Ding Huirong v China Times Securities Ltd

HCA 365/2018

[2020] HKCFI 376

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 365 OF 2018

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DECISION

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INTRODUCTION

1. This case concerns a parcel of shares (“the Shares”), namely 19,112,000 issued shares in Billion Industrial Holdings Limited (“Billion Industrial”), a company listed on the Main Board of the Stock Exchange of Hong Kong (stock code 2299).

2. The plaintiff was the owner of the Shares. According to his pleaded case, sometime in 2017, he was interested in borrowing funds, using the Shares as collateral. As a result, through arrangements made by intermediaries, he, as the borrower, signed a Non-Recourse Loan and Securities Pledge Agreement effective as of 20 April 2017 (“the LC3 Loan Agreement”), with the lender being LC 3 Inc (“LC3”).

3. Under the LC3 Loan Agreement, LC3 agreed to make a loan of up to US$50,000,000 to the plaintiff, and provided that the plaintiff was to open an account with the 1^st defendant “to hold Listco Securities of the Borrower”. Such an account was called the “Borrower Securities Account” and “Listco Securities” were the shares in Billion Industrial owned by the plaintiff. The plaintiff did open an account with the 1^st defendant, a securities dealer licensed by the Securities and Futures Commission, by various documents dated 2 May 2007 (“the Account”).

4. The LC3 Loan Agreement contained various provisions concerning the “Pledged Securities” provided by the plaintiff as general and continuing security for the due, prompt and complete performance by the plaintiff of his obligations thereunder, being the Listco Securities delivered to the Borrower Securities Account, together with:

“all substitutions, additions and proceeds thereof, all dividends, interest, income, revenue, return of capital or other distributions made in respect thereof and all rights and claims of the Borrower in respect of the foregoing or evidenced thereby”.

5. On 8 May 2017, the plaintiff transferred the Shares to the Account[1].

6. On 3 June 2017, the plaintiff received a “Funding Notice”. The Funding Notice referred to a “Secured Loan and Pledge Agreement dated June 1, 2017 between [the plaintiff], as Borrower, and Adam International Limited, as Lender”, to the “Total Collateral” as “19,112,000 pledged shares of 2299.HK”, and to the total amount of the loan of approximately US$6,400,000, available in four tranches. The net fund provided, after deductions, was HK$11,946,099, with the “Tranche Shares” involved being 4,778,000 (exactly a quarter of the total collateral).

7. The sum of HK$11,946,099 was credited to the Account on 9 June 2017. In the statement dated 9 June 2017 of the Account, the description of this sum was “Transfer from 810220 Adam International Investment Limited”.

8. It will have been noted that while the plaintiff says that the lender with which he contracted was LC3, and has produced a copy of the LC3 Loan Agreement before me, the Funding Notice refers to a loan agreement of a different date, with the lender being “Adam International Limited” (“AIL”) rather than LC3, while the statement of the Account refers to the provider of the first tranche to be “Adam International Investment Limited”. While the plaintiff does not deny receiving the Funding Notice, or the HK$11,946,099 in the Account, he says that at the time he did not pay attention to the identity of the entity with which he contracted, or the lender on the Funding Notice, which he assumed was the contracting counterpart. At all times he was dealing with the lender through intermediaries.

9. The question of the identity of the lender which contracted with the plaintiff is a matter of dispute in this case. While the plaintiff says that it was LC3, it is the defendants’ case that it was the 2^nd defendant, Adam International Investments Limited[2] (“AIIL”), which had entered into (i) a loan agreement dated 1 June 2017 (“the Adam Loan Agreement”), which contained a Promissory Note, a “Pledge Agreement” and a “Pledge Addendum”, with the plaintiff, and (ii) a Collateral Agency Agreement therefor of the same date (“the Adam CAA”) with the plaintiff and the 1^st defendant. However, as in the Funding Notice, the lender was referred to in those documents as “Adam International Limited”, and not “Adam International Investments Limited”. It is AIIL’s case that those were mistakes: the entity concerned was AIIL but was misstated to be “Adam International Limited” because of a miscommunication between it and its attorney at the time.

10. The plaintiff denies ever dealing with or signing any agreements with AIL or AIIL, and alleges that the signatures purporting to be his on the Adam Loan Agreement and the Adam CAA were forged.

11. After the first tranche of funds was received by the plaintiff, he says he repeatedly reminded the intermediary to liaise with the lender to make available the remainder of the loan, but to no avail. Frustrated, he wanted to terminate the loan. On 11 July 2017, the plaintiff’s assistant sent an email to the 1^st defendant and a firm of lawyers said to represent the lender to give notice of termination of the loan. The email asked for a return of the 14,334,000 shares in Billion Industrial which had not been pledged, and, as for the 4,778,000 shares pledged:

“we would like to see if there is any solution to cancel this loan”.

12. However, on 6 July 2017, apparently a Notice was issued (“the Notice”[3]). AIIL says that it sent the Notice to the plaintiff and his associates (which he denies) and a copy thereof to the 1^st defendant. Relying on an event of default stated in Clause 6(a)(15) of the Adam Loan Agreement[4], the Notice stated:

“Based on the foregoing, pursuant to Section 6(b)(2) of the Loan Agreement the Lender has the right to exercise all rights with respect to the Collateral as if it were the sole and absolute owner thereof, without limitation to any and all other rights set forth under Section 6(b) of the Loan Agreement”.

13. In response to the email from the plaintiff purporting to cancel the loan, on 13 July 2017, AIIL sent a letter to the plaintiff.[5] The letter referred to a Loan Agreement dated 1 June 2017 between AIIL as “the Lender” and the plaintiff as “the Borrower”, and stated:

“We received your correspondence in connection with the above-referenced Loan Agreement regarding your desire to have collateral returned to you and/or cancel the loan.

We reiterate from our last communication: there were unambiguous defaults by the Borrower, including without limitation the Borrower attempting to incur indebtedness for borrowed money secured by shares of Common Stock. As you know, this as an extremely material issue for us and the reason we had originally contemplated holding your additional shares in a separate account. This was a very risky non-recourse loan we made were all we had to look for repayment was the collateral, and we trusted you not to harm us by dealing with the shares. Instead you flagrantly violated your commitment to us. Given the time of the breach we suspect you fraudulently induced us into making this loan by misrepresenting your intentions with respect to other loans.

Therefore, we find it unconscionable after your egregious actions that you would seek to benefit from this behavior. In conformance with and as explicitly permitted by the Loan Agreement, the Borrower’s Events of Default resulted in the Lender taking full control and possession of the applicable stock, and the Borrower can expect any actions in contravention of such to be met with a vigorous response for which the Lender will hold it liable for all costs and expenses. We sincerely hope you dispense with this fruitless exercise”.[6]

14. In the statement for the Account dated 10 July 2017 issued by the 1^st defendant, it was stated that the Shares were still there, with a market value of HK$103,969,280. There was, however, the following notation:

“We have received a notice from Adam International Investment Limited (‘Adam’) that an Event of Default has occurred. Pursuant to the collateral agency agreement, Adam now has full and exclusive control and ownership of all the shares in this account”.

Even though the plaintiff had only been provided with HK$11,946,099 and notwithstanding the terms of the Funding Notice which referred only to 4,778,000 of the Shares as “Tranche Shares”, it is clear that AIIL was purporting to take control and ownership of the entire 19,112,000 shares.

15. By this action, the plaintiff makes various claims against the 1^st defendant and AIIL for fraud and deceit in common law, securities fraud contrary to the Securities and Futures Ordinance[7], conversion, and breaches of the Money Lenders Ordinance[8], and against the 1^st defendant for breach of agreement and breach of duty. Further or alternatively, the plaintiff claims against the 1^st defendant and AIIL relying on his right in equity to redeem the Shares. Reliefs sought include the delivery up of the Shares and dividends and tracing claims in relation to the Shares and dividends. Without setting out in detail the pleaded answers to the plaintiff’s claims by the 1^st defendant and AIIL, in summary they deny all allegations of wrongdoing.

16. One can immediately see that there are many disputed issues between the parties which can only be resolved by a full trial. However, by a Summons dated...