Commercial Law — Court allows interim payment application of $115 million in a stock loan dispute
In a recent decision of the Court of First Instance in ZS Capital Fund SPC v Astor Asset Management 3 Ltd [2024] HKCFI 1535, Richard Yip and Tara Liao (led by Anson Wong SC) successfully persuaded the Court to release an interim payment of HK$115 million to the Plaintiffs (“Ps”) in view of the overwhelming merit of Ps’ case. The case involves arbitration in St Kitts & Nevis, as well as court proceedings. The legal team formulated a detailed litigation strategy for the clients that ultimately achieved significant recovery for clients.
Factual background
Ps and D1 entered into respective stock loan agreements (the “SLAs”) under which (1) individual Ps were to deposit their shares in a then listed company (“Cangnan”) with a designated depository broker (“D2”) and to grant a lien over their shares to D1; and (2) D1 was to advance loans to Ps. Ps duly deposited their shares with D2, but D1 only advanced a small amount of loan and withheld further tranches purportedly on legitimate grounds. The loan proceeds were accordingly secured by corresponding portions of the deposited shares. Nonetheless, Ps later found out that some of the deposited shares were sold on market without their knowledge or approval.
Ps successfully obtained an injunction retraining D1 and D2 from disposing of the deposited shares. The action had however been stayed pending inter alia an arbitration between Ps and D1 in St Kitts, in which the tribunal subsequently concluded in the award that:-
(1) D1 at the material time was an unlicensed money lender subject to the Money Lenders Ordinance (Cap. 163) (the “MLO”) and the SLAs thus contravened the MLO. Relief under the proviso of section 23 of the MLO could only be granted by the Hong Kong court; and
(2) Ps’ alternative equity of redemption claim should also be dealt with by the Hong Kong court.
In this application, Ps asked for interim payment in a sum of over HK$115 million, from the proceeds paid into Court following the buy-back of the deposited shares by the listco, on the grounds that:-
(1) The SLAs were not enforceable due to their contravention of the MLO, and thus Ps remained the beneficial owners of the deposited shares and ultimately the proceeds in Court; and
(2) Further and alternatively, Ps had right of redemption to obtain the proceeds in Court representing the traceable proceeds of the deposited shares.
In resisting the application, D1 claimed that there were events of default under the SLAs.
Reasoning and decision
To allow an application for interim payment, the Court must be satisfied on a balance of probabilities that the defendant has no arguable defence or that there are sufficient doubts regarding the genuineness of the defence. The test is essentially the same as that for granting conditional leave to defend in a summary judgment application.
DHCJ Kent Yee held that D1’s security interest, namely all the deposited shares, was clearly subject to Ps’ right of redemption. In reaching his decision, the learned judge reviewed the following established principles regarding right of redemption:-
(1) Right of redemption is an inseparable incident of a mortgage, in that the mortgagor can have his property re-assigned to him by offering to repay in full;
(2) Until foreclosure by order of the court, the mortgagor has an equitable right to redeem; and
(3) The right remains exercisable even after default and cannot be overridden by express agreement of the parties.
In the absence of a foreclosure order, Ps’ right of redemption remained intact and exercisable notwithstanding the alleged events of default. D1 should not have refused Ps’ offer to redeem the deposited shares by payment of the outstanding loan principal plus interest. The learned judge was satisfied that D1 had raised no valid defence and that Ps would very likely succeed in their right of redemption claim at trial.
Thus, notwithstanding D1’s potentially arguable case on the application of the proviso of section 23 of the MLO in its favour, the learned judge considered that the granting of interim payment was appropriate in the circumstances. After deducting the loan proceeds, interest and costs awarded to D2, the learned judge ordered that a sum of HK$115,300,000 be released to Ps as interim payment.
Significance
This is a highly complicated stock loan fraud case involving multi-jurisdictional elements – the assets in dispute were placed within the jurisdiction of Hong Kong, while the seat of arbitration was agreed to be St Kitts, with the supervisory court being the Jamaican Court. Notwithstanding the inherent complexity and difficulty, timely legal actions were brought to restrain further disposal of the deposited shares. The legal team then adopted the carefully formulated and well-executed legal strategy to successfully secure a significant sum of compensation for the Plaintiffs even before the case is tried and heard, by way of interim payment.
Richard Yip
“One of the strongest junior barristers around, his stand-out qualities include an excellent handle on the detail, an insightful legal mind, and sound commercial sense.”
Legal 500 Asia-Pacific 2021 – 2024, Commercial Disputes — Leading Juniors, Tier 1
Richard has a broad civil practice with a focus on shareholder disputes, commercial litigation, financial regulation, competition law and personal injuries. He joined Denis Chang’s Chambers in 2011. Prior to joining the bar, Richard was a corporate finance solicitor at Herbert Smith Freehills.
He represented four respondents in the second case before the Hong Kong Competition Tribunal, where the economic efficiency defence was raised for the very first time in Hong Kong. He was also involved in a number of substantial shareholder disputes, including Acropolis Ltd v W&Q Investment Ltd, 2018 HKCA 379 (appeal against interlocutory injunction concerning the EGM voting results of a listed company) and Waddington Ltd v Chan Chun Hoo Thomas, HCA 3291/2003 (trial of a double derivative action).Richard is also actively involved in the community and academia. He is a part-time lecturer at the University of Hong Kong.
Visit Richard’s profile for more details.
Tara Liao
“Tara is a very safe pair of hands. She is extremely industrious and her work is consistently of a very high quality.”
Legal 500 Asia-Pacific 2021 – 2024, Commercial Disputes — Leading Juniors
Tara was recognised by Legal 500 as a leading junior in commercial dispute resolution from 2021 to 2024. She appears regularly in the Court of Appeal, the High Court and in arbitrations with a focus on commercial injunctions, arbitrations, company, insolvency, civil fraud, trust and cross-border disputes. She sat as a Deputy District Judge in 2021 and 2023.
Tara has a keen interest in arbitration and was a committee member of HK45, an active young arbitration practitioners group in Asia formed under the auspice of HKIAC.
Prior to joining the Bar in 2015, she was a solicitor in an international law firm specialising in commercial litigation and regulatory matters. She holds a bachelor’s degree in PRC laws from Peking University and has passed the PRC National Judicial Examination.
Visit Tara’s profile for more details.
This article was first published on 16 October 2024.
Disclaimer: This article does not constitute legal advice and seeks to set out the general principles of the law. Detailed advice should therefore be sought from a legal professional relating to the individual merits and facts of a particular case. The photographs which appear in this article are included for decorative purposes only and should not be taken as a depiction of any matter to which the case is related. The views and opinions expressed in this article/material are solely those of the members authoring it and do not necessarily reflect the official policy or position of Denis Chang’s Chambers, or of any other member or members of Denis Chang’s Chambers.