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Summer Pioneer Holdings Ltd v Hna Group (International) Co Ltd

Judgment Cited authorities 14 Cited in Precedent Map Related
Vincent
Judgment Date10 June 2022
Neutral Citation[2022] HKCFI 1691
Year2021
Judgement NumberHCA488/2021
Subject MatterCivil Action
CourtCourt of First Instance (Hong Kong)
HCA488/2021 SUMMER PIONEER HOLDINGS LTD v. HNA GROUP (INTERNATIONAL) CO LTD

HCA 488/2021

[2022] HKCFI 1691

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 488 OF 2021

____________

BETWEEN
SUMMER PIONEER HOLDINGS LIMITED Plaintiff

and
HNA GROUP (INTERNATIONAL) COMPANY LIMITED Defendant

____________

(By original action)

AND BETWEEN
HNA GROUP (INTERNATIONAL) COMPANY LIMITED Plaintiff

and
SUMMER PIONEER HOLDINGS LIMITED 1st Defendant
SUMMER MASTER FUND II LIMITED 2nd Defendant
ALRIGHT INVESTMENT HOLDINGS LIMITED 3rd Defendant
JIARUI INVESTMENT (HONG KONG) COMPANY LIMITED 4th Defendant

(By counterclaim)

____________

Before: Deputy High Court Judge Le Pichon in Chambers
Date of Hearing: 11 April 2022
Date of Decision: 10 June 2022

______________

DECISION

______________

1. This is an application by Summer Pioneer Holdings Limited (“the Plaintiff”) by summons (amended on 11 November 2021) to strike out certain parts of the Defence and Counterclaim (“D & CC”), or alternatively that certain questions be determined under Order 14A or as a preliminary issue under Order 33, the net effect of which is for the Plaintiff’s claim of approximately USD 357 million be determined on a summary basis. At the conclusion of the hearing, the decision was reserved which I now give.

I. BACKGROUND

2. On 19 May 2017, Alright Investment Holdings Limited (“Alright”) (who is the 3rd counterclaim defendant), a then wholly-owned subsidiary of HNA Education & Healthcare Co-Limited (“HNA Investor”) entered into an agreement (“the SPA”) to acquire all the shares of the Swiss Education Group Holding AG (“SEG”) for CHF 750 million.

3. A deposit totalling CHF 59,600,000 (equivalent to USD 60 million) was paid by instalments between June 2017 and February 2018 to the vendor.

4. Meanwhile, by letter dated 13 November 2017, HNA Investor engaged Summer Capital Limited (“SCL”) to act as the sole leading structurer to design and establish a financing structure for the leveraged acquisition by HNA Investor of the shares in the capital of SEG per the SPA (“the Engagement Letter”). The Engagement Letter provided that SCL was not acting as adviser or agent of HNA Investor and has no duties to HNA Investor in relation to any transaction financing.

5. The financing arrangement is acknowledged to be complex. Although the court is not required to consider its complexities, an understanding of its overall structure is necessary.

6. SCL utilised a fund structure it already controlled, namely, Summer Feeder Fund Limited (“Fund I”) and Summer Master Fund II Limited (“Fund II”). Fund I holds 100% of the non-voting shares in Fund II, representing the full economic benefit of the investments made by Fund II. SCL owns all the shares in each of the Funds.

7. HNA Group (International) Co Ltd (“the Defendant”) and HNA Investor are members of the HNA Group Co Limited (“HNA Holding”), the parent group entity. While the Defendant is majority owned by HNA Holding, HNA Investor is not a subsidiary of the Defendant which has no direct or indirect ownership or control over HNA Investor. Likewise, HNA Investor has no direct or indirect ownership or control over the Defendant.

8. The financing structure involved, inter alia, the following steps:

(a) on 10 April 2018, HNA Investor agreed to transfer all its shares in Alright to Fund II (“Alright share transfer”); and

(b) on 17 May 2018, Fund I, SCL and HNA Investor entered into a letter agreement (“the Side Letter”) to reflect the parties’ agreement on certain matters in relation to HNA Investor’s investment in Fund I.

9. It is the Defendant’s case, pursuant to the Side Letter, that

(a) it was intended and agreed that HNA Investor would be the only equity investor in the fund structure for the purposes of acquiring SEG and that all other financing would be raised by debt financing, including the Bonds and other debt instruments;

(b) HNA Investor would subscribe for Fund I shares representing shares in Alright for a total amount of USD 186 million (“the subscription amount”) with the Alright deposit amount treated as part of the subscription amount;

(c) HNA Investor would procure the Defendant to provide the HNA Guarantee and Indemnity (“the HNA Guarantee”);

(d) HNA Investor would be entitled to appoint 2 directors to the SEG board[1]; and

(e) HNA Investor’s investment in Fund I would be used to fund the acquisition of SEG and that HNA Investor would be entitled, proportionate to the percentage of equity shares it held in Fund I to participate in the equity investment in SEG, a beneficial interest in the issued shares of each of Alright and Jiarui Investment (Hong Kong) Co Ltd[2] (“Jiarui”) and SEG (“the anti-dilution clause”).

10. The financing structure SCL designed is depicted in the following chart:

11. Following the Side Letter,

(a) HNA Investor was allotted USD 186 million participation shares of Fund I;

(b) on 29 May 2018, the Defendant entered into the HNA Guarantee in favour of the Plaintiff;

(c) Alright entered into a Convertible Bond Trust Deed (“CB Trust Deed”) on 30 May 2018 and issued convertible bonds due 2023 in the principal amount of USD 275 million (“the Bonds”) to Fund II. The Plaintiff guaranteed performance by Alright of all its obligations in respect of the Bonds (“the Pioneer Guarantee”);

(d) also on 30 May 2018, Alright assigned all of its rights under the SPA (to acquire SEG) to Jiarui; and

(e) completion of the Transaction[3] took place on 6 June 2018.

(A) The HNA Guarantee

12. The HNA Guarantee was made between the Defendant (as guarantor) and the Plaintiff (as beneficiary). It recited inter alia that the Plaintiff had agreed to guarantee all of the obligations of Alright arising under the Bonds on the condition that the Defendant shall provide the HNA Guarantee.

13. Under the HNA Guarantee, the Defendant irrevocably and unconditionally agreed to indemnify the Plaintiff immediately on demand against any liability incurred by it as guarantor under the Finance Documents (clause 2.1). Upon demand by the Plaintiff or the Bonds Trustee, the Defendant would make payment unconditionally and its obligations were unconditional (clauses 2.3 and 2.4). The guarantee was a continuing guarantee and indemnity and the Defendant would not be discharged by anything other than irrevocable and unconditional discharge of the liabilities in full (clause 3.1).

14. As I understand it, the HNA Guarantee effectively underwrote the Plaintiff’s liability (if any) under the Pioneer Guarantee given to Bondholders. It appeared that the Plaintiff’s role was purely nominal. According to the Plaintiff, its function[4] was limited to providing the Pioneer Guarantee and contracting with the Defendant under the HNA Guarantee[5].

(B) Breaches of the Side Letter

15. On 5 September 2019, 2 HNA representatives were removed from the Board of Directors of SEG and on 22 November 2019 the same representatives were also removed from the Board of Directors of SEG’s subsidiary Swiss Education Group AG.

16. On 27 November 2019, Castle Loyal Limited (“Castle Loyal”) a subsidiary of an entity called Skilled Dragon Limited (“Skill Dragon”) acquired all the shares in SEG from Jiarui. Skill Dragon then issued 49% of the shares in Castle Loyal to Jiarui.

17. It is accepted that the events mentioned in §§15-16 above occurred. It is the Defendant’s case that they constituted breaches of the provisions of the Side Letter,: see §9 (d) and (e) above.

II. THE ISSUES

18. They fall under the following main heads: (a) striking out under the court’s inherent jurisdiction; (b) implied term; (c) discharge by conduct; (d) whether discharge by conduct applies to indemnities; (e) minimum balance; and (f) the Defendant’s counterclaim. They are considered below.

19. Before turning to the issues, it would be convenient to set out the rather singular features of this application.

20. The Plaintiff’s case focuses entirely on the HNA Guarantee as a stand-alone transaction involving only the Plaintiff and the Defendant.

21. But the backdrop against which the HNA Guarantee came into existence is relevant. The Defendant highlighted the following matters:

(a) Ms Zhang, the Plaintiff’s key witness, is a director of the Plaintiff and also a director of SCL which was a party to the Side Letter. Ms Zhang is also the sole director of Fund II and she was authorised to affirm on behalf of the other counterclaim defendants[6].

(b) Hence, Ms Zhang bestrides 3 key entities: the Plaintiff (the party to the HNA Guarantee); Fund II (the shareholder of Alright, Jiarui and SEG); and SCL (which controls Funds I and II).

(c) The HNA Guarantee formed part of a suite of documents designed collectively to effectuate a particular purpose.

(d) The transactions are interrelated and were designed collectively to fund the purchase of a business and to provide for its ongoing management (“the Transaction”).

(e) The fund structure was designed by SCL.

22. In her affirmation, Ms Zhang made it clear that whenever she refers to “we”, “us” or “our” in her affirmation, she is referring to SCL and all of the entities that it controls (“the Summer parties”).

23. I now turn to the issues.

(A) Striking out under the court’s inherent jurisdiction

24. The Plaintiff’s application to strike out parts of the Defence (“the challenged paragraphs”) is not brought under RHC O 18, r 19 (1) (a) (“limb (a)”)[7] but (b), (c) and (d) or the court’s inherent jurisdiction. As one of the defences raised is based on an implied term, it was necessary for the Plaintiff to file an affidavit which precluded the Plaintiff from invoking limb (a)[8].

25. The question that arises is whether the...

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