent, of the two letters of undertaking dated G
2 June 2008 (“LOUs”), and the two IHAL share pledge
H agreements dated 2 June 2008; H
I (ii) against D4, of the FSCL share pledge agreements dated I
2 June 2008; and
J J
(iii) against D6, of the two Shanghai Bund share pledge
K agreements. (These agreements will be considered K
further below.)
L L
RELEVANT BACKGROUND AND DOCUMENTS
M M
7. The background to this matter, and the defences raised in the
N N
1st Summary Judgment Application, are thoroughly addressed in the
O 1st Summary Judgment. However, I will briefly address the relevant O
background facts and documents for the purposes of this application
P P
below.
Q Q
8. On 2 June 2008, Ps and/or one or more of the Ds executed
R R
documentation relating to loan facilities totalling US$40 million,
S including. S
T T
U U
V V
- 5 -
A A
B B
(1) Loan Agreement for a loan facility of US$10 million by P1 to
C
D1, with a repayment date of 2 June 2009 (“1st Loan C
Agreement”).
D D
(2) Loan Agreement for a loan facility f US$30 million by P1 to
E
D1, with a repayment date of 2 June 2009 (“2nd Loan E
Agreement”).
F F
(3) Two letters of undertaking (“LOUs”) (in respect of each of the
G 1st and 2nd Loan Agreements). Each LOU was given by both G
Carlos and Vincent, and promised (in certain circumstances)
H to sell a property they owned (“the Guangzhou Property”) and H
apply the net proceeds of sale to satisfy the loans.
I I
(4) Eight share pledge agreements, including:
J J
(i) Two agreements by Carlos and Vincent to pledge the
K shares of D4 (IHAL) as security for the 1 st and 2nd Loan K
Agreements (“the IHAL Share Pledge Agreements”);
L L
(ii) Two agreements by D4 (IHAL) to pledge the shares of
M D7 (“FSCL”) as security for the 1st and 2nd Loan M
Agreements (“the FSCL Share Pledge Agreements”);
N N
and
O (iii) Two agreements by D6 (RIL) to pledge the shares of O
st nd
Shanghai Bund as security for the 1 and 2 Loan
P P
Agreements (“the Shanghai Bund Share Pledge
Agreements”).
Q Q
(5) Two personal guarantees by Carlos.
R R
(6) Two corporate guarantees by D7.
S S
9. Carlos died on 14 November 2008.
T T
U U
V V
- 6 -
A A
B 10. D1 was unable to make repayment of the outstanding loan B
debt of US$38 million pursuant to the 1st and 2nd Loan Agreements. By
C C
two agreements dated 2 June 2009 (albeit signed thereafter), P1 and D1
D agreed to amend the terms of the 1st and 2nd Loan Agreements to (1) extend D
the repayment date (2) vary the interest terms (“the 1st and 2nd Amendment
E E
st nd
Agreements” respectively). D1 entered the 1 and 2 Amendment
F F
Agreements by its director, Vincent.
G G
11. By solicitors’ letter dated 31 May 2013, Ps stated that an
H event of default under Clause 7.1 of the Loan Agreements had occurred, H
demanding immediate repayment of the loans, interest and other amounts
I I
apparently accrued under the Loan Agreements. I am not aware of any
J J
earlier notice of event of default under Clause 7.2 of the Loan Agreements
K
(in particular, any Clause 7.2 notice prior to the Amendment Agreements). K
L SUMMARY JUDGMENT — RELEVANT PRINCIPLES L
M 12. There was no dispute as to the applicable legal principles. M
N (1) Leave to defend should be given where the defendant raises N
any substantial question of fact which ought to be tried, or
O O
there is a fair dispute to be tried as to the meaning of the
P document on which the claim is based: Hong Kong Civil P
Procedure 2016, para 14/4/11, pp 272.
Q Q
(2) Leave to defend should be given where a difficult question of
R law is raised: Hong Kong Civil Procedure 2016, para 14/4/12, R
pp 272.
S S
(3) “House of Lords points” should be left to mature
T consideration at trial: Citic Ka Wah Bank Ltd v Lau Kam Luen T
[2008] 2 HKLRD 167.
U U
V V
- 7 -
A A
B D4 AND D6 B
C 13. I can dispose of the applications against D4 and D6 briefly. C
Each of D4 and D6 have by letters dated 27 August 2015 addressed to the
D D
court stated, by reference to the 2 nd Summary Judgment Summons, that
E they do not object to summary judgment and the relief sought against them E
in the ASOC (which is the relief claimed today). Accordingly, those
F F
orders for specific performance will be granted.
G G
D3/VINCENT
H H
14. The plaintiffs made an application to amend the prayer of
I I
their Amended Statement of Claim, in order to claim specific performance
J of the IHAL Share Pledge Agreements against Vincent. Although the J
plaintiffs had pleaded the facts they claimed to be necessary to make a
K K
claim against Vincent for specific performance of the IHAL Share Pledges,
L such a claim was omitted from the prayer. I agree with L
Mr Edward Chan SC for the plaintiffs, leading Hugh Kam, that this is a
M M
technical matter. Counsel for Vincent, Mr Earl Deng leading Au Lut Chi,
N did not object to the amendment. I accordingly allow an amendment to N
the prayer as proposed by Mr Chan SC in oral submissions (without a draft
O O
amendment being produced) to add the following words to the prayer
P “AGAINST CARLOS AND/OR VINCENT” before “(2) Specific P
Q
performance of the IHAL Share Pledge Agreements”. The plaintiffs’ Q
solicitors are directed to effect such amendment. The costs of and
R R
incidental to the amendment are to Vincent, to be taxed if not agreed.
S S
nd
15. The evidence filed in support of the 2 Summary Judgment
T Summons is the 7th affidavit of Warren Allderige on behalf of the plaintiffs, T
U U
V V
- 8 -
A A
B the 5th affidavit of Vincent in opposition, and the 12th affidavit of B
Warren Allderige in reply. The evidence suggests that Vincent would be
C C
disputing the indebtedness of D1 as primary debtor in order to defend the
D claims made against him. Such evidence was filed before the Leave D
Judgment. By the time of the service of the skeleton arguments, it was
E E
clear that (in my view, sensibly), Vincent was not disputing the
F F
indebtedness of D1 for present purposes.
G G
st
16. I am satisfied, by virtue of the 1 Summary Judgment, that D1
H is indebted to Ps. H
I I
17. I am satisfied that Carlos and Vincent provided the LOUs to
J P1: J
K (1) The LOU in respect of the 1st Loan Agreement (“the 1st LOU”) K
provides:
L L
“We, [Carlos] and [Vincent], refer to:
M M
(a) [the 1st Loan Agreement].
N (b) All related agreements, undertakings, and understandings to N
the [1st] Loan Agreement.
O … O
By virtue of this Letter and in consideration of Lender’s [P1’s]
P entry of the [1st] Loan Agreement with Borrower [D1], the P
undersigned hereby:
Q Q
(1) confirm that we are the owners of … (“the Guangzhou
Property”)…
R R
(2) undertake with you that should you exercise your right
under Clause 7.2 of the above [1 st] Loan Agreement and that
S the Borrower fails to repay all monies outstanding under the S
terms of the above [1 st] Loan Agreement within 15 days of
T the receipt of the notice mentioned in the said Clause 7.2, T
we shall sell the Guangzhou Property in accordance with the
terms of the above [1 st] Loan Agreement and pay the net
U U
V V
- 9 -
A A
B proceeds of sale to you to satisfy the monies outstanding by B
the Borrower [D1] as aforesaid.”
C C
(2) The 2nd LOU is in identical terms save that it refers to the
2nd Loan Agreement.
D D
E 18. I am also satisfied that the IHAL Share Pledge Agreements E
were provided to P1 by Carlos and Vincent as pledgors:
F F
(1) The 1st IHAL Share Pledge Agreement (in respect of the
G G
1st Loan Agreement) provides:
H (i) Carlos owns 95% and Vincent owes 5% of the issued H
shares of IHAL.
I I
(ii) Carlos and Vincent pledge the IHAL shares in favour of
J P1 as security for all moneys from time to time owing J
to P1 under the 1st Loan Agreement.
K K
(iii) Carlos and Vincent shall, immediately upon demand by
L P1, do all acts necessary or desirable to ensure the L
perfection of the pledge.
M M
(iv) In the Event of Default (including any default under the
N 1st Loan Agreement) and at the request of P1, the IHAL N
shares shall be sold by Carlos and Vincent in the open
O O
market at the then current market value or higher to
P settle D1’s obligations and duties under the 1st Loan P
Agreement.
Q Q
(2) The 2nd IHAL Share Pledge Agreement is in identical terms
R save that it refers to the 2nd Loan Agreement. R
S S
19. Ps, having established the outstanding primary indebtedness
T of D1, and the obligations of Vincent under the LOUs and the IHAL Share T
Pledge Agreements (there being no dispute that the relevant demands have
U U
V V
- 10 -
A A
B been made and notices given), are prima facie entitled to the relief they B
seek against Vincent. The burden shifts to Vincent to establish an
C C
arguable defence.
D D
20. Vincent argues that there should be no specific performance
E E
of the LOUs on the following grounds:
F F
(1) Vincent’s liability as a guarantor under the LOUs has been
G discharged. G
(2) In any event, specific performance is not an appropriate
H H
remedy.
I I
21. Vincent argues that there should be no specific performance
J J
of the IHAL Share Pledge Agreements on the basis that specific
K performance is not an appropriate remedy in the circumstances. K
L L
DISCHARGE OF VINCENT AS GUARANTOR
M M
(a) Arguments
N N
22. It is argued on behalf of Vincent that:
O O
(1) The 1st and 2nd Loan Agreements were amended by the
Amendment Agreements after Carlos died, and without the
P P
consent of, or on behalf of, Carlos.
Q Q
(2) Carlos was therefore discharged from his guarantee liability
under the LOUs.
R R
(3) Vincent, as co-surety with Carlos under the LOUs, is
S S
discharged from his liability thereunder by virtue of
T
Carlos’discharge. T
U U
V V
- 11 -
A A
B 23. It is argued on behalf of Ps: B
C (1) It is for Vincent to establish a defence. Although Vincent C
pleaded the discharge of the LOUs’ liabilities by reason of
D D
variation to the 1st and 2nd Loan Agreements, D2 simply
E denied liability without raising the express defence. (I am at E
a loss to understand why D2’s pleaded position should impact
F on Vincent’s case and I say no more about this.) F
G (2) Clause 4 of the Amendment Agreements (as construed by Ps) G
provides for the continuation of the security agreements
H H
provided by D1 in respect of the 1st and 2nd Loan Agreements,
so that there is consent to variation of the 1st and 2nd Loan
I I
Agreements and/or a reservation of rights under the security
J agreements. J
(3) In the absence of evidence as to ownership of the Guangzhou
K K
Property:
L L
(i) If the Guangzhou Property was jointly owned, if one
M
owner dies, then the whole property will be vested in M
the other. Whether or not Carlos’ liability under the
N LOUs was discharged, that will not prejudice Vincent N
because Carlos had nothing to sell. 1
O O
(ii) If the Guangzhou Property was severally owned, as
P tenants in common, and if Ps are right in their P
construction of Clause 4 of the Amendment Agreement,
Q Q
then neither co-surety is discharged, so the co-surety
R point does not arise.2 R
1
This submission does not sit easily with Mr Chan’s submission (correct as it seems to me) that the
S LOU only creates a limited liability to apply the sale proceeds of the Guangzhou Property to D1’s S
debt, rather than a complete guarantee of D1’s liability — if Vincent owned the whole of the
Guangzhou Property, he would be paying 100% of the sale proceeds rather than his share.
T 2
T
Implicit in this submission is the acceptance that Vincent would be prejudiced if the successor to
Carlos’ several interest was discharged from liability under the LOUs.
U U
V V
- 12 -
A A
B B
(4) If Ps are wrong on the construction of Clause 4 of the
C
Amendment Agreement, then Vincent is also estopped from C
claiming that he is discharged as guarantor because of his loss
D of rights against the principal debtor or co-sureties. That is D
(it is said) on the basis that Vincent engineered the change of
E E
position of the principal debtor, he knew Carlos was dead and
F no one represented Carlos’ interest, so he cannot claim the F
benefit of what he has engineered.
G G
(b) Relevant legal principles
H H
24. Mr Chan SC and Mr Deng were largely agreed as to the
I I
applicable legal principles.
J J
25. If obligations under a contract are guaranteed, any variation to
K K
the contract must be agreed by the guarantor, or the creditor must reserve
L his rights against the surety when making the variation agreement, L
otherwise the guarantor will be discharged: Holme v Brunskill (1878) 3
M M
QBD 495 at 505.
N N
26. The rationale for the general rule as to discharge of the surety
O O
is that a variation of the principal contract, for example by way of
P extension of time or release, interferes with the surety’s right to pay off the P
debt and sue the principal debtor: Holme v Brunskill at 505.
Q Q
R 27. The rationale for the exceptions is as follows: R
S (1) If a guarantor agrees to the variation, he has of course agreed S
to the variation of his own rights.
T T
U U
V V
- 13 -
A A
B B
(2) If the creditor (in agreeing a variation with the principal
C
debtor) reserves his rights against the surety, then the C
principal debtor impliedly consents to the surety’s rights
D against him remaining on foot notwithstanding the variation. D
The surety’s rights to pay off the debt and sue the principal
E E
debtor remain intact. Mahant Singh v U Ba Yi [1939]
F AC 601 at 609; Greene King plc v Stanley [2001] EWCA F
Civ 1966 at para 80.
G G
28. The burden of proof is on the creditor seeking to enforce the
H H
guarantee that the guarantor has given consent: O’Donovan & Phillips
I “The Modern Contract of Guarantee” (English edn) at paras 7-56. I
J J
29. Consent to the variations need not be express; it may be
K implied eg where the guarantor requests or instigates the variation and/or K
where the guarantor is a director of the principal debtor company and
L L
negotiates with the creditor for the variation: O’Donovan & Phillips at
M paras 7-59-7-60. M
N N
30. Mere knowledge of the variation is an insufficient basis from
O which to infer consent: O’Donovan & Phillips at para 7-58. O
P P
31. Polak v Everett (1876) 1 QBD 669 at 673 makes clear that if a
Q surety is aware of a proposed variation of the principal contract which Q
might discharge his liability as guarantor, there is no authority for the
R R
proposition that he is under a duty to warn the creditor. Mere knowledge
S of the variation by the surety does not amount to consent to the variation. S
T T
U U
V V
- 14 -
A A
B 32. Where the guarantor is the director of the debtor company B
negotiating for the variations, it would be unrealistic to make an artificial
C C
distinction in terms of his knowledge and consent between the two
D capacities of guarantor and director of the debtor: Beck Interiors Ltd v D
Russo [2009] EWHC 3861 (QB) at para 34; Winstone Ltd v Bourne [1978]
E E
1 NZLR 94 at 96 lines 23-43; German Trade House International Ltd v
F F
Lau Wai Ki [1996] 3 HKC 406 at 411H-412E.
G G
33. As to the impact on a guarantor of the release of a
H co-guarantor, Andrews & Millett “The Law of Guarantees” (7th edn), H
para 9-040 states that:
I I
(1) The rationale underlying the discharge of the surety where the
J J
principal is no longer liable is that the creditor cannot do
K anything to put the rights of the surety in danger. K
Accordingly, where the creditor releases a co-surety who is
L L
jointly or jointly and severally liable, the surety’s rights of
M
contribution and marshalling of securities are prejudiced, and M
the release will discharge the surety in toto, unless remedies
N have been reserved against him. N
O (2) Where one of a number of jointly liable co-sureties is released, O
the remaining co-sureties are wholly discharged. The
P analysis is that since they are jointly liable, release of one is P
release of all. However, the rule that this applies to jointly
Q Q
and severally liable sureties has been doubted by the Court of
R Appeal and must be treated with caution (referring to R
Commercial Bank of Australia v Wilson & Co’s Estate
S S
(Official Assignee) [1893] AC 181).
T T
U U
V V
- 15 -
A A
B 34. I was not referred to Commercial Bank of Australia, nor did B
I hear argument on this area of apparent uncertainty in the law. I do not
C C
begin to consider whether the discharge rule does apply in the joint and
D several liability situation. For present purposes, I assume that there may D
be discharge in the context of joint and several liabilities and that is not a
E E
matter for summary judgment.
F F
(c) Discussion
G G
35. It seems to me that the Amendment Agreements would serve
H H
to discharge the LOUs unless either of the exceptions are established ie:
I I
(1) consent of the guarantor, or
J J
(2) reservation of the creditor’s rights against the guarantor.
K K
36. Vincent, as director of D1 who procured the Amendment
L Agreements, must be taken to have consented to the variations. Mr Deng L
sensibly did not dispute this.
M M
N 37. I have no doubt that if the LOU contained a surety obligation N
of Vincent alone, then Vincent’s liability as surety would remain intact
O O
notwithstanding the Amendment Agreements.
P P
38. Ps rely on Clause 4 of the Amendment Agreements to argue
Q Q
that the LOUs, and the liability of Carlos and Vincent thereunder, remain
R intact. R
S S
39. Clause 4 of the 1st Amendment Agreement provides:
T T
“The Borrower [D1] hereby confirms that any security
agreements it has entered into pursuant to the [1 st] Loan
U U
V V
- 16 -
A A
B Agreement will continue to secure its obligations under the B
[1st] Loan Agreement”.3
C C
40. Mr Deng on behalf of Vincent argues that the said Clause 4
D D
only applies to security agreements entered into by D1. That certainly
E seems to be the literal meaning of Clause 4. In other words, Mr Deng E
argues that Clause 4 of the Amendment Agreement does not apply to the
F F
LOUs and need not be considered.
G G
41. Mr Chan SC on behalf of Ps responds that Clause 4 cannot
H H
properly be read literally, as to do so robs it of any meaning whatsoever.
I That is because if one considers the security agreements to be provided I
under the 1st and 2nd Loan Agreements, none of them were to be entered
J J
into by D1, but D1 was obliged to procure that they all be provided.
K Significantly, Mr Chan SC submits that Clause 4 should be read as K
substituting the words “entered into” with “provided”.
L L
M 42. I now consider it necessary to address Ps’ pleaded case and M
the notice given to Vincent as to Ps’ case on the question of discharge of
N N
liability under the LOUs.
O O
43. Contrary to Ps’ submissions, the burden is on the creditor, Ps,
P P
to establish an exception to the general rule of discharge upon variation of
Q the principal contract. I note that Ps do not appear to have adequately Q
pleaded their case.
R R
S S
T T
3
Clause 4 of the 2nd Amendment Agreement is in identical terms save that it refers to the 2 nd Loan
Agreement.
U U
V V
- 17 -
A A
B B
(1) Although Vincent had expressly pleaded the discharge of the
C
LOUs by reason of the Amendment Agreements, Ps had not C
sought to make any positive plea in reply.
D D
(2) Ps had indeed pleaded the Amendment Agreements in their
E
Amended Statement of Claim including Clause 4 thereof, but: E
(i) they have not pleaded that Clause 4 should be rectified or
F F
construed in a manner other than its literal or natural
G meaning, G
(ii) nor have Ps pleaded that by Clause 4 of the Amendment
H H
Agreements, either (i) Carlos and Vincent had agreed to
I the amendments or (ii) Ps had reserved their rights I
against Carlos and Vincent as guarantors.
J J
(3) Warren Allderige’s 12th affidavit (ie Ps’ reply evidence on the
K 2nd Summary Judgment Summons) stated at para 32 that the K
LOUs were not discharged because of Clause 4 of the
L L
Amendment Agreements4.
M (4) Mr Chan’s skeleton argument submitted that Clause 4 of each M
Amendment Agreement operated as a reservation of rights of
N N
P1 against Carlos and Vincent as guarantors, which would
prevent the Amendment Agreement from operating to
O O
discharge either guarantor.
P P
(5) The express argument that Clause 4 should be construed in a
manner other than its literal meaning only arose in Ps’ oral
Q Q
argument at the hearing. The “construction” argument really
R requires certain words of Clause 4 to be replaced by others. R
S S
4
Warren Allderige’s 12th affidavit para 32 incorrectly set out Clause 4 of the Amendment Agreements,
T transposing the words “security arrangements” for the correct words “security agreements”. Ps’ T
construction argument would be more attractive had the correct wording of Clause 4 been “security
arrangements”.
U U
V V
- 18 -
A A
B B
It might more accurately be described as a rectification
C
argument. C
(6) Whilst Mr Deng did not complain about the lack of notice of
D D
these arguments, it would seem to me to be unsatisfactory for
E
the court to be determining matters on a summary basis that E
have not been properly pleaded or notified, with the resulting
F lack of argument on important matters. F
G (7) If I had thought that the construction argument might arguably G
have got Ps home in their claim under the LOUs, I would
H have been most reluctant to allow it at this stage in light of the H
state of pleadings and inadequate evidence and analysis.
I I
J 44. However, I do not consider it necessary to decide the J
construction point because it does not assist me in deciding whether it is
K K
arguable that either of the two exceptions to the guarantee discharge rule
L apply. L
M M
45. Firstly, on the consent issue, as Mr Deng argued, Clause 4 of
N each Amendment Agreement is effective only between those parties who N
have agreed to it. That must be right.
O O
(1) Vincent did consent to the variations.
P P
(2) There is no question that Carlos did not agree to Clause 4 or
Q any part of the Amendment Agreement, as he had died by that Q
time.
R R
S
46. Also on the consent issue, Mr Deng argued that, unlike other S
documents within the suite of security documentation executed in support
T T
of the 1st and 2nd Loan Agreements, the LOUs did not permit Ps and D1 to
U U
V V
- 19 -
A A
B make any variations to the principal contract without further consent from B
Carlos and Vincent. Mr Deng referred to Clause 6 of the IHAL Share
C C
5 6
Pledge Agreements and Clause 2.5 of Carlos’ personal guarantee to
D make this point good. D
E (1) So, Mr Deng argued, if the parties had intended that the LOUs E
remain intact and enforceable notwithstanding a variation to
F F
the 1st or 2nd Loan Agreements, there would have been an
G equivalent provision in the LOUs. G
(2) I accept that, as far as it goes. The effect of Clause 6 of the
H H
IHAL Share Pledge Agreements, and Clause 2.5 of Carlos’
I personal guarantee, is that the terms of the loans could be I
varied without discharging the IHAL share pledge or Carlos’
J J
personal guarantee, without need for any further agreement
K
from IHAL or Carlos. K
(3) However, what we are concerned with is whether, where there
L L
is no prior consent in the LOUs, Clause 4 serves as consent by
M
the guarantors that the LOUs remain in place notwithstanding M
the variation.
N N
(4) So, although Mr Deng’s observation is correct, it does not
O
advance matters for present purposes. O
P 47. Secondly, on the issue of reservation of rights: Ps have not P
persuaded me that Clause 4 of the Amendment Agreement would operate
Q Q
R
5
Clause 6 provides: “Pledgee’s Unfettered Rights. The Pledgee shall have complete liberty to vary R
the Loan or any related documents, to enforce or refrain from enforcing any of its rights thereunder,
to release or compromise with the Pledgors thereunder, to take additional security and otherwise to
S do anything under or in connection with the Loan or related documents without affecting or S
prejudicing any of its rights hereunder.”
6
Clause 2.5 provides: “The liabilities of the Guarantor under this Guarantee shall not be affected or
T discharged by: (i) the granting of any time or indulgence to the Borrower by the Lender; or (ii) any T
variation to or modification of the Loan Agreement, Loan Documents or any other document
referred to therein.”
U U
V V
- 20 -
A A
B as a reservation of Ps’ rights as against Carlos and Vincent under the B
LOUs, so as to amount to an exception to the general rule of discharge of
C C
the sureties. Indeed there was really only a bare submission on the point,
D without developed argument. D
E (1) As I understand the rationale for the exception, the reservation E
must operate so that the creditor could enforce any existing
F F
rights under the guarantee, allowing the guarantor to sue the
G principal debtor. G
(2) In this case, Clause 4 of the Amendment Agreements, even on
H H
the Ps’ construction, provides for the continuation of the
I LOUs, where liability thereunder is only triggered by an I
exercise of the right under Clause 7.2 of the Loan Agreements
J J
to give notice of default and a failure by D1 to pay within
K
15 days thereafter. If the variation of the Loan Agreements K
means that there is no notice of event of default, then there are
L no rights against the sureties which have been reserved. L
M
(3) This is to be contrasted with the hypothetical situation of the M
variation agreement effectively providing that the creditor can
N immediately pursue the surety as if there were no variation of N
the principal contract.
O O
P 48. Accordingly, it seems to me to be at least arguable that Carlos P
was discharged from liability under the LOUs by the Amendment
Q Q
Agreements.
R R
49. What then is the impact on Vincent’s liability under the
S S
LOUs?
T T
U U
V V
- 21 -
A A
B 50. It seems clear that if Carlos and Vincent are jointly liable B
under the LOUs, then discharge of Carlos’ liability would affect Vincent’s
C C
ability to seek a contribution from Carlos and accordingly also discharge
D Vincent as co-surety. D
E E
51. Mr Chan SC did not suggest that I was in a position to
F determine whether the LOUs gave rise to joint or joint and several F
liabilities of Carlos and Vincent. He gamely attempted a hypothetical
G G
analysis of the potential ownership structure of the Guangzhou Property by
H reference to Hong Kong law principles of succession and property law, but H
I do not find that to be of assistance.
I I
J 52. It therefore seems to me to be a triable issue as to whether the J
liabilities of Carlos and Vincent under the LOUs were joint (in which case,
K K
the discharge of Carlos would serve to discharge Vincent), or joint and
L several (in which case, there is an issue of law to be considered as to L
Vincent’s liability).
M M
N 53. Mr Chan submitted that it would be wrong for Vincent to N
benefit from the discharge of Carlos when Vincent consented to the
O O
variations on his own behalf and knew that Carlos’ interest was
P unrepresented. Mr Chan did not cite any authority in support. Indeed P
Q
his submission seems to run contrary to Polak v Everett. Although Q
Vincent consented on his own behalf, Vincent did not represent Carlos’
R R
interest and it was not Vincent’s duty to warn P1 that without obtaining
S
Carlos’ consent, there was a risk of discharge of the LOUs. S
T T
U U
V V
- 22 -
A A
B 54. Accordingly, I find that Vincent has an arguable defence to Ps’ B
claim under the LOUs. Insofar as I deal with the availability of specific
C C
performance of the LOUs below, I do so for completeness’ sake only.
D D
SPECIFIC PERFORMANCE
E E
55. The elements for the relief of specific performance are (1) that
F F
there is a complete, binding and valid contract (2) that the contractual
G terms are sufficiently certain and (3) that damages are not an adequate G
remedy. See Ma, Equity and Trusts Law in Hong Kong (2014) at
H H
para 23-4.
I I
56. I understood Mr Deng to dispute Ps’ entitlement to specific
J J
performance on the basis that damages would be an adequate remedy. In
K the context of the IHAL Share Pledge Agreements, Mr Deng also argued K
that there was no need for an order of specific performance in light of the
L L
factual circumstances (considered further below).
M M
57. There has been a growing tendency by the courts not to treat
N N
the adequacy of damages as a necessary threshold to surpass, but rather to
O ask the ultimate question of whether it would be more just to grant specific O
performance than to award damages. See Spry, The Principles of Equitable
P P
Remedies (2014) at 62-63.
Q Q
58. If the subject-matter of the contract is shares of a company,
R R
and if it would be problematic and difficult to assess the value of the shares
S at the present stage, and thus the damages which might be awarded, then S
damages would not be an adequate remedy and specific performance
T T
should be ordered. See Advertasia Street Furniture Ltd v China Outdoor
U U
V V
- 23 -
A A
B Media Investment (Hong Kong) Co Ltd (HCCL 145/1999, 8 October 2004) B
at paras 57-58 (Stone J); and Evans Marshall & Co Ltd v Bertola SA
C C
[1973] 1 WLR 349 (EWCA) at 380C (Sachs LJ).
D D
59. Where there is a risk that the defendant will be unable to
E E
satisfy an order for damages (eg the defendant has an unknown financial
F status), that would in and of itself be enough to justify the conclusion that F
damages are inadequate. See Evans Marshall & Co Ltd v Bertola
G G
SA (1973) at 380H-381B (Sachs LJ).
H H
60. As to the LOUs, there is at present no evidence of the value or
I I
nature of the Guangzhou Property. Ps’ written submissions asserted that
J Vincent, inter alia, would not be able to repay the loan debts, so that he J
would not be good for damages. Mr Deng did not, I think, dispute this.
K K
L 61. As to the IHAL Share Pledge Agreements, Mr Deng argued L
that the court should not make an order that would serve no purpose. He
M M
submitted that where D2 owned 95% of the IHAL shares, and Vincent
N owned 5%, and receivers had been appointed to manage D2’s IHAL N
shares, then Ps could recover their debt from the 95% interest, and specific
O O
performance of the pledge over Vincent’s 5% would only be more trouble
P for the court (in terms of directions and supervision), and be superfluous. P
Q
I am unable to accept that submission. As Mr Chan SC responded, the Q
5% interest must necessarily have value of its own. Indeed, one can see
R R
that a realisation of 100% of a private company may well be more
S
attractive than the 95% stake, with a sitting 5% minority shareholder. S
T T
U U
V V
- 24 -
A A
B 62. I see no reason why there should not be an order for specific B
performance of the IHAL Share Pledge Agreements.
C C
D ORDER D
E 63. Accordingly, I order as follows: E
F (1) leave to Ps to amend the prayer of the ASOC to claim specific F
performance of the IHAL Share Pledge Agreements against
G G
Vincent, with costs of and incidental to the amendment to
H
Vincent; H
(2) as against D4, specific performance of the FSCL Share Pledge
I I
Agreements with costs to Ps;
J (3) as against D6, specific performance of the Shanghai Bund J
Share Pledge Agreements with costs to Ps;
K K
(4) as against Vincent, specific performance of the IHAL Share
L Pledge Agreements; L
M
(5) leave to Vincent to defend the claim for specific performance M
of the LOUs; and
N N
(6) liberty to the Plaintiffs to apply for directions in respect of the
O
specific performance ordered under paras (2), (3) and (4) O
above.
P P
64. As to costs:
Q Q
(1) The costs orders made above are nisi.
R R
(2) The costs of the claims in respect of the LOUs and IHAL
S Share Pledge Agreements are to be determined following S
written submissions. I note that the evidence filed in support
T T
of the 2nd Summary Judgment Summons was largely
U U
V V
- 25 -
A A
B B
irrelevant by the time of the hearing because the initial dispute
C
apparently related to the indebtedness of D1, which was not C
argued at the hearing. However, the bulk of the hearing was
D concerned with the issue of discharge of the guarantee D
liabilities under the LOUs, in which the Ps were unsuccessful.
E E
(3) Insofar as the parties to seek to challenge the orders nisi, or
F make submissions as to the balance of the costs on the F
2nd Summary Judgment Summons, then they should provide
G G
brief written submissions within 14 days, with submissions in
H answer 14 days thereafter. H
(4) Certificate for two counsel is granted in any event.
I I
J J
K K
L (R Ismail) L
Deputy High Court Judge
M M
Mr Edward Chan SC and Mr Hugh Kam, instructed by Oldham Li & Nie,
N N
for the 1st and 2nd plaintiffs
O Mr Earl Deng and Mr Au Lut Chi, instructed by Tsang, Chan & Woo, O
for the 3rd defendant
P P
th
The 4 defendant was not represented and did not appear
Q Q
The 6th defendant was not represented and did not appear
R R
S S
T T
U U
V V