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Luso International Banking Ltd v Integrity Fund Ltd Partnership And Others

Judgment Cited authorities 3 Cited in Precedent Map Related
Vincent
JurisdictionHong Kong
Judgment Date23 November 2023
Neutral Citation[2023] HKCFI 2936
Subject MatterCivil Action
Judgement NumberHCA1548/2022
Year2023
HCA1548/2022 LUSO INTERNATIONAL BANKING LTD v. INTEGRITY FUND LTD PARTNERSHIP AND OTHERS

HCA 1548/2022

[2023] HKCFI 2936

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1548 OF 2022

________________________

BETWEEN

LUSO INTERNATIONAL BANKING LIMITED Plaintiff
and
INTEGRITY FUND LIMITED PARTNERSHIP 1st Defendant
KAPOK WISH INVESTMENT LIMITED 2nd Defendant
SINSHENG INTERNATIONAL HOLDING LIMITED (新盛國際控股有限公司) 3rd Defendant
SFUNG INTERNATIONAL INVESTMENT FUND MANAGEMENT LIMITED
(廣州基金國際股權投資基金管理有限公司)		 4th Defendant
and
LI QING (李青) 1st Third Party
AU HOI LEE JANET (區凱莉) 2nd Third Party
PAN YILONG (潘一龍) 3rd Third Party

________________________

Before: Deputy High Court Judge Roxanne Ismail SC in Chambers
Date of Hearing: 7 November 2023
Date of Decision: 23 November 2023

________________________

DECISION

________________________

Introduction

1. This is the hearing of the appeal of the 4th Defendant (“SFund”, “D4”) dated 22 May 2023 against the decision of Master Keith Lam dated 10 May 2023, in which he granted summary judgment in favour of the Plaintiff (the “Bank”). The Master provided a note of his reasons for decision on 6 June 2023.

2. D4 has also issued a summons dated 13 October 2023, seeking leave to amend its Defence and Counterclaim (“D&CC”) to plead a further defence of unilateral mistake (the “Unilateral Mistake Defence”) (“Amendment Summons”).

3. At the hearing on 7 November 2023, I dismissed the Amendment Summons with costs to the Bank, and stated that I would provide my reasons together with the reasons on the appeal.

Background

4. D4 (SFund) is the indirect shareholder of 40% of the 2nd Defendant (“Kapok”, “D2”)). Kapok formed a partnership with Grand Generation Belief Virtue Investment Limited (“Grand Generation”) and the 3rd Defendant (“Xinsheng”, “D3”) in order to acquire shares in a listed company, Midas International Holdings Limited (“Listco”). The partnership acquired the shares through the 1st Defendant, (“Integrity Fund”, “D1”), through its subsidiary New Element Investments Limited (“New Element”) whose subsidiary Qingda Developments Limited holds the shareholding in Listco.

5. The acquisition of shares in 2017 was funded by an issue of bonds by New Element (as borrower) to Great Wall International Investment IX Limited (as lender), secured inter alia by a guarantee from D4.

6. In 2018, the 2017 arrangement was refinanced by a loan by the Bank to D1 and a raft of guarantee and security documentation provided by D2, D3 and D4 (“the 2018 Financing Arrangement”).

7. The 2018 Financing Arrangement was refinanced in 2021 by a loan by the Bank to D1 and a raft of guarantee and security documentation provided by D2, D3 and D4 (“the 2021 Financing Arrangement”). The material document for these proceedings is a document in Chinese whose title has been translated as “the agreement for making up the difference”, and has been referred to by the parties as a “top-up agreement” [1], dated 29 September 2021 (“2021 Top-Up Agreement”).

8. Following an undisputed default by D1, the Bank sought payment of the outstanding indebtedness under the loan from each of D1 to D4. In the absence of repayment, the Bank issued proceedings on 11 November 2022. D4 filed its D&CC on 25 November 2022. Essentially D4 pleaded three lines of defence:

(a) The 2021 Top-Up Agreement is liable to be set aside on the basis that it was entered into in breach of fiduciary duties by senior management of D4 who received bribes or other benefits from one Mr Xu Mingjun (“Mr Xu”) (“Bribery/ Breach of Fiduciary Duty Defence”). This was relied on by D4 as the “main defence” at the hearing below.

(b) On a proper interpretation of the 2021 Top-Up Agreement, P is only entitled to pursue D4 for any outstanding sums after it has exhausted all reasonable efforts to recover the same under the 2021 Facility Agreement and other guarantees and share charges provided by D1-D3 (“Interpretation Defence”).

(c) P breached its duty to exercise reasonable care to obtain the best possible price of the charged assets and, as such, P’s claim should be reduced by the difference between the price at which the charged assets should have been sold, and the proceeds of sale (“Undervalue Defence”).

9. The Bank issued its O.14 summons on 19 January 2023 supported by the affirmation of Chen Jinhao dated 18 January 2023 (“Chen 1”).

10. D4 filed evidence in opposition namely:

(a) Affirmation of Huang Shan dated 24 March 2023 (“Huang 1”). In addition to the three pleaded defences, Huang 1 asserted that the 2021 Top-Up Agreement had not been validly executed on the basis that D4’s employee Mr Li did not have authority to apply D4’s rubber chop (“No Authority Defence”).

(b) Affirmation of Cui Lei dated 27 March 2023 (“Cui 1”).

11. The Bank filed evidence in reply: namely:

(a) 2nd affirmation of Mr Chen dated 24 April 2023 (“Chen 2”);

(b) The affirmation of Pan Yilong dated 20 April 2023 (“Pan 1”).

12. Master Keith Lam gave judgment in favour of the Bank on 10 May 2023.

13. D4 appealed therefrom on 22 May 2023.

14. On 13 October 2023, D4 applied for leave to amend its D & CC to plead the Unilateral Mistake Defence.

Key terms of the 2021 Financing

15. The principal loan document between the Bank and D1 is the Facility Agreement dated 29 September 2021 (“the 2021 Facility Agreement”). The 2021 Top-Up Agreement was executed pursuant to that. Both of these agreements are in Chinese and have been translated into English for the purposes of this hearing.

16. I note at the outset that, after the parties’ written submissions were lodged, I was provided on the eve of the hearing with new translations of certain documents. In particular, I was provided with a court-certified translation of part of the 2021 Top-Up Agreement. Counsel agreed that nothing would turn on the differences between the translations.

17. Clause 11.3 of the 2021 Facility Agreement (in translation) provides at sub-clauses (6) and (7):

“ (6) Before the loan disbursement takes effect, [D4] must provide a make up the difference agreement and legal opinion recognised by the [Bank] specifically for this loan. The legal opinion must state that the effectiveness of the make up the difference agreement for this loan is equivalent to a guarantee.

(7) Before the loan disbursement takes effect, [D2] and [D3] must sign guarantee agreements regarding this loan approved by the [Bank] or make up the difference agreement and indemnity agreement whose guarantee effect is not inferior to the guarantee agreements.”

18. Clause 1 of the 2021 Top-Up Agreement (in translation) provides:

“ … Party A [i.e. D4], as the make up the difference obligor, shall be responsible for making up the differences in obligations in relation to loan principal, interest and other payable amounts arising under the [2021] Facility Agreement. If the debt repayment under the [2021] Facility Agreement is past due or the Borrower [i.e. D1] is in breach of any provision under the [2021] Facility Agreement or the [2021 Loan] is overdue, Party A [i.e. D4] shall, within 30 days upon having received a written notice from Party B [i.e. P], repay to Party B [i.e. P] any debt that is owed to but not repaid to the Party B [i.e. P], until the debt is fully repaid.

The scope of the make up the difference obligation hereunder shall include the principal sum, interest (including compound interest), financial costs, liquidated damages, and all reasonable expenses reasonably incurred by Party B [i.e. P] to exercise its rights of claim (including but not limited to litigation costs, arbitration fee, property preservation fee, travel expenses, enforcement fee, assessment fee, auction fee, notarisation fee, delivery fee, announcement fee, legal fees, etc.).”

19. The Bank was provided with a legal opinion dated 30 September 2021 from Sun Lawyers LLP (“the Sun Legal Opinion”). Essentially:

(a) It attached a draft top-up agreement which is in exactly the same form as the 2021 Top-Up Agreement; and

(b) It expressed the opinion at paras 7(a)-(b) thereof that the nature of the obligation of D4 under Clause 1 of the 2021 Top-Up Agreement was akin to providing a guarantee to the Bank for the repayment obligation of D1; and

(c) Under the 2021 Top-Up Agreement, the actual obligation of D4 and the substantive rights of the Bank are essentially equivalent to a guarantee.

The Amendment Summons

20. It is common ground (at least at first instance), that unless D4 is allowed to amend its D&CC, the Unilateral Mistake Defence is unpleaded and D4 cannot rely on it to resist summary judgment: Kaefer v Winfield Marine Services Co Ltd [2022] HKCA 807 at paras 28-33 and paras 30-32; Hong Kong Topkey Ltd v Wintac (Hong Kong) Ltd [2023] HKCFI 1711 at para 16.

21. Accordingly, D4 seeks to amend its D&CC to introduce the proposed amendments being attached to the Amendment Summons. I set out the key proposed amendments below, with proposed amendments being underlined:

“ Fl. The 2018 Loan

26. In June 2018, Mr YL Pan submitted a proposal on behalf of the project team on an urgent basis to the Investment Committee for its approval of a loan of HK$600 million to be provided by the Plaintiff to Integrity Fund. The project team comprised, inter alia，Mr YL Pan, Ms Janet Au, Ms DM Zhang, Mr C Zhang, MrYang Liu (楊柳)and Mr Choy Wong Hoi Peter (蔡王凱). In the proposal (which comprised inter alia a document titled “簽報表” dated 11 June 2018 and submitted by Mr YL Pan to the 4th Defendant’s Investment Decision Committee on an urgent basis (“the Report Form”) and a report of the 4th Defendant’s project team titled “新元素項目優化融資方案建議書”(“the Proposal Document”)，it was suggested that:

(1) The above loan shall be applied to repay, inter alia, the Great Wall Loan;

(2) The above loan...

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