HO YUK LUN ALAN v. CHAN YUI HANG (LIQUIDATOR OF LECO WATCH CASE MANUFACTORY LTD)

HCMP 1013/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1013 OF 2013

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J U D G M E N T
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1. The Applicant seeks an order reversing a decision of the Liquidator of Leco Watch Case Manufacturing Limited (“Company”) rejecting the proof of debt submitted by him dated 25 January 2013.  The Company is in creditors’ voluntary winding up. 

2. The Applicant says that the debt which he seeks to prove in the liquidation arose in the following circumstances.  The Applicant has been in the watch manufacturing business for many years.  In 1989 he set up a company which came to be called Ultimos Manufacturing Pte Limited (“Ultimos”). The Company was in the business of manufacturing watch cases.  It was controlled by Yau Kim Ching.  The Applicant developed a business relationship with Mr. Yau over a number of years.  The Company produced watch cases for Ultimos.  In 2005 Mr. Yau approached the Applicant and asked him to make a loan to the Company. On 1 June 2005 Mr. Yau drew a cheque in favour of the Company for HK$580,000.  This is not in dispute.  There is no document other than the cheque evidencing the loan, which the Applicant says was agreed orally.  The Applicant says that this was not the first loan that he made and he had previously been repaid without difficulty.  The Applicant also says that he asked on a number of occasions, most recently in October 2012, for repayment. He had been assured by Mr. Yau that he would be repaid and because of their long business relationship he did not press the matter.

3. When the Applicant discovered that the Company had gone into voluntary liquidation he lodged a proof of debt dated 25 January 2013 with the Liquidator.  On 14 March the Liquidator replied saying that the Applicant should produce the loan agreement and a bank statement showing the settlement of the cheque.  As the Liquidator had not received them he rejected the proof. On 17 April 2013 the Applicant’s solicitors replied enclosing a bank statement showing that the cheque had been presented and honoured.  They sent a chasing letter on 23 April 2013.  On 2 May 2013 the Liquidator wrote stating he would not reply to their letters.

4. The Applicant says that the Liquidator clearly did not appreciate consequences of the Applicant demonstrating that he had advanced money to the Company in circumstances in which the presumption of advancement did not apply, namely, that the money is repayable unless the Company can demonstrate that it was gift or was a loan which is not currently repayable.  This principle, which is not commonly known in my experience, is now well established in Hong Kong: Mak Ka Hing v Pang Ming Chung,[1] citing Seldon v Davidson.[2] (approved in Lui Fai Yeung v Chui Kin Man FACV16/2011 (21 December 2012, unreported)).

5. I agree that in the present case it is for the Liquidator to prove on the balance of probabilities why the money advanced is not repayable.  I accept that this is not something that seems to have been appreciated by the Liquidator until shortly before the hearing.

6. Prior to the application being issued the Liquidator had not given any reason other than the one to which I refer for rejecting the proof.  He subsequently filed evidence setting out additional reasons.  They are explained in paragraphs 7 to 11 of the Liquidator’s affirmation in opposition to the application:

“7. By the Director Interview Notes of 7 June 2013 signed by Mr. Yau Kim Ching ("YAU''), the ex-director of Leco Watch, it clearly indicated that the cheque ofHK$580,000.00 given by the Applicant to Leco Watch ("the Said Sum") was not as a loan but the Said Sum was given to Leco Watch to buy a CNC Machine (which was basically used to make/mould some product samples) to be used entirely for the benefit of Ultra Solution Holdings Limited (in which the Applicant is a shareholder and director) and also to buy some parts and/or accessories in order to operate the CNC Machine. YAU was requested to place the CNC Machine within the premises of Leco Watch in China because Leco Watch has the relevant expertise to operate the CNC Machine to provide the Said Services (and also Leco Watch had been the supplier for Ultra Solution Holdings Limited for many years) and then Leco Watch would provide Ultra Solution Holdings Limited with the finished product samples and that would be a very reasonable and sensible decision and arrangement made by Ultra Solution Holdings Limited and the Applicant. However, after the winding-up of Leco Watch, all the properties of Leco Watch (including the said CNC Machine) were confiscated by the relevant Chinese Authorities/Departments and therefore the CNC Machine is not available for further information to be collected. Furthermore, as nearly 8 years have passed since the acquisition of the CNC Machine, all the relevant accounting records and documents are not available and also not required by the law to keep. In addition, under the Limitation Ordinance, any contractual claim (including the present claim of HK$580,000.00 of the Applicant) shall be statute-barred after the lapse of 6 years (and it is entirely up to the Applicant to adduce clear and solid evidence to prove that his claim was not statute-barred) and thus any reasonable person should have pursued the said contractual claim within the 6 years limitation period but not thereafter. There is now produced and shown to me marked "CYH-4" a true copy of the Director Interview Notes dated 7 June 2013.

8. In the Applicant's Affirmation, he alleged that from time to time YAU promised the Applicant that Leco Watch would pay the Said Sum to him when Leco Watch's business improves and the Applicant's allegation is wholly false and untrue because Leco Watch had done quite well in its business in the years of 2010 and 2011 (as shown in Page 5 of the Directors' Report and Independent Auditor's Report dated 13 February 2012 with annual Turnover in the sum ofHK$197,242,790.00 and Retained profit carried forward in the sum of HK.$4,842,333.00 in 2011) and if it were a genuine loan in the first place.(which was utterly denied by me) Leco Watch should have already repaid the Said Sum to the Applicant, or at least part of it, during its flourishing time and prosperity and furthermore, at the very least, the Applicant should have proceeded with the legal action against Leco Watch during the said prosperous period (which is still within the six years limitation period for bringing contractual claim) but nothing has been pursued by the Applicant until the year of 2013 and all these evidence grouping together clearly suggested that it was not a genuine loan. There is now produced and shown to me marked "CYH-5" a true copy of the Directors' Report and Independent Auditor's Report of Leco Watch.

9. I am of the view that the previous financial position of Leco Watch was quite good and sound and some reputable banks did consider Leco Watch as trustworthy and having good trading records and creditworthiness and hence they did grant certain banking facilities to Leco Watch in relatively recent years. According to the letter of Industrial and Commercial Bank of China (Asia) Ltd. ("ICBC") dated 16 August 2012, it was shown that ICBC did grant the Banking Facilities of SP in the amount of HK$187,200,000.00 and ILSME in the amount of 3,000,000.00 to Leco Watch. There is now produced and shown to me marked "CYH-6'' a true copy of the ICBC's letter dated 16 August 2012.

10. According to the Form of Bank Confirmation of Information for Audit Purposes regarding Leco Watch completed by The Bank of East Asia Ltd. ("BEA'') dated 1 August 2012, it was shown that BEA did grant the General Banking Facilities in the amount of HK$7,084,000.00 to Leco Watch as at 31 March 2012. There is now produced and shown to me marked "CYH-7" a true copy of the Form dated 1 August 2012 completed by BEA.

11. According to the letter of Hang Seng Bank ("HSB'') dated 30 June 2009 addressed to Leco Watch, it was shown that HSB did grant the Banking Facilities under Special Loan Guarantee Scheme in the amount of HK$3,000,000.00 to Leco Watch. There is now produced and shown to me marked "CYH-8" a true copy of the HSB's letter dated 30 June 2009.”

7. The import of this evidence is clear.  Mr. Yau says that the advance was not a loan.  It was the purchase price of a computer numerical control machine (“CNC machine”) to be located in the Company’s factory and used exclusively for the production of orders for another of the Applicant’s companies, Ultra Solutions Holdings Limited (“Ultra”).  I note that in paragraph 7 the Liquidator refers to the machine as being part of the Company’s property, although in paragraph 13 he goes on to refer to the Applicant having an interest in it.  The Liquidator believes Mr. Yau because the Company’s financial position suggests that it had no need for the alleged loan and because the Applicant did not demand repayment earlier.

8. In his reply affirmation the Applicant accepts that Mr. Yau told him that he wanted to borrow the money to purchase a CNC machine.  He says that it was never suggested that it was to be used for the sole purpose of producing watch cases for Ultra.  Mr. Yau says that it is inherently unlikely that he would have agreed to such an arrangement.  First, he says that it would have been a large investment given that in practice it would only have been used for producing watch case samples for Ultimos (Mr. Yau says it was not Ultra who placed the orders).  Secondly, Ultimos would have had no control over its use and in practice it would have been available for use by the Company to produce watch cases for other clients.  Thirdly, and in my view this has the most force, if the arrangement was, as Mr. Yau suggests, the loan would have been made by the relevant company and the arrangement recorded in writing.  The fact that the Applicant personally made the payment and nothing was recorded in writing suggests an informal and personal arrangement.  Mr. Yau also says that this explains why there is no record of demands for repayment: the arrangement was informal and his requests for repayment had been made personally and politely. Fourthly, he points out that the financial records that the Liquidator relies on as suggesting that the Company did not need a loan relate to periods after 2005.

9. In my view the Applicant’s evidence is credible.  It does not seem to me that Mr. Yau’s version of which took place is inherently more probable.  I, therefore, find that the Applicant did make a loan to the Company.  However, says Mr. Osmond Lam, who appeared for the Liquidator, the matter does not end there. The loan was, on the Applicant’s own case, interest free and repayable on demand.  Mr. Lam argues that the obligation to repay arose immediately after payment.  The Applicant’s claim is for money had and received and that section 4(1)(a) of the Limitation Ordinance, Cap. 347, provides that the limitation period is 6 years and had expired when the proof was lodged.

10. It is a well established common law rule that where a loan had been made without any provision as to the time for repayment, the obligation on the borrower is to repay immediately after the loan was made and the cause of action for money had and received accrues at that time[3]. If the parties have agreed that a demand for repayment must first be made the cause of action does not arise until the demand is made[4]. Mr. Lau argues that if one accepts the Applicant’s version of the circumstances in which the loan came to be made, which I do, it must follow that it was understood that if the Applicant wanted the loan repaid he would first make a demand.  It cannot sensibly be suggested that either party envisaged the Applicant issuing proceedings without first requesting repayment.  I think that must be correct.  The question becomes: does that make the loan repayable on demand for present purposes?  It will be appreciated that much the same argument can, I think it reasonable to assume, be made in most cases.  Or to put it slightly differently: why are not all loans treated as repayable only on demand?  The answer would appear to lie in the need to identify a time at which a cause of action accrues for the purposes of determining whether or not a claim is time barred.  Norton V Ellam [5] was an action on assumpsit on a promissory note, payable on demand.  The question for the court was whether or not the cause of action for repayment accrued when money was lent or when demand was made.  Parke B said this:

“I entertain no doubt at all on this point. It is the same as the case of money lent payable upon request, with interest, where no demand is necessary before bringing the action. There is no obligation in law to give any notice at all; if you choose to make it part of the contract that notice shall be given, you may do so. The debt which constitutes the cause of action arises instantly on the loan. Where money is lent, simply, it is not denied that the statute begins to run from the time of lending. Then is there any difference where it is payable with interest? It is quite clear that a promissory note, payable on demand, is a present debt, and is payable without any demand, and the statute begins to run from the date of it. Then the stipulation for compensation in the shape of interest makes no difference, except that thereby the debt is continually increasing de die in diem. It is quite different from the case of a note payable at sight, because there, by the terms of the contract, it must be shewn before the action is brought.”

11. In Chitty on Contracts [6] the current position is summarised as follows in the section dealing with limitation periods and accrual of causes of action:

“But by s.6 of the Limitation Act 1980, if: (a) a contract of loan does not provide for repayment of the debt on or before a fixed or determinable date; and (b) does not effectively (whether or not it purports so to do) make the obligation to repay the debt conditional on demand for repayment made by or on behalf of the creditor or any other matter, then the right of action on the contract of loan is not barred after six years from the date of the loan.[7] Instead, the six-year period does not start to run unless and until a demand in writing for repayment of the debt is made by or on behalf of the creditor (or, where there are joint creditors, by or on behalf of any one of them).[8] However, the section establishes an exception in the case where, in connection with taking the loan, the debtor enters into any collateral obligation to pay the amount of the debt or any part of it (as, for example, by delivering a promissory note[9] as security for the debt) on terms which would exclude the application of the section to the contract of loan if they applied directly to repayment of the debt.[10] ”

12. Although the reason for the rule was not fully explored before me it seems that the reason why the cause of action is treated as accruing at the time of making of a loan, unless it is agreed that a demand is necessary, is to prevent the period in which repayment can be demanded being extended indefinitely. In practice, if a person makes a loan without specifying when or in what circumstances it has to be repaid, he must require payment within 6 years or the right to recover money is lost.  The fact that if the lender had appreciated this at the time he would have agreed that repayment was due on demand, and it is likely the borrower would have agreed, is not material in determining when the cause of action accrued.  In my view, it follows that in the present case the cause of action accrued in June 2005.

13. Mr. Lau argued that if this were to be the court’s conclusion it did not prevent the Applicant claiming repayment in the present case because the Company is estopped from relying on a limitation defence.  The doctrine of estoppel is capable of operating to prevent a limitation defence being taken: Chuang Yue Chien Eugene v Ho Yau Kwong Kevin [11].  Mr. Lau argues that estoppel applies in the present case by virtue of the assurances the Applicant says were given to him by Mr. Yau. 

14. The limitation defence was not advanced until the Liquidator filed evidence in opposition to the present application.  As a result the Applicant’s own case on the limitation issue appears largely in his reply evidence.  There is, however, reference to requests for repayment in paragraph 7 of his first affirmation.  That paragraph and paragraphs 9, 17 and 25 of his 2^nd affirmation contain the following evidence:

“7. From time to time, Yan promised me orally that the Company would settle the loan when its business improves. Prior to the winding up of the Company, in or around October 2012, Yau and I met at the Company’s factory in Dongguan, China. During that meeting in the factory, Yau promised me orally that he would arrange the Company to settle the loan.”

”9. On a number of occasions, as mentioned in paragraph 7 of the First Affirmation, I casually asked Yau to repay the Loan but on every occasion he would reply words to the effect of “let’s discuss later”. Once again, considering our friendship and business partnership, I decided not to chase further and never told him to repay the Loan by a certain date. After all, because of the Business Dealings, Ultimos and I were in frequent contact with the Company and Yau, and I never thought that the Company would default on the Loan. There was no way I could have anticipated the sudden and abrupt winding up of the Company.

…

17.  Further, I wish to point out that during the period of the Business Dealings, Yau had frequently requested advance payment for the watch cases supplied by the Company to Ultimos. Yau also indicated on a number of occasions that the Company’s cash flow was very tight. Therefore, there was no way in which I would have known that the Company’s financial position was “good and healthy” and had I known this, I would have taken action to enforce the Loan earlier and would not have waited until the winding‑up of the Company.

…

25.  Once again, I reiterate that my “lack of action” was motivated by my desire to preserve a 30 year friendship between Yau and myself and the business relationship between Ultimos and the Company. It is for those reasons that I only made casual requests for repayment (whereupon Yau always dismissed my requests by saying we can discuss this later) as I did not want to put the requests on a formal footing and risk our friendship and business partnership. Further, I have been advised by my solicitors and I verily believe that there is absolutely no merit in the Respondent’s argument that the 6 years limitation period for enforcing the Loan has expired.”

15. No application to cross-examine the Applicant was made and his evidence remains uncontroverted.  I accept it.

16. In Seechurn v Ace Insurance SA – NV [12] the English Court of Appeal considered the elements of estoppel which would prevent a defendant relying on a limitation defence:

(1) The promise or representation must be clear and unequivocal in the sense that it would be reasonably understood in a particular sense by the person to whom it is addressed[13];

(2) The promise or representation must be made intending to affect the legal relationships between the parties[14]; and

(3) the promisee must act upon it and alter his position[15].

17. It would be unrealistic to expect a conversation between laymen about repayment of an undocumented loan to involve a discussion about causes of action and limitation periods.  It seems to me that the correct approach to the question of whether the necessary promise or representation was made involves assessing whether or not what was said is reasonably understood as a promise that the borrower would pay at a later date and, therefore, by necessary implication the borrower was foregoing any right he otherwise had at the time or in the future to dispute the obligation to pay but for the promise or representation he had made.  In my view where, in dealings between laymen, a lender asks for repayment and he is asked to wait for longer, as opposed, for example, to simply being told that the borrower cannot pay at the moment, he is asking the lender not to claim against him and, as Ma J (as he then was) observes at paragraph 29(1) of Chuang Yue Chien Eugene v Ho Yau Kwong Kevin [16], that must reasonably be taken to include the possibility of legal action.  That is sufficient to constitute a representation that he will not rely on any limitation defence that might otherwise have been available as a consequence of the passing of time since the date when the loan was made.  Time will begin to run from the date of the promise or, if there have been a series of promises, the last of those promises is made.  Considered in this way and having regard to the fact that what was said arose in the context of conversations between two men who had a long term business relationship and who it is reasonable to assume would probably have used polite language, in my opinion the Applicant’s evidence is, although not clear cut, sufficient to establish the necessary representation.  It also seems to me that the other two elements are present. If the Applicant had not received the assurances he says he was given it seems to me reasonable to infer that he would have taken action to protect his position.

18. Mr. Lam took one further point.  He argues that even if I find that as between the Applicant and the Company an estoppel had arisen this does not necessarily bind the Liquidator.  Mr. Lam says that where a creditor relies on an estoppel to establish a liability against a company, a liquidator is entitled to go behind the estoppel where the liability is not a true liability of a company but is founded on some act or omission by the Company which unjustly prejudices the interests of the creditors in the assets available for distribution.  This is, as a general statement of principle, correct.  It was explained in this way by Kwan J (as she then was) in Active Base Limited v the Liquidators of Moulin Global Eyecare Holdings Limited [17] at paragraph 53:

“It is otherwise if a liquidator supports his rejection of a proof of debt in reliance on a ground which allows him, and him alone, to go behind a judgment, an account stated, a covenant or an estoppel on which the company’s liability is founded (In re Van Laun; Ex parte Chatterton [1907] 2 K.B. 23 at 31; In re Exchange Securities Ltd. [1988] Ch. 46 at 59 to 60). In these instances, the liquidator is armed with grounds for rejecting a proof of debt additional to any grounds available to the company under the general law. As stated by the majority of the High Court of Australia in Tanning Research Laboratories, supra. at 339:

   ‘The principles which determine enforceability of the liability to which a proof of debt relates are, in the main, the same as the principles which would be applied in an action brought directly against the company to enforce that liability. … But this general rule is qualified. As the parties whose interests are affected by admission of a proof of debt are the general body of creditors and the contributories rather than the company in liquidation, there are some liabilities which would be enforceable against the company but which a liquidator is not bound to admit to proof of debt lest the interests of creditors and contributories may be unjustly affected. A liquidator may properly reject a proof of debt if the liability, though enforceable against the company, is not a true liability of the company but is founded merely on some act or omission on the part of the company which unjustly prejudices the interests of the creditors or contributories in the assets available for distribution.’ ”

19. The Applicant’s case is that over a period of time he raised the subject of payment and was asked to wait, which he did.  I do not see how, if this is, as I have found, sufficient to give rise to an estoppel it can be said to unjustly prejudice the interests of other creditors.  The money was advanced. The Applicant was entitled to be repaid and I have found that, but for the requests to wait, it is reasonable to assume he would have taken steps to obtain repayment.  I do not see how in these circumstances admitting his proof is unjustly prejudicial to other creditors.

20. I will, therefore, grant an order that the Liquidator’s adjudication is reversed and the proof admitted.  I will make a costs order nisi that both parties costs are paid out of the assets of the Company.  If either party wishes to challenge the costs order they should issue a summons within 14 clear days of handing down of this judgment.