HUA NING INDUSTRIES LTD v. BEST LEADER ENGINEERING LTD

HCA 1801/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1801 OF 2008

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JUDGMENT

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1.  In HCA 1801 of 2008, Hua Ning Industries Limited (“Hua Ning”) claims against Best Leader Engineering Limited (“Best Leader”) for the sum of $28,537,236 as rentals in arrears for Best Leader’s hiring of 8 vessels (“the Vessels”) from Hua Ning.

2.  In HCA 215 of 2009, Mr Chan Ka Ming (“Mr Chan”) claims against Mr Sze Kung Yee (“Mr Sze”) and Best Leader for the sum of $6,315,159.25 as outstanding loan owed by Hua Ning to Mr Chan for which Mr Sze and Best Leader were the guarantors.

3.  By the order of Master R Lai on 20 December 2011, HCA 1801 of 2008 (“the Rental Arrears Action”) and HCA 215 of 2009 (“the Loan Action”) were ordered to be tried together.

BACKGROUND

4.  The background of this case has been set out in the judgment of Au J earlier in the Rental Arrears Action dated 11 June 2011. For easy reference, I would set out the material facts here.

5.  Mr Sze and Mr Chan have known each other since the 1970s in the Mainland.

6.  In 1990, Mr Sze founded Hua Ning.  He and his wife were the first subscribers of Hua Ning.

7.  In or about 1996, Mr Sze started to borrow money from Mr Chan for his business ventures.

8.  On 16 April 2003, Mr Sze founded Best Leader in preparation for bidding as a sub-contractor for the reclamation works to be carried out in Central.  These would include seawall and marine fill, dredging and demolition works (“the Central Reclamation Works”).

9.  On 24 May 2003, the principal contractor, Leighton-China-Van Oord Joint Venture (“the Principal Contractor”), engaged Best Leader as a sub-contractor for the Central Reclamation Works.

10.  On 12 September 2003, Hua Ning and Best Leader entered into a cooperation (“the Cooperation Agreement”), whereby they agreed, inter alia, that:

(i)   the Cooperation Agreement was signed for the purpose of the Central Reclamation Works; and

(ii) Best Leader shall be responsible for the execution of the construction work, the management of its financing and the deployment of the Vessels for the carrying out of the works at the harbour;

(iii) Hua Ning shall be responsible for the investment of the Vessels and shall follow the instruction of Best Leader as to the deployment of the Vessels;

(iv) Hua Ning shall be responsible for providing security to Best Leader’s investors such as Mr Chan;

(v) Hua Ning shall assist Best Leader in obtaining financing; and

(vi) Best Leader and Hua Ning shall cooperate closely for the purpose of the successful completion of the Central Reclamation Works.

11.  In the period from mid-2003 to early 2005, Best Leader made various rental agreements with Hua Ning whereby Best Leader rented the Vessels belonging to Hua Ning for use in the Central Reclamation Works and other projects (“the Rental Agreements”).  After the initial expiration of the rental terms, there were various extension agreements to extend the rental of the Vessels to Best Leader, the last of which was dated 10 December 2007 for all the 8 Vessels.  Other than the length of the rental periods, the essential terms of the Rental Agreements remained the same.

12.  By a loan agreement (“the Loan Agreement”) dated 8 February 2005 made between Mr Chan and Hua Ning, Mr Chan agreed to lend a sum of $12,000,000 (“the Loan”) to Hua Ning.  The Loan Agreement provides, inter alia, that:

(i) the Loan shall be for the exclusive use of the Central Reclamation Works;

(ii) the Loan shall last for 1 year and shall be repaid on 31 December 2005; and

(iii) Hua Ning shall provide the Vessels as security for the Loan in favour of Mr Chan.

13.  In 2005, Mr Sze transferred 5,100 shares of Hua Ning to one Mr Wu Shen Shen (“Mr Wu”) as security for an intended loan from Mr Wu.

14.  In the period from September 2005 to October 2006, the Central Reclamation Works had been suspended due to a set of legal proceedings brought for the purpose of harbour protection.  This put Hua Ning and Best Leader in serious financial difficulty.  As a result, Hua Ning was unable to repay the Loan.

15.  By an extension agreement dated 29 December 2005 made between Mr Sze and Mr Chan (“the 1^st Extension Agreement”), it was agreed, inter alia, that:

(i) the due date of the Loan shall be extended to December 2006;

(ii) Mr Chan shall be provided with the custody of the Vessels’ licence books, but Mr Chan shall have to ensure the normal operation and deployment of the Vessels;

(iii) Mr Chan shall have the rights to monitor and supervise the Vessels, including their whereabouts, expenses, rental periods and rentals;

(iv) Mr Chan shall have control over the Vessels’ rentals; and

(v) in addition to the Vessels, Hua Ning also provided its property at Room 2313 of Tower 1 of Tak Fung Industrial Centre in Tsuen Wan (“the Tak Fung Property”) as security for the Loan.

16.  On or about 1 March 2006, Mr Sze and Mr Sze Chung Yuk (“Mr CY Sze”) orally agreed to appoint Mr Chan as a director of Hua Ning.  Mr CY Sze is Mr Sze’s nephew and was then a director of Hua Ning.

17.  On 9 March 2006, 4,000 shares of Hua Ning (representing 40% of its issued shares) were transferred from Mr Sze to Mr Chan as a further security for the Loan.

18.  Later in 2006, Mr Chan became one of the signatories of Hua Ning’s bank account.  Mr Chan’s signature was required as an additional signature for money to be withdrawn from Hua Ning’s bank account, and for cheques drawn from the account to be valid.

19.  By a set of extension agreements dated 18 September 2007 and 6 October 2007 respectively made between Mr Sze and Mr Chan (“the 2^nd Extension Agreement”), it was further agreed, inter alia, that:

(i) the due date of the Loan shall be extended to May 2008; and

(ii) Hua Ning shall provide the Vessels and the Tak Fung Property as security for the Loan.

20.  Mr Sze and Mr Chan made a further agreement dated 28 December 2007 to extend the term of the Loan (“the 3^rd Extension Agreement”), whereby it was agreed, inter alia, that:

(i) the due date of the Loan shall be extended to June 2008 but not beyond December 2008 (the completion date of the Central Reclamation Works); and

(ii) Mr Sze shall transfer 90% of Hua Ning’s shares to Mr Chan as security for the Loan.  Mr Chan shall keep the  shares until Mr Sze fully repays the Loans, and by then, the shares shall be transferred back to Mr Sze; and

(iii) in the event that Mr Sze was unable to repay the Loan with interest accrued before the expiry date, Mr Chan shall have the right to recover the Loan by selling the assets of Hua Ning by way of auction.

21.  On 25 January 2008, Mr Sze procured Mr Wu to transfer 5,100 shares of Hua Ning to Mr Chan.  On the same day, Mr Chan transferred 300 shares of Hua Ning to Mr Sze.  As a result, Mr Chan had held a total of 8,800 shares of Hua Ning (representing 88% of its issued shares) as security.

22.  On 16 July 2008, Mr Chan transferred 8,000 shares of Hua Ning to his wife.  In an EGM of Hua Ning on 26 August 2008, it was resolved to remove Mr Sze and Mr CY Sze as Hua Ning’s directors and to appoint Mr Chan’s wife as a director.

23.  By that time, there was a dispute between the parties as to whether Mr Chan was entitled to sell the Vessels to repay the outstanding Loan.  On 29 August 2008, Mr Sze obtained an ex parte injunction to restrain Mr Chan and his wife from selling any of Hua Ning’s assets.

24.  On 22 September 2008, Mr Chan and his wife as directors caused Hua Ning to commence the Rental Arrears Action against Best Leader claiming for rentals for the Vessels due from Best Leader in the period from 2003 to 2008 in the total sum of $28,537,236.

25.  The injunction restraining Mr Chan from selling the assets of Hua Ning expired on 31 December 2008.  On 7 January 2009, Mr Chan, in the name of Hua Ning, auctioned off 7 of the 8 Vessels owned by Hua Ning.  The Tak Fung Property was also sold by way of auction.

26.  On 23 January 2009, Mr Chan commenced the Loan Action to claim for the outstanding balance of the Loan and its interest in the sum of $6,315,159.25 against the guarantors under the Loan Agreement.  The outstanding sum was calculated after the deduction of the sales proceeds of the 7 Vessels of Hua Ning and the Tak Fung Property in the sums of $10,500,000 and $610,000 respectively.

27.  In the Rental Arrears Action, Best Leader made an application to strike out the claim brought by Hua Ning for want of authority. After a trial of 4 days, Au J dismissed such application on 3 June 2011.

THE RENTAL ARREARS ACTION

28.  To me, the Rental Arrears Action is not the main dispute between the parties.  At the commencement of the trial, Ms Seto, counsel for Mr Chan and Hua Ning, confirms that Mr Chan is only holding the shares of Hua Ning as a security for the Loan advanced to Hua Ning in the Loan Action, which was in substance a loan advanced to Mr Sze.  If Best Leader or Mr Sze repays the outstanding amount of the Loan, Mr Chan would return the shares to Mr Sze and he would not be concerned about the result of the Rental Arrears Action.

29.  In the Rental Arrears Action, Best Leader does not dispute the amount of the rentals in arrears owed under the Rental Agreements and their various extension agreements.  However, Best Leader puts forward the following grounds of defence:

(i) in order to give business efficacy to the Cooperation Agreement, there should be an implied term in such Agreement to the effect that no legal action shall be taken by Hua Ning against Best Leader for any outstanding unpaid rentals of the Vessels hired by Best Leader, until and unless all the works of the Central Reclamation Works had been carried out and completed by Best Leader and the claims were fully settled and paid by the Principal Contractor (“the Implied Term Defence”); and

(ii) in order to provide securities to the other investors of Hua Ning, Hua Ning had assigned the debts in respect of the rentals in arrears due under the Rental Agreements to the following investors:

(a) the sum of about $4,500,000 to one Mr Sze Hung Sum; and

(b) the sum of about $11,000,000 to Mr Sze himself (“the Assignment Defence”).

30.  For the Assignment Defence, the witnesses for Best Leader, whilst pointing out that the boards of Hua Ning and Best Leader had passed a resolution authorising the assignments of the debts due under the Rental Agreements, nevertheless agree that Hua Ning had not actually executed the assignments of the debts.  Since there was no actual assignments of the debts, even Mr To, counsel for Best Leader, agrees that the Assignment Defence must fail.

31.  The only defence left is the Implied Term Defence.  

32.  Firstly, Mr To points out that the following were discussed and resolved in the joint board meeting of Hua Ning, Best Leader and Leader International on 22 April 2003:

(i) “三家公司分工合作，各盡其責、自負盈虧，工程最終總體盈虧統一結算，盈虧責任比例另行確定” (clause 5(F)(5)); and

(ii) “各自核算成本；工程盈虧結算照合作約定比例承擔、分成；統由[Best Leader]對承建商結算，結算之回收資金擾先還各方本金” (clause 6(3)).

33.  Secondly, in another joint board meeting of the said companies on 29 April 2003, it was decided, inter alia, that:

(i) “合约結束、工程结束、工程款项回收結束、各方利益分配或虧损的承擔结束, 则算該項合作结束” (clause 5(8));

(ii) “參與營運公司，在工程營運中，優勢互補，互通有無，求大同 存小異，分工緊密合作，共同對外，共同為順利完成HK12/02海事工程而努力，為立足香港海事工程、土木工程打基楚” (clause 5(9)); and

(iii) “各方依法經營，內外有別，嚴控成本，通力團結合作，共進退” (clause 5(10)).

34.  Thirdly, the following were stated in the Cooperation Agreement made by Hua Ning and Best Leader on 12 September 2003:

(i) “[Hua Ning] 協助 [Best Leader] 籌贷资金” (clause 3(3)); and

(ii) “雙方友好協商,共進退,緊密合作,共同顺利完成HK12/02海事工程” (clause 5).

35.  Further, Mr To relies on the following terms in the Rental Agreements signed by Hua Ning and Best Leader from 1 July 2003 to 28 March 2005:

(i) “在租期内,[Hua Ning] 不能以任何理由單方面终止租约,必须要得[Best Leader] 同意;否则[Best Leader]由此產生的經濟损失(包含工程進步的廷誤、行政費用),概由[Hua Ning]承擔” (eg. clause 4(2) of the Rental Agreement dated 1July 2003); and

(ii) “[Best Leader] 收到承建商款項後的七個工作天內支付給 [Hua Ning]，但不能超過30天，否則當為甲方單方面違約，而[Best Leader] 必須賠賞 [Hua Ning] 的全部經濟損失” (eg. clause 3 of the Rental Agreement dated 1 July 2003).

36.  I reject the Implied Term Defence.  Firstly, according to Best Leader’s pleading in the Rental Arrears Action, Best Leader is not seeking to rely on the terms in the Rental Agreements (as opposed to the terms in the Cooperation Agreement and the joint board meetings) to oppose Hua Ning’s claim.  In such circumstances, Best Leader should not be allowed to depart from its pleaded case and to rely on a defence or contractual provisions not properly included in the pleading.

37.  Secondly, Mr To, at the trial, does not dispute that Best Leader is seeking to rely on an implied term to the effect that no legal action shall be taken by Hua Ning against Best Leader for any outstanding unpaid rentals of the Vessels hired by Best Leader, until and unless all the works of the Central Reclamation Works had been carried out and completed by Best Leader and the claims were fully settled and paid by the Principal Contractor. Apparently, Mr To submits that the court should imply such a term in the Cooperation Agreement in order to give business efficacy to the arrangement between the parties as stated in the said express terms of the Cooperation Agreement.

38.  However, it is trite law that the court would only imply a term in a contract if the following conditions are satisfied (see: Kensland Realty Ltd v Whale View Investment Ltd & Anr (2001) 4 HKCFAR 381 at §§23 & 59):

(i) it must be reasonable and equitable;

(ii) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(iii) it must be so obvious that “it goes without saying”;

(iv) it must be capable of clear expression; and

(v) it must not contradict any express terms of the contract.

39.  Applying the aforesaid criteria, I cannot see how the court can imply the alleged term in the Cooperation Agreement.  The terms about the duty of cooperation used in the minutes of the joint board meetings and the Cooperation Agreement are extremely vague.  In fact, most of these terms are commonly used in contracts drafted in the Mainland, which do not have any specific meanings under the common law.

40.  Best Leader is basically asking the court to incorporate a “pay-when-paid” clause into the Cooperation Agreement.  However, the Cooperation Agreement would still be an effective agreement without such term, and the incorporation of such term is not obvious that “it goes without saying”.  Under such circumstances, unless there is an express term to that effect, there is no room for the court to imply a “pay-when-paid” clause in the Cooperation Agreement.

41.  Thirdly, according to the pleading, Best Leader is asking the court to imply a term in the Cooperation Agreement and not the Rental Agreement, and yet Hua Ning is suing Best Leader for the rentals in arrears under the Rental Agreements.  Without anything in the pleading to establish the relationship between the Cooperation Agreement and the Rental Agreements, even if Best Leader has satisfied all the requirements for implying a term in the Cooperation Agreement, the court would not similarly incorporate such a term into the Rental Agreements.

42.  Fourthly, even if Best Leader can ignore the rules on pleading and were to be permitted to rely on all the express terms mentioned in Mr To’s final submission, it would not be able to assist the defence case.  As mentioned above, Best Leader is trying to establish a “pay-when-paid” arrangement relating to the payment of rentals for the Vessels.  In construction cases, there are quite established authorities for the proposition that sufficiently clear wording must be used in contractual provisions to express a “pay-when-paid” agreement (see: Wo Hing Engineering Ltd v Pekko Engineers Ltd, unreported, HCA 5561/1996, 7 September 1998, at para 47, Honeywell Ltd v Kin Ming E&M Works Ltd and Anr, unreported, HCCT 76/2001, 5 May 2004, at para 23, Massford (HK) Ltd v Wah Seng General Contractors Ltd [2006] 1 HKC 58, at paras 62H-63A, Chitty on Contracts – Hong Kong Specific Contracts, supra, para 5-140).

43.  The terms relied on by Mr To do not specifically say that no legal action can be instituted by Hua Ning unless and until Best Leader has recovered the payments from the Principal Contractor.  Further, the sub-contract between Best Leader and the Principal Contractor must have contained detailed provisions relating to the payment of the works under the sub-contract, and it may contain terms providing for payments in stages.  In such circumstances, how long does Hua Ning have to wait for the payment?   In my judgment, the terms relied on by Mr To are far from clear in establishing a “pay-when-paid” arrangement between the parties.

44.  Finally, according to Mr Chan, Best Leader had received various payments for the works undertaken with the use of the Vessels from the Principal Contractor in the Central Reclamation Works and other projects, and yet Best Leader had not paid the outstanding rentals to Hua Ning. Without any evidence adduced by Best Leader to rebut such allegation, Best Leader should pay for the outstanding rentals due under the various Rental Agreements even if there was a “pay-when-paid” arrangement between the parties which was not the case here.

45.  For the above reasons, there is also no merit in the Implied Term Defence.  As there is no valid defence to Hua Ning’s claim under the Rental Arrears Action, I grant judgment in favour of Hua Ning for the amount claimed in the Statement of Claim.

THE LOAN ACTION

46.  As mentioned above, the main dispute here is between Mr Chan and Mr Sze relating to the Loan advanced by Mr Chan for the Central Reclamation Works.  Hence, the Loan Action is the main battlefield between the parties.

47.  Mr Chan originally claimed the sum of $6,315,159.25 as the outstanding amount due under the Loan Agreement.  However, it has been revealed at the trial that the amount claimed by Mr Chan included the loans advanced by him for projects other than the Central Reclamation Works.  As Mr Sze and Best Leader are being sued as the guarantors under the Loan Agreement and the Loan Agreement only covers the Loan advanced for the Central Reclamation Works and not other projects, all the parties agree that the amount due under the Loan Agreement should be reduced to $3,569,551.23.

48.  It is also Mr Chan’s case that Best Leader had issued 8 cheques in the total sum of $6,315,160 to Mr Chan for the repayment of the Loan.  As these cheques were dishonoured upon presentation for payment, Mr Chan also claims against Best Leader for the sum due under the dishonoured cheques.

49.  Mr Sze and Best Leader oppose Mr Chan’s claim on the grounds that: (i) Mr Chan had wrongfully removed valuable equipments and articles from the Vessels on 3 January 2009; and (ii) there were serious irregularities in the auction of the Vessels on 7 January 2009, and as a result the Vessels were sold at a price below their market value.  According to the defence case, as Mr Chan had dealt with the securities of the Loan, i.e. the Vessels, in a manner which would vary the risk of default by the principal debtor, equity should intervene to discharge the liability of the guarantors under the Loan Agreement (see: Chitty on Contract, 31 ed., §44-118, Law of Guarantee, 6 ed, §9-041).

50.  Mr Sze and Best Leader have not adduced any expert evidence about the value of the Vessels at the time of the auction.  It is their case that the aforesaid conduct on the part of Mr Chan was already sufficient to discharge the liability of the guarantors.  For the Loan Action, I therefore have to resolve the following 2 issues:

(i) whether Mr Chan, as a matter of fact, had removed any valuable equipments or articles from the Vessels on 3 January 2009; and

(ii) whether there was any irregularities in the auction of the Vessels on 7 January 2009.

(a)   The allegation about the removal of the articles from the Vessels

51.  At the trial, Mr Chan testifies on behalf of his case.   According to Mr Chan, he wanted to sell the Vessels in mid-2008 to repay part of the Loan.  However, Mr Sze obtained an injunction from the court on 29 August 2008 restraining him from selling any of the assets of Hua Ning including the Vessels.  During such time, the Vessels were moored at the Tuen Mun Sam Shing Estate Typhoon Shelter (“the Shelter”), and he was responsible for paying the salaries of all the workers and watchmen maintaining and guarding the Vessels.

52.  The court recognised his right to sell the Vessels after 31 December 2008 and so the injunction expired after that date. Before the expiry date, he engaged an independent licensed auctioneer, C S Auctioneers Limited (“the Auctioneer”), to auction the Vessels and the Tak Fung Property after 31 December 2008.

53.  To prepare for the auction of the Vessels, Mr Chan hired 2 derricks on 3 January 2009 to remove the valueless rubbish, debris and gravels in the Vessels.   However, someone made a report to the Police and the Marine Police arrived at the Shelter later on the day.  Mr Chan provided information to the Marine Police about his rights to manage and to dispose of the Vessels, the Marine Police then left the scene without taking any further action or investigation.  Before the Police left, they advised Mr Chan not to remove any items from the Vessels in order to avoid any complaint.  Mr Chan accepted the advice and ceased all further work of removing the debris and gravels from the Vessels.

54.  According to Mr Chan, the defence witness, Mr Cheng Wei Yee (“Mr Cheng”), was one of the workers he had engaged to maintain and guard the Vessels.  He left after the incident on 3 January 2009. 

55.  Mr Chan strenuously denies that he had removed any valuable equipments or articles from the Vessels.

56.  The 2 main witnesses in support of the defence case on such issue are Mr CY Sze and Mr Cheng.

57.  According to Mr CY Sze, Mr Cheng made a report to him on 3 January 2009 that Mr Chan was trying to remove some of the equipments in the Vessels.  He therefore made a report to the Police.  He went to the Shelter at around 4 pm.  When he arrived, the Marine Police were already there.  By that time, Mr Chan had already finished removing the equipments and so he made a record of the articles removed by Mr Chan.  He does not produce such contemporaneous record at the trial.  According to him, he had supplied such document to the lawyer for Mr Sze.  Nevertheless, he confirms that the list of articles removed by Mr Chan as contained in Annex 14 of the witness statement of Mr Sze in the Loan Action (page 220 of Bundle A of the Trial Bundles) is correct.

58.  Mr Cheng also testifies at the trial.  He was one of the workers working at the Vessels.  He used to work for Mr Sze.  In September 2008, he was told by Mr Chan that he became his “boss”.  On 3 January 2009, he saw that Mr Chan was trying to remove some of the equipments in the Vessels and offloaded them to the derricks hired by Mr Chan.  He therefore made a report to Mr CY Sze.  After the incident, he did not go back to the Vessels at the Shelter.  Instead he went back to work at the office of Best Leader or Leader International.  In his witness statement, he also provided a table showing a list of articles allegedly removed by Mr Chan.

59.  Some of these witnesses had given evidence before Au J earlier in the application to strike out the claim in the Rental Arrears Action.  In assessing the creditability of the witnesses in the trial before me, I have reminded myself that Au J’s assessment of the creditability of witnesses is not relevant for our present purpose, and I have to make an independent assessment of the creditability of the witnesses before me.

60.  Having carefully considered the evidence of all the witnesses on such issue, I prefer to accept Mr Chan’s evidence on the balance of probabilities.

61.  Mr Chan testifies in a clear and straightforward manner and he makes no attempt to evade any questions from Mr To.  Further, he fairly concedes that the original amount claimed by him had included the loan advanced to a project which was not covered by the Loan Agreement.  There is no sign of exaggeration in Mr Chan’s evidence and I accept that he is telling the truth.

62.  On the other hand, I have serious doubt about the defence case on this issue.  Firstly, it has all along been the defence case that the auction was an improper one and Mr Chan had only wanted to sell the Vessels to his son, Mr Chan Lam, at under-market value.  If that was indeed the case, there was simply no need for Mr Chan to remove the valuable items from the Vessels prior to the auction.  Furthermore, it was quite expensive for Mr Chan to hire 2 derricks to remove the equipments from the Vessels. According to Mr CY Sze, the cost for hiring a derrick for one day was $10,000. In such circumstances, it does not make sense that Mr Chan had to remove valuable equipments from the Vessels prior to the auction, and I therefore accept Mr Chan’s evidence that he was only removing the debris and gravels from the Vessels with a view to obtain a higher price in the auction sale of the Vessels.

63.  Secondly, the Marine Police arrived at the scene to investigate the complaint lodged by Mr CY Sze.  As the police officers were present, it would be unwise for Mr Chan to have removed anything of value from the Vessels.

64.  Thirdly, there are some material inconsistencies in the evidence of Mr Cheng.  At the trial, he confirms that he did not go back to the Vessels and the Shelter after 3 January 2009.  Instead, he went back to work at the office of Best Leader or Leader International.  This is different from his evidence in his written statement, in which he stated that he was still on shift-duty on the Vessels until 15 January 2009.  He even went further to state that he was repeatedly asked to leave the Vessels after 8 January 2009.  Further, he provided a list of the articles removed by Mr Chan in his witness statement.  Yet in his oral testimony, Mr Cheng is not sure about the articles actually removed by Mr Chan from the Vessels.  He only witnessed that some “環保架” (environmentally-friendly frameworks or structures) were being off-loaded, but he was not sure whether there were other items removed from the Vessels.  As no satisfactory explanation has been given for such inconsistencies, I have doubt about the creditability of Mr Cheng’s evidence.

65.  Fourthly and more importantly, there are serious discrepancies between the list of removed articles annexed to the witness statement of Mr Cheng (p 92 of Bundle 1 of the Trial Bundle) and the list annexed to the witness statement of Mr Sze (see: §57 above).  The items alleged to have been removed, the quantities of particular items removed and the values of the items removed were not the same.  Mr CY Sze and Mr Cheng cannot provide a satisfactory explanation for such discrepancies, and this certainly undermines the creditability of their evidence.

66.  In trying to attack Mr Chan’s case, Mr To submits that Mr Chan should have called the other 7 workers or watchmen working at the Vessels to testify on his behalf.  As Mr Chan has failed to do so, the court should draw an adverse inference against Mr Chan’s case.

67.  I disagree.  Whether the court should draw an adverse inference against a party who fails to call a particular witness depends on the facts of each individual case.  Mr Chan is the material witness to rebut the allegation of the defence case about the removal of articles from the Vessels.  If the court were to accept his evidence, that would be sufficient to support Mr Chan’s case.  On the other hand, if Mr To’s argument is correct, one may also make a complaint against Mr Sze and Best Leader for not calling those 7 workers to testify at the trial.  Although Mr Chan was the one who actually paid the salaries of these workers, the exact relationship between Mr Chan and these workers was unclear.  In any event, there appeared no difficulty for Mr Sze and Best Leader to contact these workers to testify at the trial.  I therefore refuse to draw any adverse inference against Mr Chan’s case by reason of the absence of the oral testimony from these 7 workers.

68.  Mr Sze and Mr Sze Hung Sum also testify on behalf of the defence case, but their evidence is not particularly helpful in determining the main issues in the Loan Action.  For the avoidance of doubt, as I find Mr Chan to be a honest and truthful witness, insofar as there is any inconsistency between the evidence of Mr Chan and that of Mr Sze and Mr Sze Hung Sum, I prefer to accept the evidence of Mr Chan.

69.  For the above reasons, I find as a fact that Mr Chan had not removed any valuable equipments or articles from the Vessels whether on 3 January 2009 or otherwise.

(b)   The allegations about the propriety of the auction sale

70.  I then turn to the allegations about the propriety of the auction sale of the Vessels.  In essence, Mr Sze and Best Lender make the following 3 complaints against Mr Chan:

(i) the reserve price of $12,000,000 was fixed arbitrarily and without any legal basis;

(ii) the Vessels were sold below the original reserve price of $12,000,000 fixed on 17 December 2008; and

(iii) the successful bidder did not attend the auction.

71.  I also reject the defence case on the propriety of the auction for the following reasons.

72.  Firstly, none of the above alleged irregularities had been pleaded by Mr Sze or Best Leader in the pleading nor mentioned in any of their witness statements.  In such circumstances, they should not be allowed to raise such allegations at the trial.

73.  Secondly, under clause 4 of the 3^rd Extension Agreement dated 28 December 2007, auction was the agreed mode for the sale of the Vessels and the Tak Fung Property.  In fact, Mr Chan engaged the same independent licensed Auctioneer to conduct the auctions of both the Vessels and the Tak Fung Property.  Mr Sze and Best Leader have made no complaint about the auction of the Tak Fung Property, and so there is no reason for the court to doubt that both auctions had been conducted in a fair, public and open manner.

74.  Thirdly, Mr Chan had given a satisfactory explanation as to why the original reserve price as stated in the Auction Agency Agreement was lowered on the day of the auction.  As the original reserve price was too high and the auction was conducted after the outbreak of the financial tsunami, no participants of the auction were interested in buying the Vessels at the original reserve price.  He therefore accepted the Auctioneer’s suggestion to lower the reserve price.  As there is no expert evidence adduced by Mr Sze or Best Leader about the true market value of the Vessels at the time of the auction, there is no reason for the court to query that the price offered by the highest bidder was not market value of the Vessels at the time.

75.  Fourthly, the complaint that Mr Chan Lam, the successful bidder of the Vessels, did not attend the auction is neither here nor there.   Given that Mr Sze and Best Leader are not disputing the identity of the successful bidder, the only reasonable inference that can be drawn from the absence of Mr Chan Lam’s name from the letter of the Auctioneer dated 2 March 2010 is that, as explained by Mr Chan during cross-examination, the list of participants on the letter was incomplete.  In any event, it is not in dispute that Mr Chan Lam signed a written contract with the Auctioneer for the purchase of the Vessels on the date of the auction.

76.  The fact that the successful bidder was Mr Chan’s son also cannot help the defence case.  There is simply no evidence to suggest that the auction conducted by an independent licensed Auctioneer was not a fair one and the price obtained in such independent auction was not the best possible price.  In fact, Mr Chan had tried to contact the surveyor who conducted the valuation of the Vessels in July 2008 to purchase the Vessels in the auction, but the surveyor was simply not interested because the market was not favourable at the time.  As the auction was conducted in an open and proper manner, there is no reason for the court to doubt that the auction price was not the market value of the Vessels.

77.  Further, I accept the submission of Ms Seto that if the auction sale was intended to be an irregular one, there would have been no need for Mr Chan to do the following:

(i) the engagement of Mr Cheng, at his own expenses and at a monthly  salary of $15,000, to maintain and upkeep the Vessels since August 2008;

(ii) the engagement of 7 watchmen, at his own expenses and at a monthly salary of $8,000 each, to guard the Vessels since August 2008; and

(iii)  the alleged removal of valuable equipments from the Vessels with the hiring of 1 or 2 derricks at a daily rate of $10,000 per derrick (according to Mr CY Sze).

78.  Hence, I see no merit in the complaint of Mr Sze and Best Leader about the propriety of the auction sale of the Vessel.

79.  Further, even if I were to find that Mr Chan had removed various equipments from the Vessels and there were irregularities in the auction as alleged by Mr Sze and Best Leader, it would not be sufficient to discharge the liability of the guarantors under the Loan Agreement.

80.  It is the case of Mr Sze and Best Leader that, by reason of the improper conduct on the part of Mr Chan, it varied the risk of default by Hua Ning thereby prejudicing the right of the surety.  However, the problem is that Mr Sze and Best Leader have not adduced any expert evidence to prove the market values of the Vessels and the equipments allegedly removed by Mr Chan.  Without such information, there is simply no basis for the court to conclude that the risk of default by Best Leader had varied thereby prejudicing the right of the surety.  Hence, I reject all the defences in the Loan Action.

81.  Based on the aforesaid ruling, it is quite unnecessary for the court to consider the claim for dishonoured cheques against Best Leader in the Loan Action.  At the trial, Best Leader seeks to amend the Amended Defence to include the averment that there was no consideration to support the cheques.  However, this is a completely new defence which would entitle Mr Chan to carry out further investigation and to adduce new evidence to deal with the allegation.  This would certainly de-rail the trial and so I refuse the amendment application at the trial.  Under such circumstances, there appears to be no valid defence to the claim for dishonoured cheques against Best Leader. In any event, Mr Chan’s claim under the Loan Action must succeed.

CONCLUSION

82.  For the above reasons, I grant judgment in favour of Hua Ning in the Rental Arrears Action in the sum of $28,537,236.  I also make an order nisi that:

(i) there be interest on the said sum at the rate of 8% per annum from 22 September 2008 (the date of the writ) to the date hereof and thereafter at judgment rate; and

(ii) the costs of the action be to Hua Ning to be taxed if not agreed.

83.  For the Loan Action, I grant judgment in favour of Mr Chan against Mr Sze and Best Leader in the sum of $3,569,551.23.  I also make an order nisi that:

(i) there be interest on the said sum at the rate of 1.5% per month from 1 January 2009 to the date hereof and thereafter at judgment rate; and

(ii) the costs of the action be to Mr Chan to be taxed if not agreed.

84.  The said orders nisi shall be made absolute 14 days after the date of the handing down of this Judgment.