MCY FINANCE LTD. S.A. AND OTHERS v. HONGKONG SHANGHAI (SHIPPING) LTD

HEADNOTE

                Criteria to be adopted in determining whether a party has "established a place of business in the colony" according to S.338 of cap.32.

                Also considering whether a Money Lending Agreement made under the 1911 Money Lending Ordinance comes within the ambit of Money Lenders Ordinance, cap.163.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. Four summonses lie before me for determination. Folios (4) and (9) relate to the service of process on the defendants within the jurisdiction. Such service is predicated on a premise that the defendants have established a place of business in Hong Kong.

2. Folio (7) seeks to set aside an ex parte order made by Mr Justice Rhind granting the plaintiffs leave to serve the process outside the jurisdiction. The 4th summons is taken out by the plaintiffs who are applying for an injunction to restrain the plaintiffs from enforcing the securities they hold, the effect of which would be to prevent the plaintiffs from continuing their business.

3. I propose dealing initially with the first three summonses which to an extent are inter-related.

4. Central to the issue of these summonses is the question whether the defendants have established a place of business in Hong Kong.

5. Mr Jonathan, a solicitor, has sworn various affidavits which are of assistance in this connection. He deposes that the defendant is a wholly-owned subsidiary of the Hongkong & Shanghai Banking Corporation. It was incorporated in the Bahamas. Another company was formed in Hong Kong, Wayfoong Shipping Services (which I will refer to as WSS). WSS is a wholly-owned subsidiary of the defendant.

6. The defendant entered into an Agency Agreement with WSS. A copy of the Agency Agreement is exhibited to the affidavit and under the Agency Agreement WSS is enpowered to represent the defendant in Hong Kong in connection with shipping finance business. It is, however, clear to me that what is contemplated by the Agency Agreement is that in general terms WSS's representation is limited to negotiations and discussions concerning the provision of shipping finance. If the negotiations are fruitful, the matter is referred to the defendant in the Bahamas who makes the final decision whether or not to conclude the transaction and advance the moneys required. Also WSS is involved in servicing any loans and supervising the repayment.

7. Voluminous correspondence was exhibited to the court. It is strongly my impression from going through this that the separate corporate identities are maintained and that business is transacted in the manner contemplated by the arrangements when the whole scheme was set up. It is perhaps relevant to observe that one of the main purposes of the Hongkong Bank incorporating the defendant and entering into the arrangements I have referred to was an endeavour to circumvent the possibility of tax liabilities arising.

8. There is no dispute that WSS has established a place of business in Hong Kong. Indeed a photo was produced which shows a plaque which is installed in China Building which indicates that it has offices there. Reference is also made to the defendants but it is clear that WSS hold themselves out as the defendants' agent. This is equally made clear on WSS's notepaper and at all times it is evident in the documents which were before me that WSS was acting as an agent for the defendant.

9. Mr Phillips for the plaintiffs invited me to view the arrangements in an entirely different way. I must say immediately that I have very considerable sympathy with the dilemma which faced him. Clearly his clients were not privy to the inner counsels of the Hongkong Bank group. I think he accepted that the correspondence and documents established that WSS and the defendant went through the form of dealing with transactions on the basis that the defendant was the principal and WSS, the agent for the shipping finance transactions. He maintained, however, that the substance of the matter was completely different. He mainly drew support for this submission from the absence of the sort of documents one would expect to see exhibited in support of defendant's case. In particular, he referred to the absence of internal memoranda to and from the Bahamas at the time of transactions which would lend credence to the assertion that WSS was indeed acting as agent and performing duties on the defendant's behalf. Mr Phillips also drew attention to the history of the matter. Prior to the formation of the defendant, the Hongkong & Shanghai Bank transacted its shipping finance affairs in Hong Kong. Many of its customers either had representatives in Hong Kong or were based there.

10. Mr Kwan of the plaintiffs had given an indication of the way business had been conducted and it was suggested that even after the defendant came into existence he still conducted his business with the defendant in a similar manner to the way it had always been previously transacted. Mr Phillips then took me through the correspondence and other documents and highlighted the parts which indicated that decisions were in reality taken in Hong Kong rather than in the Bahamas. He pointed out occasions where actions had been taken so promptly that it beggared belief to imagine that WSS had in fact communicated with the Bahamas to get confirmation of what was being done. It was also evident that some of the officers of the defendant had on occasion worn two or more hats. They had held positions in both WSS and the defendant. Mr Phillips submitted that having regard to all the circumstances, it appeared to be much more likely that in substance the main decisions were made in Hong Kong and that the defendant was used as a channel of communication rather than making meaningful decisions on its own initiative.

11. Mr Crystal for the defendant, as one would expect, took a very different line. He referred to a number of the letters and documents which were exhibited. He emphasized the fact that on almost every document WSS repeated that they were acting as agents for the defendant. It was evident that various officers in the companies had taken care to ensure that separate records and accounts were maintained and that it was fanciful to suggest that the whole arrangement was simply a charade. The defendant had, on the evidence before the court, clearly demonstrated the separate corporate identities and the fact that WSS was in substance and in fact the agent of the defendant. Mr Crystal referred to the Artemis⁽¹⁾ as authority for the proposition that the burden of proof of satisfying the court that the defendant has established a place of business in Hong Kong lay upon the plaintiffs. Mr Phillips agreed with this.

12. Before considering the law in any detail it is necessary for me to consider the extent to which the plaintiffs has succeeded in discharging this burden on the facts.

13. I am, by no means, satisfied that the functions which are performed by WSS and the defendant could remotely be described as a sham or a facade. I accept that any officer making decisions on such matters as the credit worthiness of customers must use a number of different sources of information before deciding whether or not to advance moneys. The fact that WSS or the Hongkong Bank may make recommendations is neither here nor there. It was necessary for the defendant to get advice from Hong Kong before loans were granted. It is also highly significant to observe that nowhere in the papers is it suggested that the defendant actually made any loans in Hong Kong. Normally arrangements were made for payments to be made in New York, if the currency concerned was U.S. dollars.

14. I will now endeavour to deal with the position in relation to the law. Lord Dunedin in the Lord Advocate v. Huron ⁽²⁾ suggested as a test the local habitation of the company. He accepted that an established place of business was an entirely different matter to carrying on business in the jurisdiction. This distinction was also accepted by Lord Cohen in re Tovarishestvo Manufactur Lindvig-Rabenek⁽³⁾.

15. It is also necessary to bear in mind the definition of "place of business" in section 341 of Cap.32. It does not include "a place not used by the company to transact any business which creates legal obligations.".

16. Assistance can also be derived from South Indian v. The Korean Bank⁽⁴⁾ which can readily be distinguished from the present case. Here, there is no question of the defendant having taken out a lease of the premises at China Building. Theodohos⁽⁵⁾ and Oriel⁽⁶⁾ are both also of assistance. I do not think that on the law the plaintiffs have satisfied me that the defendants, who are of course the party which is being sued, has "an identifiable or recognizable place of habitation in the Colony" which is the test according to the cases I have referred to.

17. The consequence of this is that the plaintiffs have not satisfied me that the defendants have established a place of business in the Colony and accordingly the defendant will be entitled to the relief they seek in folios (4) and (9) that is in setting aside the service within the jurisdiction.

18. The next matter to consider is whether the plaintiffs can show that it is appropriate for leave to be granted for service out of the jurisdiction under Order 11. By this I mean that Mr Justice Rhind's ex parte order should be set aside.

19. I accept that Vitcavichi v. Korner⁽⁷⁾ is authority for the proposition that there is a burden upon the plaintiffs to show that they have a good and arguable case before leave should be granted to serve a defendant out of the jurisdiction under Order 11 rule 4. I regret that the plaintiffs' case seems to me to fall far short of this.

20. Their claim is based on the defendant's alleged noncompliance with the Money Lending Ordinances. There is no doubt in my mind that the defendants are exempted from the requirements of Cap.163. This is because they are a wholly-owned subsidiary of a licensed bank. However, the 1980 Agreement, under which the main advances were made, was entered into prior to the enactment of Cap.163.

21. Mr Phillips argued that as the defendant was not registered under the 1911 Money Lending Ordinance the agreement was void. He cited as authority for this a number of cases. He went on to submit that the enactment of Cap.163 could not have the effect of breathing life into a void agreement. This submission disregards the specific transitional provisions contained in Section 36 of Cap.163. This section is stated to apply to "any agreement" made before the commencement of the Ordinance. I have no doubt that the effect of this is to bring the 1980 Agreement within the ambit of Cap.163. Even if I am wrong in this, there are other good reasons why the plaintiffs have no prospect of success in this litigation.

22. Consequent upon my finding that the defendants have not established a place of business in Hong Kong, there is very little to show that they have conducted business as Money Lenders here.

23. As has been pointed out by Mr Crystal, the moneys were not lent in Hong Kong. Also the 1980 Agreement was not concluded in Hong Kong by the defendants. When the transaction was completed the agreement was executed by the defendants in the Bahamas.

24. There is also the question of clause 17 of the 1980 Agreement and similar provisions in the subsequent agreements to the effect that English law should apply to the agreement. The plaintiffs should, in the absence of very compelling reasons, be held to this agreement. No compelling reasons have been forthcoming.

25. For the short reasons I have given, the plaintiffs have failed to discharge the burden which is placed upon them and accordingly I am satisfied that Mr Justice Rhind's ex parte order granting leave to serve the process out of the jurisdiction should be set aside. This means that the defendants are entitled to the relief sought in folio (7).

26. The consequence of my finding on these three summonses is that it is not necessary for me to consider the 4th summons, that is folio (15) where the plaintiffs are seeking an injunction. This summons will accordingly be dismissed.

27. I will hear the parties on costs.

(1) Artemis v. Artemis Transportation Corp. [1983] H.K.L.R. p.364
(2) Lord Advocate v. Huron [1911] S.C. p.612
(3) In re Tovarishestvo Manufactur Lindvig-Rabenek 1 Ch [1944] p.404
(4) South India Shipping corporation Ltd. v. Export-Import Bank of Korea [1985] 1 W.L.R. p.585
(5) The "Theodohos" [1977] Vol. 2 L.L.R. p.428
(6) In re Oriel Ltd [1986] 1 W.L.R. p.180
(7) Vitkovice Horni A Hutni Tezirstvo v. Korner [1951] Ac p.869