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HCA 6915/1996
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 6915 OF 1996
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| BETWEEN |
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CHINA GREAT WALL FINANCE COMPANY |
Plaintiff |
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AND |
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WONDERYOUTH INDUSTRIES LIMITED |
Defendant |
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Coram: Hon Reyes J in Court
Dates of Hearing: 27 and 28 October 2003
Date of Judgment: 18 November 2003
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J U D G M E N T
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I. Background
A. Preliminary
1. The Plaintiff ("CGW Finance") in its Re-Amended Statement of Claim ("RAMSOC") pleads that by a written agreement ("the Loan Agreement"), which came into existence before 20 May 1990, CGW Finance agreed to lend US$4.3 million to the Defendant ("Wonderyouth") at a rate of 7% per year for the purpose of purchasing and renovating La Salle Court, 30 La Salle Road, Kowloon ("the Property"). RAMSOC says that in breach of the Loan Agreement a substantial part of the loan has remained unpaid.
2. RAMSOC further alleges that by a 2nd written agreement ("the Supplemental Agreement") dated 19 March 1996 CGW Finance and Wonderyouth agreed to reschedule the payment of the principal and interest due under the Loan Agreement and grant CGW Finance an entitlement to "50% of the selling profit of the Property after deduction of all related costs". RAMSOC says that Wonderyouth failed to meet its obligations under the Supplemental Agreement.
3. Accordingly, CGW Finance claims outstanding principal and interest under the Loan and Supplemental Agreements and seeks a Declaration of entitlement to 50% of the net profit from any sale of the Property.
4. Wonderyouth's Re-Amended Defence ("RAMDEF") denies the authenticity of the Loan Agreement. Wonderyouth says that it never entered into such agreement. It alleges that in early 1990 Mr Mao Zhi Ren ("Mao") (described in RAMDEF as "the senior representative of the China Great Wall group of companies resident in Hong Kong") approached Mr Yip Heon Wai Dennis ("Yip") (Wonderyouth's executive director) and "asked to invest in [Wonderyouth's] business and to use [Wonderyouth] as an investment opportunity vehicle in Hong Kong". As a result, "Mao, acting on behalf of [CGW Finance] or otherwise, invested the sum of US$4.3 million into [Wonderyouth]". The US$4.3 million so "invested" was used for "various investment projects", including the purchase of the Property and the maintenance of a Foreign Exchange Margin Account ("the FX Account") at Bank of America's Hong Kong branch.
5. RAMDEF also says that in any event the US$4.3 million invested into Wonderyouth has been fully or partially repaid over time. If there was a Loan Agreement or if part of the US$4.3 million remains unpaid, RAMDEF further contends that the same is irrecoverable. This is because under Mainland law it was illegal for CGW Finance to lend money to Wonderyouth and under Hong Kong law CGW Finance in lending money acted as an unlicensed money lender.
B. Company profiles
6. It is convenient to introduce here certain companies to which reference will be made in this Judgment.
7. CGW Finance. This is a Mainland state-owned company set up on 8 April 1988. It is a subsidiary company of the China Great Wall Computer Group ("the CGW Group"). It engages in financing and investment business pursuant to its Memorandum and Articles of Association ("the Articles"). Its business is confined to the Mainland. The US$4.3 million advanced to Wonderyouth was the only loan ever made by CGW Finance to a Hong Kong company.
8. The Articles (dated January 1988) provide as follows (in translation):-
(1) "Chapter 1. General Provisions
1. China Great Wall Group Finance Company Limited (herein after referred to as the 'Company') is a finance company with ownership by the whole people which handles the internal financing business of Great Wall Computer Group Company (hereinafter referred to as the 'Great Wall Group').
2. In compliance with relevant guidelines, policies, laws and regulations of the State and in accordance with the Provisional Regulations of the People's Republic of China for the Administration of Banks and relevant stipulations of the People's Bank of China ["PBOC"], and with the aim of developing the economy, stabilising the currency, raising socio-economic efficiency, the Company uses flexible and diversified credit forms to raise funds for the member enterprises of Great Wall Group, supports the development of the Group and contributes to rigorous development of China's computer industry and the opening up of the international market.
3. The Company shall be subordinate to China Great Wall Computer Group Company Limited and its business shall be subject to the leadership, administration, coordination, supervision and auditing of the People's Bank of China.
4. The registered capital of the Company shall be RMB 50 million and foreign currency of US$51 million. The Company shall have limited liability and it shall be liable for its debts to the extent of its registered capital.
5. The Company shall be an economic entity which implements independent accounting, operates autonomously and of self-sufficiency. It shall be an enterprise legal person which is registered with the State Administration for Industry and Commerce.
6. Address of Company: A1, Ba Bao Zhuang, Diaoyutai, Fucheng Road, Beijing."
(2) "Chapter 2. Scope of Business
7. The Company shall handle the following Renminbi business:-
(1) operate the deposit and adjustment business of all dedicated funds of the member units of the Great Wall Group;
(2) handle the loan and investment business for technological innovation and the short-term, interim and urgent working capital loan business of the member units of the Great Wall Group;
(3) undertake mandate investment and mandate loans for specified projects of the member enterprises of the Great Wall Group;
(4) be an agent for the share and bond issuing business of the member units of the Great Wall Group as approved by the People's Bank of China; and,
(5) provide debt security and attestation services to the member units of the Great Wall Group.
8. The Company operates the following foreign exchange business inside the Great Wall Group:-
(1) operate foreign exchange deposits, loans and investment business;
(2) operate foreign exchange security and attestation business; and,
(3) handle international financing, leasing and sub-leasing business.
9. To handle leasing and sub-leasing of equipment, products for member units of the Great Wall Group.
10. To undertake economic consulting business for member units of the Great Wall Group.
11. To handle other business approved by the People's Bank of China and the State Administration of Foreign Exchange."
(3) "Chapter 3. Organisation
12. The Company shall implement a system under which the general manager is responsible to and under the leadership of the Board.
The board of directors shall convene once annually.
13. The duties and powers of the board of directors shall be:-
(1) to elect the chairman of the board and appoint the general manager.
(2) to examine and approve the operational plans and medium - and long-term development plans of the Company;
(3) to examine and approve the annual work reports, financial reports and plan for dealing with profits and losses of the Company; and,
(4) to amend the Articles of Association of the Company.
14. The duties and powers of the general manager shall be:-
(1) to be in charge of the overall operation and management of the Company;
(2) to appoint and dismiss the deputy general manager and department managers of the Company;
(3) to be in charge of drawing up the operational plans and development plans of the Company and implementing the same upon submission to, and approval by, the board of directors;
(4) to formulate various systems of rules and regulations of the Company and be in charge of their implementation;
(5) to propose the annual work reports, financial reports and plan for dealing with profits and losses; and,
(6) to determine and approve agreements regarding financing and development, etc. of the Company."
(4) "Chapter 4. Operation and Management
15. The Company shall submit the annual work plans, summary reports and financial statements to the People's Bank of China and timely report the detail of material business activities in accordance with regulations.
16. The Company shall deposit a reserve in accordance with regulations and shall open respectively with the Beijing Branch of the People's Bank of China and the Bank of China a Renminbi and a foreign exchange account.
17. The interest rates on deposits and loans shall be implemented in accordance with the relevant regulations of the People's Bank of China.
18. The Company shall establish a bad debt provision system in accordance with regulations.
19. The Company shall establish various sound management systems such as for loans, financing and finance in accordance with relevant state regulations.
20. The Company shall pay profits to the Great Wall Group Company. Retained and special funds shall be handled in accordance with the relevant regulations of the state and financial administration authorities."
(5) "Chapter 5. Supplementary Provisions
21. Matters not addressed in these Articles of Association shall be handled in accordance with state laws and regulations of the People's Bank of China.
22. These Articles of Association shall be implemented upon their approval by the head office of the People's Bank of China and the same principle shall apply when they are amended."
9. Mao was CGW Finance's General Manager from the early 1990s until January 1996 when he was relieved of his duties. Mr Gao Chuan Yi ("Gao") was CGW Finance's Assistant General Manager. He came to Hong Kong in 1993. Gao ceased to work for CGW Finance about a month before trial. Mr Wang Zhi ("Wang"), CGW Finance's only witness at trial, was General Manager from 1988 to about 1990 when he became chairman of the company's board.
10. CGW Finance has never had an office or bank account in Hong Kong.
11. CGW Group. This is a Mainland state-owned enterprise whose business is developing computer technology. It has many subsidiaries in the Mainland, including CGW Finance. It has 2 subsidiaries in Hong Kong, Technology Research Company Limited ("TRC") and China Great Wall Computer Group (HK) Limited ("CGW Computer HK").
12. Wonderyouth. This was incorporated on 6 September 1988. It has a share capital of 10,000 shares of $1.00 each. Its 1st directors were Yip and his mother Madam Wong Ying ("Madam Wong"), both of whom lived at 8A Winway Court, 3-9 Tai Hang Road ("the Winway residence"). In about October 1988 the company's registered office was 6th Floor, Success Commercial Buildings, 245 Hennessy Road, Wanchai. As at 26 October 1988 (when 2 subscription shares were transferred to them), Yip and Madam Wong each held 5,000 shares in the company.
13. On 18 May 1990 Mao was appointed a director of Wonderyouth. At the time he used the Winway residence as his address. On 22 May 1990 Yip transferred 100 Wonderyouth shares and Madam Wong her entire holding of 5,000 Wonderyouth shares to Mao. As a result Mao became a 51% shareholder.
14. On 22 August 1990 Bank of America registered a charge dated 19 July 1990 to secure such general banking facilities as might be extended to Wonderyouth. Particulars of the property charged were as follows:-
"The Company's/* Deposit(s) with Bank of America NT & SA and such further sum or sums which shall at any time hereafter be deposited by the Company/* with Bank of America NT & SA
* and the company trading as Electro Metrics Asia"
According to Wonderyouth's business registration, Electro-Metrics Asia was a name under which Wonderyouth carried on business between 1989 and 1991.
15. From at least 14 September 1992 the company used as its address: 1704 Hennessy House2, 313 Hennessy Road, Wanchai ("the Hennessy Road address").
16. A company return dated 30 December 1996 and filed with the Companies Registry on 3 January 1997 states that "[Mao] was removed as Director of the Company with effect from 17/1/1996". The return was amended by notice filed on 13 February 1997 to read: "[Mao] was resigned as Director of the company with effect from 17/01/96". No resignation letter from Mao appears among the bundle of Company Registry records adduced in evidence by Wonderyouth.
17. Some time before 6 September 1996 (it is not apparent when from the Company Registry documents adduced at trial), Mao's 5,100 shares in Wonderyouth were transferred to Prosten Technology Company Limited ("Prosten"). Prosten is a close associate company of Wonderyouth.
18. On 25 February 1998 Madam Wong resigned as Wonderyouth director. On the same day Ms Gladys Chan Fu Kuen and Mr Yip Heon Keung (Yip's brother) were appointed directors.
19. On 19 March 1998 Yip transferred 4,400 of his shares to Prosten, with the result that the latter became 95% shareholder of Wonderyouth.
20. In 1998 the company seems to have changed its address to Unit 1105, 118 Connaught Road West. Later, on 27 May 2000, the company's registered office became Unit 906-910, 9th Floor, Dah Sing Financial Centre, 108 Gloucester Road, Wanchai.
21. Silver Good Development Limited ("Silver Good"). This was incorporated on 9 March 1990. The 1st directors were Mao, Mr Lei Kat Cheong ("Lei"), Mr Kang Dian ("Kang"), Mr Gao Jian Min ("Gao Jian Min") and Mr Wang Gang ("Wang Gang"). All used B1, 11th Floor, Block B, Greenville Gardens, Shiu Fai Terrace as their address in Company Registry returns. The company's registered office was 1609 Shun Tak Centre, Connaught Road, Central.
22. On 17 May 1990 Silver Good's share capital was increased from 10,000 shares of $1.00 each to 1 million shares of $1.00 each. 999,998 shares were allotted as follows: Mao 250,000; Lei 199,999; Ms Lei Julia Yip ("Ms Lei") 49,999; Kang 200,000; Gao Jian Min 100,000; and Wang Gang 200,000. On 12 June 1990 2 subscription shares were transferred to Lei and Ms Lei respectively.
23. On 22 May 1991 Lei resigned as director. He was replaced by Mr Tse Ping ("Tse"). On 10 June 1991 Lei transferred 100,000 Silver Good shares to each of Mao and Gao Jian Min. On the same date Ms Lei transferred her 50,000 shares to Tse.
24. On 14 June 1991 Silver Good moved its registered office to the Hennessy Road address. On 28 February 1992 its registered office changed to Room 1201, Allied Kajima Building, 138 Gloucester Road, Wanchai ("the Allied Kajima address").
25. On 19 February 1993 Gao became a Silver Good director and Kang, Tse, Gao Jian Min and Wang Gang resigned as directors. On 30 September 1993 Kang, Gao Jian Min and Wang Gang transferred their respective holdings of 200,000 shares to Mao. On the same date Tse transferred his 50,000 shares to Gao.
26. On 1 December 1994 Silver Good again changed registered office, this time to Unit A, 9th Floor, China Overseas Building, 139 Hennessy Road, Wanchai ("the China Overseas address"). The office later moved to 4th Floor, Block C, Sea View Estate, 2-8 Watson Road, North Point on 14 November 1996 ("the Sea View address").
27. On 27 November 1996 James Tsang Tuan Hui ("Tsang") became a director. Gao resigned as director on 8 April 1999. Mao and Tsang resigned on 18 January 2000. According to a note dated 3 September 2003 in the trial bundle, Silver Good has not filed any document with the Companies Registry since 2001.
28. Silver Dragon Management Limited ("Silver Dragon"). This was incorporated on 21 April 1989. The 1st directors were Tsang and Mr Takayoshi Chigita ("Chigita"), each of whom held 1 share in the company. The company's registered office in April 1989 was Rooms 1106-1108, Tai Yau Building, 181 Johnston Road, Wanchai. In September 1989 the office moved to 8th Floor, Caltex House, 258 Hennessy Road, Wanchai.
29. On 23 April 1990 Mr Kwok Chang Shiu Feng ("Kwok") became a director. As at October 1990 the 3 Silver Dragon directors each held 30,000 shares.
30. On 29 January 1993 Tsang and Chigita respectively transferred their 30,000 shares to CGW Computer HK. On the same day Kwok transferred 29,999 of his shares to CGW Computer HK and the remaining 1 share to Mao. On 19 March 1993 Mao became a director and Kwok and Chigita resigned from the board. Tsang resigned at the same time, but only to be immediately re-appointed director. In about August 1993 the company moved its registered office to the Allied Kajima address. Around December 1994 the office moved once more, this time to the China Overseas address.
31. On 2 August 1996 Gao became director. In about November 1996 Silver Dragon moved its office to the Sea View address.
32. On 6 May 1997 Mr Song Chun Sheng was appointed director.
33. On 4 April 2003 CGW Computer HK transferred 1 Silver Dragon share to Mr Sam Leung Ming Sang ("Leung"). At some time before 21 April 2003 Leung replaced Mao as a director.
34. CGW Computer HK. This was incorporated on 27 June 1991. The company was set up to register its name in the Companies Registry. It was feared that the name would be taken by a 3rd party, especially since there was then a listed Hong Kong company known as Great Wall Electronic International Limited. The 1st directors were Wang and Mao. Each held 1 share. Mao resigned as director on 17 January 1997. He was replaced by Mr Lu Ming ("Lu"). Mao's 1 share was transferred to Lu on 25 February 1997. On 2 May 2001 Wang resigned as director. He was replaced by Leung. Wang's single share was transferred to Leung on 8 May 2001.
35. TRC. The company was incorporated on 23 September 1980 as Chatenay Limited. It was re-named TRC on 3 January 1986. Wang became a director on 30 October 1985. In about April 1986 TRC moved its office to the Sea View address.
36. On 29 December 1987 China Computer Development Corporation (Shenzhen) ("CCDC") came to hold 80,000 shares (that is, 80% of TRC's share capital of 100,000 shares of $10 each). On 22 December 1988 CCDC's shareholding increased to 99,999 shares, the remaining 1 share being held by Wang. On 22 March 1996 the company's share capital was increased to $11 million by the creation of 1 million new shares of HK$10 each. One million of the new shares were allotted to China Great Wall Computer Group Co. ("CGW Computer"). CCDC transferred its 99,999 shares to CGW Computer on 10 October 1996.
C. Basic facts
37. There is no dispute that US$4.3 million was advanced by CGW Finance to Wonderyouth as follows:-
(1) On 5 April 1990 CITIC Industrial Bank Beijing ("Industrial Bank") transferred US$1 million from CGW Finance's account to Wonderyouth's Account No. 415-205-2011-2 ("the Wonderyouth Account") with Standard Chartered Bank.
(2) On 16 May 1990 Industrial Bank transferred US$600,000 from CGW Finance's account to the Wonderyouth Account.
(3) On 29 June 1990 Industrial Bank transferred US$2.7 million from CGW Finance's account to the Wonderyouth account.
38. CGW Finance contends that the US$4.3 million was transferred pursuant to the terms recorded in the Loan Agreement. CGW Finance says that such terms must have been agreed before 20 May 1990, although on the face of the copy Loan Agreement produced in Court a written document was not signed by Mao until 6 January 1991.
39. No original copy of the Loan Agreement was produced at trial. The original cannot be found. CGW Finance instead produced a photocopy of the Loan Agreement. The document (typed in Chinese with handwritten insertions) provides as follows (in translation):-
"LOAN AGREEMENT
| Borrower: |
Wonderyouth Industries Limited, Hong Kong |
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| Lender: |
China Great Wall Finance Company |
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| Guarantor: |
The property, LASA COURT in Kowloon Tong, as security. |
The parties as mentioned above, through full consultations, reach the loan agreement as follows:
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Type of Loan: |
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Loan for property investment. |
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Amount: |
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United States Dollars Four Million Three Hundred Thousand Only (US$4,300,000). |
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Specific purpose of the Loan: |
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To acquire the LASA Court apartment in Kowloon Tong, Hong Kong and for maintenance thereof. |
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| 4. |
Interest Rate for the Loan: |
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The loan will adopt a fixed interest rate, i.e. 7.0% per annum. If the state makes adjustments to interest rates, the said interest rate will also be adjusted according to corresponding percentage. In case of any objections thereto, the Lender will have the right to have the loan repaid on demand. |
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Interest will be calculated based on the actual amount lent and the duration of the loan. The date on which the loan is drawn shall be the date on which the interest thereon is calculated. Where the duration of the loan is within 3 months, the interest will be paid together with the principal. Where the duration of the loan exceeds 3 months, the interest will be settled quarterly. This loan will be drawn down in stages in accordance with the payment requirements of the property. |
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| 6.3 |
Term of the Loan and Method of Repayment: |
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The term of the loan will begin from May 20, 1990 and end on May 20, 1993. |
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The principal of and interest on the loan repaid by the Borrower shall be made by wire transfer or account transfer to the account designated by the Lender. |
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If repayment (of the principal and interest) of the loan has not yet been made when it is due, the term may be appropriately extended through consultations. |
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Liability for Breach of Contract: |
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The Lender shall make its loan within three days (subject to postponement if not a banking day) upon signing of this contract. If the Lender fails to make its loans on schedule, it shall pay a breach of contract penalty at a rate of 5% to the Borrower based on the loan amount and days postponed. |
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Within the effective term of the contract, the Borrower shall submit a financial statement to the Lender on a monthly basis. Within the term of the loan, the Lender will have the right to supervise the use thereof, and will have the right to request the Borrower to provide information relating to the loan and will keep it confidential for the Borrower. If the Borrower fails to perform the obligations as mentioned above, the Lender will have the right to withhold the loan in part or in whole. |
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If the Borrower fails to use the loan for the purpose specified in the contract, the Lender will have the right to at any time ask repayment of the principal and interest of the loan in part or in whole. The portion the use of which is not in accordance with the contract will be subject to an additional default interest at a rate of 50%. If the case is serious, the Lender will have the right to stop the making of new loans. If overstocking, loss or waste of supplies is caused by the Borrower or the Borrower uses the loan contract for illegal purposes during the term of the loan, the Lender will have the right to charge an additional default interest at a rate of 100% on the loan amount or have the principal and interest of the loan repaid on demand. |
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The Borrower shall make repayments according to the time schedule specified in the contract. If the Borrower is required to extend the term of the loan, it shall apply to the Lender seven days before its maturity. With the consent of the Lender, the Borrower may go through the procedures for such extension. If the Borrower fails to repay the loan on schedule, the Lender, in addition to the right to have the loan repaid on demand, will have the right to charge an additional default interest at a rate of ____ % of the original interest rate on the principal and interest which has been overdue until the principal and interest of the loan which has been overdue is repaid in full. |
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Guarantee: |
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The Guarantor will be responsible for supervising the repayment by the Borrower of the principal and interest of the loan on schedule. If the Borrower fails to repay the principal and interest of the loan on schedule, the Guarantor will be responsible for the repayment of the principal and interest thereof and the default interest within seven days from the date on which the loan is due. Upon the satisfaction of the obligations under the guarantee, the Guarantor will have the right to claim the same from the Borrower. |
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Others: |
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Either Party shall not amend or dissolve the contract without consent of the other parties except for the occurrence of those events which will cause such amendment or dissolution as permitted in the agreement. |
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With respect to any matters not covered in this contract, the Parties agree to make supplementary provisions thereto based on the spirit of friendly cooperation and through consultations. The supplementary provisions will be equally authentic as this contract. |
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This agreement is made in triplicate and will be effective after the Parties have affixed their signature and seal thereto. The Lender, the Borrower and the Guarantor will each keep one copy. |
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The English translation of this contract is an appendix to this contract and is for tax purposes in Hong Kong. Any inconsistency between both language versions, the contract in Chinese language shall prevail." |
40. Two signatures, said to be those of Yip and Mao respectively, are at the bottom of each page of the Loan Agreement. On the right side of the last page appear Mao's signature and 2 imprints (one fainter than the other) of CGW Finance's seal. On the left side there seems to be Yip's signature (Yip denies this) and just below that an imprint of Wonderyouth's chop.
41. On 21 May 1990 Wonderyouth entered into a Sub-sale and Purchase Agreement with Hung Shiu Limited ("Hung Shiu") to purchase the Property for $26 million. Hung Shiu had itself just agreed to purchase the Property on 9 May 1990 for $21.85 million. Wonderyouth entered into a Supplemental Agreement with Hung Shiu on 12 July 1990. The Property was finally assigned to Wonderyouth on 21 July 1990.
42. On 26 November 1991 Messrs Fairbairn Catley Low & Kong ("FCLK") wrote to "China Great Wall Finance Corporation, c/o Mr Dennis Yip, 802 Connaught Commercial Bldg., 185 Wanchai Road, Hong Kong". FCLK requested settlement of Bill No. 46348 dated 24 September 1991 for $199,250. That bill concerned services provided by FCLK for a loan agreement in connection with No. 109 Caroline Hill Road. Wonderyouth paid FCLK's bill by cheque ("the Caroline Hill Payment") dated 9 December 1991 signed by Yip. Wonderyouth also issued its Debit Note No. 91120 addressed to "China Great Wall Finance Corp.[,] c/o Silver Good Development Ltd.[,] Room 1704, Hennessy Road, Wanchai, Hong Kong" and marked "Attention: Mr Mao Zhi Ren". The Debit Note charged CGW Finance with $199,250 "[b]eing expenses payment on your behalf - Cost of legal fees (details attached)".
43. On 2 December 1993 Wonderyouth remitted US$200,000 ("the December 1993 Payment") from its American Express Bank account to CGW Finance. Yip signed the Telegraphic Transfer Request Form. In the "Message" box of the latter, the words "REPAYMENT OF LOAN" were inserted. Yip says that he does not know why those words were put in the box.
44. In January 1996 Mao left CGW Finance to settle in the United States. Wang assumed Mao's responsibilities.
45. Between 2 and 5 February 1996 Mao faxed a copy of the Loan Agreement to Yip. Yip says that this was the 1st time that he saw the Loan Agreement. The final page of the Loan Agreement faxed by Mao in February 1996 and produced by Wonderyouth in discovery has Mao's signature and CGW Finance's 2 chop imprints, but does not have Yip's signature or Wonderyouth's chop. Mao's signature appears on all other pages of this copy Loan Agreement; Yip's does not.
46. In February 1996 Mao also faxed to Yip an English document ("the English Document") entitled "LOAN AGREEMENT" whose function or purpose neither party could explain at trial. Mr Coleman (appearing for Wonderyouth) suggested that Mao might have put forward the document as the English translation mentioned in the Chinese Loan Agreement. But, while it follows the text of the Chinese version relatively closely, the English document is not an exact translation of the Chinese version. The English document bears Mao's signature and no one else's. It contains no seal imprints.
47. A repayment agreement ("the March 1996 Agreement") dated 14 March 1996 on Wonderyouth letterhead was produced by Wonderyouth in discovery. That document states:-
"This agreement is made on the 14th day of March, 1996 between:
| Party A: |
Wonderyouth Industries Limited having a business address at 1704 CLI Building, 313 Hennessy Road, Wanchai, Hong Kong and |
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| Party B: |
Silver Good Development Limited having a business address at Unit A, 9th Floor, China Overseas Bldg., 139 Hennessy Road, Wanchai, Hong Kong
c/o. China Great Wall Finance Company, having a business address at A11 Nan Cao Chang Street, Xi Zhi Men Nei Avenue, Xi Cheng District, Beijing, P.R. China
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At the request of Party B, Party A agrees to make an urgent T/T payment to party B on or before 15th March, 1996 for the amount of Japanese Yen20,200,000,000.00 which is accepted as equal to USD200,000.00 at an exchange rate of 1 USD to 101 Japanese Yen.
Also at the request of Party B. Party A will convert the total Yen to USD for Party B at the market rate of the date-of-transfer. All exchange lost and cost of exchange is charged to Party B. Party B realize the received amount will be less than USD200,000.00 depends on the market exchange rate.
This repayment of Yen20,000,000 is confirmed to be part of the total repayment of the Loan amount between Party A and China Great Wall Finance Company (Loan agreement dated Jan 6, 1991).
After paying this amount, the total repayment due from Party A to Party B will be reduced to USD4,100,000.00."
The March 1996 Agreement was signed by Gao on behalf of Silver Good. Wonderyouth did not sign the same.
48. On 16 March 1996 Prosten caused ￥20,200,000 to be remitted to Silver Good's Kincheng Bank account. The amount ("the March 1996 Yen Payment") was converted to US$190,381.53 at a rate of US$1 = ￥106.1027311 on 19 March 1996.
49. In late March 1996 Wang and Yip signed the Supplemental Agreement which was as follows:-
"This agreement is made on the 19th day of March, 1996 between:
| Party A: |
Wonderyouth Industries Limited, having a business address at 1704 CLI Building, 313 Hennessy Road, Wanchai, Hong Kong; and |
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| Party B: |
China Great Wall Finance Company, having a business address at A11 Nan Cao Chang Street, Xi Zhi Men Nei Avenue, Xi Cheng District, Beijing, P.R. China. |
Based on the loan agreement between Party A and Party B dated on Jan.6, 1991, the two parties agreed to settle all issues according to the following:
| 1) |
Party A will make a repayment of total USD4,100,000 or its equivalent currency amount to Party B within 30 days after both parties signed this settlement agreement. This amount of USD4,100,000.00 is calculated based on the original loan amount minus the USD200,000.00 that Party A had paid to Party B on March 15,1996. |
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Party A will make an interest repayment on or before 30th Sept. 1996 for the total interest of the loan (based on attached loan agreement) minus any previous payment that Party A had repaid to Party B or its affiliated Companies in the past. |
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In appreciation of the extended loan, Party A agreed to let Party B share 50% of the selling profit for La Salle Court property after minus all related costs. |
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This agreement is a supplement agreement to the loan agreement dated Jan 6,1991 and becomes effective when both parties signed. This two agreements will supersede all other previous agreement both verbal or written. |
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| 5) |
This agreement is under the law of Hong Kong." |
50. The Supplemental Agreement, which is on Wonderyouth letterhead, was signed by both Wang and Yip, the latter signing on 28 March 1996. At the bottom of the document were the following words: "Attachment: Loan agreement between the two parties dated Jan 6,1991". But nothing was actually annexed to the Supplementary Agreement.
51. On 30 April 1996, 2 days after payment of the US$4.1 million ought to have been made under the Supplemental Agreement, Wonderyouth by its accountant Ms Celia Cheung, wrote to CGW Finance "c/o Silver Good Development Ltd". The letter was marked for Gao's attention. It read:-
"With reference to the loan settlement between CGWF and our company, we like to extend the payment date for at least 15 days since we can not exchange that big sum of money to USD.
Meanwhile, we like to offer other currencies instead. We should be able to pay USD1 million in RMB and USD1.5 million in Japanese Yen (Exchange rate 105 yen to 1USD).
Please confirm your acceptance of the above arrangements in writing so we can start the necessary arrangement."
52. On the same day, the Beijing representative office of Homko International (Holdings) Investment Company Limited ("Homko") transferred RMB 2 million ("the Homko Payment") to CGW Finance at Wonderyouth's instruction in part payment of the US$4.1 million loan.
53. On 3 May 1996 CGW Finance replied to Wonderyouth's letter of 30 April 1996 as follows (in translation):-
"We have received your letter dated 30 April 1996 and now reply as follows:
| 1. |
We received on 30 April 1996 a cheque of RMB 2,000,000 from [Homko] delivered on your behalf. The cheque has been banked. |
|
|
| 2. |
We agree that you may effect repayment of one million US dollars in RMB to be converted at the exchange rate of US$1:RMB 8.35. |
|
|
| 3. |
We agree that you may effect repayment in Japanese Yen to be converted at the exchange rate of US$1:105 Japanese Yen. |
|
|
| 4. |
The total payment of US$4,100,000 shall be completed no later than 13 May 1996. |
|
|
| 5. |
Please reply to us and arrange repayment as soon as possible upon receipt of this letter. |
We hope to continue the friendly cooperation with you in the future."
54. On 10 May 1996 Beijing Summer Palace Garden Villas Co. Ltd ("Summer Palace") wrote to CGW Finance (in translation):-
"We have a deposit with you in the sum of US$137,001. We hereby agree that this amount and any interest thereon will be used to repay the outstanding amount owed by [Wonderyouth] to you. Please notify [Wonderyouth] as well."
I refer below to the transfer of US$137,001 as "the Summer Palace Payment".
55. The trial bundle includes a loan document ("the May 1996 Mao Loan") dated 28 May 1996 between Mao and Prosten. It reads:-
| "Lender: |
Prosten Technology Co. Ltd |
| Borrower: |
Mr Mao Zhiren |
| Subject: |
Loan Agreement |
| Date: |
May 28, 1996 |
|
|
| 1) |
The borrower requested the lender to T/T USD1,000,000 (US dollars one million) to the following account: |
|
|
|
| Bank Name: |
Texas Commerce Bank |
|
|
| Bank Address: |
717 Travis
PO Box 2558
Houston, Texas
77252-8025
USA |
| Bank ABA#: |
113000609 |
| Account Name: |
Best Road Investment Co. Ltd |
| Account No.: |
001-00913947 |
|
|
| 2) |
The borrower had paid to China Great Wall Finance totally USD376,522.00 on behalf of the lender during May 1996. Thus the loan amount reduced from USD1,000,000 to USD623,478.00. |
|
|
|
| 3) |
The borrower agreed to pay back the loan anytime at the request of the lender with interest rate to be determined by both parties. |
|
|
|
| 4) |
The date of the loan will be effective on the date of T/T transaction." |
|
If one converts the Homko Payment of RMB 2,000,000 into US$ at the rate of US$1 = RMB 8.35 (the rate mentioned in CGW Finance's 30 April 1996 letter), one obtains US$239,520.96. If one adds the Summer Palace Payment of US$137,001 to this amount, one arrives at US$$376,521.96 which is close to the figure of US$376,522 mentioned in the May 1996 Mao Loan. This coincidence suggests that the reference in the May 1996 Mao Loan to a payment of US$376,522 by Mao on Wonderyouth's behalf concerns the Homko and Summer Palace Payments.
56. On 4 June 1996 Prosten remitted ￥52.5 million ("the June 1996 Yen Payment") to Silver Good to hold on behalf of CGW Finance. The Customer Receipt (signed by Prosten) included an instruction for Prosten's bank to send the following message: "LOAN REPAYMENT TO GREAT WALL FINANCE OF THE AMT OF USD500,000 X 105 = ￥52.5 MILLION EXCHANGE TO USD AT SPOT RATE". In actuality the amount remitted was converted by Silver Good's bank at US$1 = ￥108.0571805 and only came to US$485,834.38.
57. By a Receipt dated 5 June 1996 Silver Good acknowledged receipt of the Homko, Summer Palace and June 1996 Yen Payments.
58. On 5 June 1996 CGW Finance's then solicitors, Messrs Robert Wang & Co., sent a letter before action demanding the balance of the US$4.1 million due under the Supplemental Agreement.
59. CGW Finance filed a Statement of Claim on 19 June 1996. By its Defence of 2 August 1996, Wonderyouth initially admitted the Loan Agreement. On 26 July 1999 it amended that plea to one of non-admission. Following objection by CGW Finance, on 4 January 2000 Master Lau gave Wonderyouth leave to re-amend its Defence. RAMDEF pleaded for the 1st time that Yip never saw the Loan Agreement until February 1996 when the document was faxed to him by Mao.
D. Alleged payments and set-offs
60. Wonderyouth says that the 1990 US$4.3 million loan was more than repaid through some 14 transactions, including the Caroline Hill Payment, the December 1993 Payment, the Homko Payment, the Summer Palace Payment and the March and June 1996 Yen Payments mentioned above. In this section I summarise miscellaneous other payments and set-offs alleged by Wonderyouth.
61. On 18 December 1990 Wonderyouth caused Texas Commerce Bank in Houston to transfer US$200,000 ("the GWC Payment") from Wonderyouth's account to Great Wall Corporation ("GWC"). GWC is a US company set up by the CGW Group's US subsidiary. GWC is separate from CGW Finance, which has no control over GWC.
62. By cheque dated 27 March 1992 Wonderyouth paid $30,000 ("the Macau Lawyer Payment") to FCLK. This was done pursuant to a letter dated 25 March 1992 from FCLK to CGW Computer HK "c/o Room 802, Connaught Comm. Bldg., 185 Wanchai Road, Hong Kong" and marked for Mao's attention. The letter (which concerns work done by FCLK in connection with the purchase of Silver Dragon by CGW Computer HK) stated:-
"Re: Silver Dragon Management Limited
We refer to the above matter and note that the assets of the company include a property in Macau, of which we are not in a position to advise you.
A Macau lawyer should be engaged to advise on the title deeds of the property and the relevant issues concerning the operation of the hotel in Macau; especially the licenses in relation thereto. If you wish to engage a Macau lawyer through our firm, kindly deposit a sum of HK$30,000 as costs on account so that we can proceed to engage a Macau lawyer to advise on the same.
Further, since our meeting on 21st March 1992, we have not received further documents from Silver Dragon Management Limited."
63. The trial bundle contains a document ("the Prosten Computer Document") dated 4 May 1993 billing CGW Finance "c/o Silver Good Development Ltd" for US$160,000 in respect of "80 sets computer sold to China Great Wall Finance Corp., Re: Our Invoice no.: 90879 dd Mar 31, 92". The last line of the Prosten Computer Document reads "Silver Good due to Prosten" and quotes a figure of US$160,000. CGW Finance denies that it bought computers from Prosten. No evidence was adduced as to when and where Prosten delivered computers to CGW Finance. Invoice No. 90879 was not produced.
64. On 6 May 1993 Mao on behalf of Silver Good signed the following receipt:-
"We, Silver Good Development Ltd, acknowledge receipt of Standard Chartered cheque no. 572355 amounted to HK$600,000 (SAY HONG KONG DOLLARS SIX HUNDRED THOUSAND ONLY) being fund transfer from Wonderyouth Industries Ltd to Silver Good Development Ltd."
Silver Good also acknowledged receiving $300,000 from Wonderyouth on 8 November 1995. CGW Finance denies that it authorised Silver Good to receive these 2 amounts ("the 2 Silver Good Payments") on CGW Finance's behalf.
65. On 24 September 1993 Wonderyouth received a letter from East Sea International Ltd ("ESI") instructing Wonderyouth to remit US$300,000 ("the ESI Payment") to ESI's Banque Indosuez Macau Branch account in payment of a debt said to be owed by CGW Finance to ESI. Wonderyouth remitted US$300,000 as instructed on 7 October 1993. CGW Finance has no record of doing business with ESI, much less owing ESI US$300,000.
66. By a receipt dated 12 August 1994 Silver Dragon acknowledged receipt on behalf of CGW Computer HK of Wonderyouth's cheque no. 231025 for $200,000 ("the Silver Dragon Payment"). CGW Finance denies that it authorised Silver Dragon to receive that amount on its behalf.
67. Wonderyouth seeks to set-off losses sustained on the FX Account. The FX Account was opened pursuant to a Wonderyouth board resolution dated 30 October 1990 signed by Yip as Chairman. The board minutes record that:-
"IT WAS RESOLVED THAT
the opening of FX Margin A/C in the name of Mr Yip Heon Wai with Bank of America, Hong Kong Branch, be and hereby approved and that Mr MAO Zhiren and Mr GONG Li be hereby authorized to operate the FX Margin account singly. All the profit and losses derived from the trading of FX Margin are to be treated as the company's profit and losses."
68. Yip explains the rationale for attributing losses incurred on the FX Account to CGW Finance in his Witness Statement as follows:-
"In practice and as envisaged by the Company's board, the FX Account was run and controlled by Mao and Gong. Although the FX Account was opened in my name, I had no real input or say in the day to day running of the FX Account. With hindsight, I wish I had taken a keener interest in the running of the FX Account as the end result was that it operated at a loss of US$843,280.40. It was agreed between Mao and myself that these losses would be set off against the Company's payment out on [CGW Finance's] investment in the Company. I saw this as a fair arrangement in circumstances where the operation of the FX Account was outside my direct control and where it had been Mao and Gong who had been responsible for incurring these losses."
69. In support of the claim for US$843,280.40 on the FX Account, Wonderyouth adduced a single sheet ("the FX Document") entitled "Movement of FX Margin Call A/C (No. 1)". The FX Document purports to show how the FX Account operated between September 1990 and April 1995. During that period a total of US$843,280.40 was pumped into the FX Account from other accounts: Wong Ying - Bank of America Time Deposit (US$200,000 in September 1991); Electro Metric Asia - Bank of America Time Deposit (US$100,000 in October 1990); Prosten - American Express Time Deposit (US$165,000 in November 1991); Dennis Yip - Bank of America Time Deposit (US$157,551.06 in early 1992); and Prosten - Bank of America Time Deposit (US$220,729.34 in May 1992). Interest totalling US$79,481.65 was earned on the FX Account. A total of US$460,891.90 was remitted out from the FX Account to various accounts: Prosten - Bank of America Savings Account (US$70,000 in July 1992); Dennis Yip FX No. 2 Account (US$130,000 in October 1993); Prosten - Bank of America Savings Account (US$170,000 in December 1993) and Prosten - Sin Hua Account (US$90,891.90 in April 1995). Following the last remittance of US$90,891.90, the balance of the FX Account was zero. If one adds the total interest accrued on the FX Account to the total monies put in and then subtracts the total amount taken out, one arrives at a net loss of US$461,870.15 sustained on the FX Account.
70. Finally, Wonderyouth wishes to set off the amount of US$1,795,768.78 said to have been transferred between 8 April 1992 and 31 March 1994 from Wonderyouth's Lehman Brothers account to Silver Good.
II. Discussion
A. The US$4.3 million loan
71. The Loan Agreement. I do not think that the Loan Agreement, apparently signed by Mao on 6 January 1991, reliably reflects the terms which were initially agreed orally between CGW Finance and Wonderyouth before 20 May 1990 in relation to the US$4.3 million loan. Four reasons lead me to this conclusion.
72. First, the copy Loan Agreement which Mao faxed to Yip in February 1996 bore neither Yip's signature nor Wonderyouth's chop. The copy Loan Agreement produced by CGW Finance on the other hand purports to have been signed by Yip and chopped by Wonderyouth on some unknown date. When asked by Mr Coleman whether the copy Loan Agreement in CGW Finance's possession had been given to CGW Finance by Mao, Wang replied that he could not remember. In all likelihood that copy was provided to Wang by Mao in early 1996 at about the time when CGW Finance started pressing for payment of the US$4.3 million loan by Wonderyouth. If so, it is strange that Mao should provide a copy signed by Yip to CGW Finance and at around the same time fax an unsigned copy to Yip.
73. If one places the signature pages of the copy Loan Agreements respectively produced by CGW Finance and Wonderyouth (Trial Bundle III, pp. 626 and 658 respectively)) one on top of the other and holds the superimposed copies to the light, one finds that the location of Mao's Chinese and English signatures and the 2 impressions of CGW Finance's chop on both pages neatly coincide with each other. Thus, the copy signature page faxed to Yip and the corresponding page in the Loan Agreement given to CGW Finance are probably images of the same original page. The copy signature page sent to Yip bears the fax legend "FEB-05-96 MON 03:08 AM" on top. In the absence of evidence that Mao covered up Yip's signature and Wonderyouth's chop before faxing the signature page to Yip, one must infer that on about 5 February 1996 the original Loan Agreement (that is, the original document which Mao copied to Wang and Yip) had not been signed by Yip. That means Yip would not have signed the original Loan Agreement on 6 January 1991 or any time shortly thereafter. Yip probably did not see the signed Loan Agreement until February 1996 as he claims.
74. Second, although it is not unusual for parties later to reduce into writing terms initially agreed orally, reading the Loan Agreement it is hard to believe that was the case here. This is because the Loan Agreement purports to record terms which the parties could not conceivably have agreed. For example, the reference in cl. 7(3) of the Loan Agreement to "overstocking, loss or waste of supplies" does not make sense. It is unlikely that the parties agreed to such term orally in 1990. Yet on its face the Loan Agreement alleges that they did so. Another example is cl. 8. That implies that a 3rd party guarantor was privy to the oral agreement in 1990. No such guarantor has been identified, nor does it seem that there ever was a guarantor. Such discrepancies cast doubt on the Loan Agreement as an accurate record of what may have been orally agreed in 1990 as the terms of the US$4.3 million loan.
75. Third, Mr Coleman noted that Yip's purported signature on the Loan Agreement was more like the signature which he used in 1996 and did not match the signature which he had in 1990 or 1991. Yip denied ever having a signature such as that which appears on the Loan Agreement during the period between 1990 and 1991. Examples of his signature in 1990-91 appear in the trial bundle, typically on Wonderyouth cheques or Companies Registry documents which Yip signed in his capacity as Wonderyouth director. Despite the fact that no handwriting expert was called, on a visual inspection the signature on the Loan Agreement is plainly different from that which Yip seems conventionally to have used in 1990-91. This fact causes me to doubt whether Yip's signature on the document was actually affixed in January 1991. It may instead have been forged onto the Loan Agreement by someone (possibly Mao) in 1996 just before a copy of the document was provided to CGW Finance.
76. It would have been useful to have seen the original version of which Trial Bundle III, pp. 626 and 638 claim to be copies. But CGW Finance on whom the onus rests to establish the authenticity of the Loan Agreement on the balance of probability cannot produce the original. Presumably, such original remains in Mao's hands and Mao, who now resides in the US, was apparently not prepared to give evidence before the Court.
77. Mr Anthony Chan SC (appearing for the Plaintiff) submitted that I should regard Wonderyouth's chop on the copy Loan Agreement produced by CGW Finance as strong evidence of the latter's genuineness. I am unconvinced. The chop is a simple one, similar in format (ignoring Wonderyouth's name on the chop) to stamps used by many companies in Hong Kong, A determined person could easily fabricate such a chop. In any event, it is likely that at least until 17 January 1996 when he ceased to be a Wonderyouth director, Mao had access to the company chop and could have readily obtained a version of the chop or made imprints of the same on any documents he chose.
78. Fourth, I am bothered by the English Document. It may just possibly have been a rough attempt at translating the Loan Agreement. It may have been prepared to be appended to the Loan Agreement as a translation. But it is not a translation. It diverges from the Chinese Loan Agreement on many points. There are then 2 different documents, both of doubtful provenance, which claim to record terms orally agreed in 1990. They cannot both be right. In my view, their twin existence suggests that both should be treated with scepticism and rejected as reliable evidence of terms agreed in 1990.
79. Accordingly, I reject the Loan Agreement as a document accurately reflecting the terms on which US$4.3 million was advanced to Wonderyouth in 1990.
80. The US$4.3 million as "investment". Rejection of the Loan Agreement as evidence of the terms on which US$4.3 million was advanced to Wonderyouth in 1990 does not mean that US$4.3 million was not loaned in 1990. On the contrary, Wonderyouth admits having received US$4.3 million as a loan from CGW Finance.
81. At the start of the trial, I asked Mr Coleman what Wonderyouth meant when pleading in RAMDEF that US$4.3 million was received from CGW Finance as an "investment". "Investments" in companies are typically effected through provision of loan or equity capital. Was Wonderyouth referring to one or other of such type of investment or was it referring to something else? In due course, Mr Coleman clarified that Wonderyouth's case was that US$4.3 million had been received from CGW Finance as a shareholder loan and that in consideration of the same Mao was made a director and majority shareholder of Wonderyouth.
82. The clarification given was strange since, if the injection of US$4.3 million came from CGW Finance, why should Wonderyouth make Mao (as opposed to CGW Finance) as majority shareholder? Further, at the time when the US$4.3 million loan was advanced, Wonderyouth had a share capital of only $10,000. It is unclear how it was determined that the injection of US$4.3 million by way of shareholder loan qualified Mao for a 51% (as opposed to some greater percentage) of Wonderyouth's shareholding. I shall return to Mao's relationship with Wonderyouth later.
83. For now, the key point is that Wonderyouth accepts that CGW Finance loaned US$4.3 million. Such loan must have been subject to terms. For instance, in the absence of evidence that particular terms were specified, the law will generally imply that the loan was made at a commercial rate of interest and the principal was to be repaid within a reasonable time. See, on the Court's general approach, Chitty on Contracts (28th ed.), I, §§2-129 and 2-131 (pp. 148-9). Prima facie, the consequence of having received the US$4.3 million loan was that, subject to questions of illegality (see below), Wonderyouth came under an obligation to repay the same to CGW Finance.
84. The Supplemental Agreement. Nor does rejection of the Loan Agreement as evidence of terms actually agreed between CGW Finance and Wonderyouth in 1990 mean that the Supplemental Agreement is of no effect. On the contrary, to see why the Supplemental Agreement has contractual force, it is necessary to consider its genesis.
85. Wang said that, after assuming Mao's duties, he learned about the outstanding US$4.3 million. He sought to recover the loan from Wonderyouth. In his Witness Statement, Wang states:-
"... I made several telephone calls to Yip in which I demanded from the Defendant repayment of the loan. At no time since I started making contact with Yip and until the filing of [RAMDEF] in these proceedings had [Wonderyouth] in any way disputed the Loan Agreement, the loan it had received thereunder or its obligation to repaid the loan with interest. It was probably due to the Plaintiff's pressure on [Wonderyouth] for repayment that [Wonderyouth] had through a third party made a partial payment of Japanese yen 20,200,000 (agreed to be equivalent to US$200,000) on 15th March 1996 ... and which prompted [Wonderyouth] to send to [CGW Finance] the Supplemental Agreement dated 19th March 1996 ... for [CGW Finance's] approval and signature. [CGW Finance] accepted the terms proposed by [Wonderyouth] and I had on behalf of [CGW Finance] signed on it..."
86. Yip's evidence is to the following effect:-
"On about 28 March 1996, I signed on the Company's behalf what CGW [Finance] describes as the Supplemental Loan Agreement (P13/D49) dated 19 March 1996. CGW's then Chairman, Wang Zhi signed the Supplemental Loan Agreement on CGW's behalf. This agreement is typed on the Company's [Wonderyouth's] notepaper. It refers to the Loan Agreement dated 6 January 1991 and to the 'extended loan' and apparently attached a copy of the Loan Agreement. I agreed to the terms of the Supplemental Loan Agreement at Mao's request. When he asked me to agree the Supplemental Loan Agreement he told me that he had come from a meeting with Wang Zhi, who had not been happy with the existing investment arrangements and had requested that in consideration for the investment, the Company should agree to give CGW [Finance] a 50% share of any profit made from any sale of the Property. I agreed to Mao's request and to the terms of the Supplemental Loan Agreement without the benefit of any legal advice. I simply did not realise the legal significance of referring to CGW [Finance]'s investment of US$4.3 million in the Company as a 'loan'. I agreed to the term 'loan' as this is how the investment was described in the Loan Agreement. I was happy to adopt CGW [Finance]'s description of the scheme of arrangement between the two companies in circumstances where the Company and Prosten were already paying out on the investment to CGW [Finance], or to its associated companies."
87. By end March 1996 when the Supplemental Agreement was signed, Yip had become aware of the Loan Agreement. The latter had been faxed to him in early February 1996. Although no copy of the Loan Agreement was ever annexed to the Supplemental Agreement, the reference to an agreement of 6 January 1991 in cl. 6 and at the bottom of the Supplemental Agreement must have been understood by Yip to mean the copy Loan Agreement provided to him by Mao in February 1996. The Supplemental Agreement was prepared by Wonderyouth (probably acting through Mao) on its letterhead. There is no suggestion that, in preparing the Supplemental Argument, Wonderyouth intended to refer to any document other than the Loan Agreement dated 6 January 1991.
88. On CGW Finance's side, Wang was pressing for payment of the outstanding balance of the US$4.3 million. As far as Wang was aware, only US$200,000 of the loan amount had been repaid over nearly 6 years. As far as CGW Finance was concerned, the terms of the US$4.3 million advance as evidenced by the Loan Agreement had stipulated for full payment by 20 May 1993. Unless Wonderyouth paid the overdue monies immediately or a rescheduling of the debt was agreed, CGW Finance would have regarded itself as entitled to sue Wonderyouth (as it has since done) under the Loan Agreement.
89. Yip's evidence in Court was that he knew that the Loan Agreement was false in that it was not a genuine record of the terms behind CGW Finance's "investment" of US$4.3 million in Wonderyouth. Yip said in cross-examination that he allowed Mao to persuade him to sign the Supplemental Agreement. That may have been the case. It is apparent from Yip's evidence that Mao exerted a strong influence on him. But CGW Finance would not have known any of this discussion between Yip and Mao. Such discussion between Mao and Yip would have been purely internal to Wonderyouth. Whatever Yip's motive for signing the Supplemental Agreement, CGW Finance was entitled to take Yip's signature on the contract at face value as signifying Wonderyouth's consent to be bound by the terms of the Supplemental Agreement. There is no suggestion that Yip lacked authority to bind Wonderyouth. Nor has Wonderyouth pleaded any case of undue influence or duress exerted by Mao on Yip.
90. The Supplemental Agreement refers to itself in cl. 1 as a "settlement agreement". One might ask: a settlement of what? On an objective assessment, the description must refer to the settlement of CGW Finance's claims under the Loan Agreement. Thus, in consideration for CGW Finance not pursuing whatever claims it might have under the Loan Agreement dated 6 January 1991, Wonderyouth agreed to abide by the payment terms in the Supplemental Agreement. As an added inducement to CGW Finance's forbearance, Wonderyouth also promised to give 50% of the net sale profit from the Property.
91. Within the Supplemental Agreement, there is valid consideration at law moving from one party to the other. Whatever the strength of CGW Finance's case on the Loan Agreement as a standalone document, the Supplemental Agreement is a valid enforceable contract in its own right. The fact that in 2003 the Court rejects the Loan Agreement as an authentic document, does not mean that on purely commercial considerations Wonderyouth in 1996 would not have preferred to settle any CGW Finance claims in connection with the Loan Agreement rather than take a chance on the hazards of litigation. In other words, it does not follow (contrary to Mr Coleman's submission) that, the Loan Agreement being void, the Supplemental Agreement must also be void.
92. I should spell out a further ramification of the execution of the Supplemental Agreement. The Supplemental Agreement is in effect a contract to be bound by the terms of the Loan Agreement as modified by the Supplemental Agreement. Such agreement was entered into by the parties by way of a settlement, regardless of the merits or defects of the Loan Agreement as an enforceable contract. Had there been no Supplemental Agreement, CGW Finance could not have sued on the Loan Agreement on its own. But, as a result of Wonderyouth signing the Supplemental Agreement, Wonderyouth accepted liability on the terms of the Loan Agreement as modified by the Supplemental Agreement. CGW Finance, in my judgment, has a valid cause of action arising out of the Loan And Supplemental Agreements taken in conjunction.
93. Wonderyouth's conduct after the Supplemental Agreement. The evidence shows that in fact, following the signing of the Supplemental Agreement, Wonderyouth regarded itself as bound by the Loan Agreement as modified by the Supplemental Agreement. This is contrary to Yip's denials at trial. I now review that evidence.
94. First, there is the letter dated 30 April 1996 from Wonderyouth to CGW Finance which explicitly refers to "the loan settlement between CGWF and our company". It was sent 2 days after full payment of the outstanding principal should have been made under the Supplemental Agreement and asks for a further extension of time.
95. Second, the Homko and Summer Palace Payments do not make sense unless Wonderyouth regarded itself as bound by the Supplemental Agreement. I have noted that the figure of US$376,522 in the May 1996 Mao Loan probably refers to the US$ total of the Homko and Summer Palace Payments. If so, the May 1996 Mao Loan acknowledges that the borrower (Mao) caused US$376,522 to be paid to CGW Finance on behalf of the lender (Wonderyouth or its alter ego Prosten) in May 1996. Why would US$376,522 be paid on behalf of Wonderyouth/ Prosten unless the latter owed CGW Finance at least that much? Mr Coleman suggested that the amount might have been a gift. I find this suggestion fanciful.
96. Third, the June 1996 Yen Payment to CGW Finance likewise makes no sense unless Wonderyouth/Prosten regarded itself as owing money to CGW Finance. It is significant that the Customer Receipt signed by Prosten refers to the monies remitted as a loan repayment. It is also noteworthy that, although the US$/Yen exchange rate at the time of the remittance was US$1 = ￥108.0571805, Prosten instructed its bank to inform CGW Finance that the ￥52.5 million remitted should be regarded as equivalent to US$500,000 using a conversion of US$1 = ￥105. The latter was the rate stipulated by CGW Finance in its letter of 3 May 1996 agreeing to extend further the time of payment in the Supplemental Agreement. This is unlikely to have been mere coincidence.
97. Fourth, invited to explain the post-Supplemental Agreement documentary evidence in cross-examination, Yip was unconvincing and evasive in his response. He blamed Mao. He did whatever Mao told him to do. He did not know why the Customer Receipt for the June 1996 Yen Payment mentioned loan repayment. Apparently, although Wonderyouth did not regard itself as bound by the Loan or Supplemental Agreements, it was prepared to say whatever Mao or for that matter Silver Good, Silver Dragon and even CGW Finance wanted Wonderyouth to say about a remittance being a loan repayment.
98. The thrust of Yip's evidence was that he looked up to Mao. Mao was well-educated. As an undergraduate, Mao had been a student of Yip's father. Mao held a master's degree from an American university. Mao had previously achieved "an impressive and successful investment record whilst working in CITIC's head office." Insofar as monies were remitted out of Wonderyouth to companies associated with Mao on Mao's instructions, Yip trusted Mao implicitly. It was unnecessary to challenge him and Yip never did so. Yip gave Mao free rein to do as Mao pleased. Mao understood every transaction and kept details of the same. Yip says that he did not regard monies being sent by Wonderyouth to companies associated with Mao as money going outside Wonderyouth, since Mao owned 51% of Wonderyouth's shares.
99. Pressed by Mr Chan in cross-examination, Yip referred to a "specific understanding" that he had with Mao in 1996 that the "inward funding" of US$4.3 million had been "fully repaid in one way or another to him [Mao] or his associates". According to Yip, at some point (it is not clear from Yip's evidence when), Mao had wanted more payment to be made over and above the US$4.3 million advanced by CGW Finance, apparently so that the "investment" would have some yield. After discussion with Mao, Yip agreed to make additional payments on Mao's instruction. Yip "honoured" what he had agreed with Mao just as in the past he had never questioned Mao's instructions to send money to Silver Good, Silver Dragon or CGW Finance.
100. In re-examination, Yip clarified that Mao became a director in 1990 at the time when the US$4.3 million was advanced to Wonderyouth. From that time onwards, monies were periodically transferred from Wonderyouth to companies associated with Mao. Mao ceased to be a Wonderyouth director in early 1996 because Yip and Mao agreed, "after looking into the numbers of previously transaction" that the "inflow" of funds from Mao or his associate companies into Wonderyouth had more than "outflowed" to companies associated with Mao. Mao therefore had no more reason to be in business with Wonderyouth.
101. I am prepared to accept that Mao held an extraordinary sway over Yip. But that cannot explain everything. I still find Yip's explanation unconvincing. I do not think that it gives a complete picture. Yip must have been aware that funds were being remitted out of Wonderyouth on Mao's instruction to various companies including CGW Finance. I doubt that anyone would have tolerated such situation unless he felt that the monies were being paid out for some good reason. In the case of payments specifically made to CGW Finance, there would have been no other reason than that Wonderyouth owed CGW Finance a substantial amount of money.
102. After 28 March 1996 when Yip signed the Supplemental Agreement, he must have appreciated that CGW Finance would enforce the bargain reached in that document. He must also have known that monies were being paid to CGW Finance, possibly on Mao's instruction, pursuant to that document. If Yip allowed Mao a free hand in how and when payments were made to CGW Finance after 28 March 1996, it would have been because Yip knew that Wonderyouth was obliged to repay monies pursuant to the terms of the Supplemental Agreement.
103. Mr Coleman argued that none of the references to loan repayment in the various documents identified by me above specifically mention the Loan or Supplemental Agreements. It cannot therefore be inferred (Mr Coleman says) that sundry references to "loan repayment" relate to monies being paid pursuant to the Loan or Supplemental Agreements. With one exception, I disagree.
104. One cannot read the documents in a vacuum. Given the chronology of these documents, the natural inference is that the references to loan repayment after March 1996 relate specifically to what was agreed by the Supplemental Agreement.
105. The one exception concerns the December 1993 Payment. I agree that the words "REPAYMENT OF LOAN" in the Telegraphic Transfer Request Form do not refer to repayment of a loan pursuant to the Loan Agreement. As discussed above, the evidence suggests that the Loan Agreement probably did not come into existence until early 1996. The words in the Telegraphic Transfer Request Form are more likely simply to refer to the partial repayment of the US$4.3 million advanced in 1990.
106. I conclude that, as from 28 March 1996, contrary to Yip's evidence, Wonderyouth regarded itself as bound by the Loan Agreement as modified by the Supplemental Agreement.
B. Wonderyouth's technical objections against repayment
107. Regardless of the status of the Loan and Supplemental Agreements as evidence of a contract, Mr Coleman submitted that any unpaid balance of the US$4.3 million loan was not recoverable for one or more of the following reasons:-
(1) the loan was illegal under Mainland law;
(2) the loan was illegal under the Money Lenders Ordinance ("MLO") (Cap. 163);
(3) RAMSOC only advanced a case based on the Loan Agreement so, if the Loan Agreement was invalid for any reason, it was not open to CGW Finance to claim repayment under any other basis.
108. Alleged illegality under Mainland law. Both parties produced expert reports on Mainland law to the effect that CGW Finance had no power to make US$ loans to companies outside the CGW Group. By agreement, the 2 reports were produced at trial without their respective experts being called to give oral evidence. Further, the submission by CGW Finance of a report was without prejudice to its contention that Mainland law was irrelevant.
109. Wonderyouth tendered an expert report by Mr David Dali Liu ("Liu") of Llinks Law Office, Shanghai. Liu's opinion may be summarised as follows:-
(1) On 20 May 1990 CGW Finance, as the finance company of the CGW Group, was not permitted to loan monies to companies outside of the CGW Group. This prohibition arises from Art. 1(3)4 of the "Circular on Some Issues Regarding Incorporation Approvals of Finance Institutions" issued by the PBOC on 5 February 1997. The Circular remains in effect today.
(2) On 28 March 1996 CGW Finance was not permitted to loan monies to companies outside of the CGW Group without the PBOC's special approval. This arises from Art. 5(1)5 of the "Implementing Rules on Trial Establishment of Finance Companies by Group Companies" promulgated by PBOC, the State Planning Commission, the State Commission of Restructuring Economy and the Economic and Trade Commission of the State Council.
(3) The business licences of the CGW Group for the relevant period all limit CGW Finance's scope to the internal business of CGW Group companies. Thus, the US$4.3 million loan to Wonderyouth was beyond CGW Finance's scope of business whether the loan was made in 1990 or 1996 or any time in between.
(4) A Reply dated 10 September 1990 from the Economic Tribunal of the Supreme People's Court to the Enterprise Registry Section of the State Administration for Industry and Commerce states that:-
"The scope of business of an enterprise shall be subject to the scope of business approved by and registered in the administration for industry and commerce. In the event that an enterprise is engaged in any business activities that exceed its scope of business, such activities should be deemed void."
(5) On the other hand, Liu points out:-
"According to Article 106 of the Supreme People's Court's Interpretation (First) on Certain Issues Concerning the Application of the Contract Law of the PRC enacted on 29 December 1999..., if a transaction is beyond the scope of business of one party to such transaction and such business is restricted or specifically chartered by the state, the PRC court may hold such agreement as invalid. Financial business is one kind of the businesses specially chartered by the state."
(6) Liu concludes in his final paragraph:-
"Based on the above and assuming that, as a matter of Hong Kong law, Wonderyouth is not a member of the [CGW Group] and the transactions under the Loan Agreement and its Supplemental Agreement, as a matter of Hong Kong law, constitute loans, I am of the opinion that [CGW Finance] was not permitted by the laws of the PRC to make the said loan transactions with Wonderyouth and [CGW Finance] has exceeded its scope of business as set out in its business licenses when making the said loan transaction with Wonderyouth."
110. Liu does not expressly say that the provision of US$4.3 million by CGW Finance to Wonderyouth was illegal. Liu simply concludes that CGW Finance "exceeded its scope of business" in a way not permitted by Mainland law. The consequence of such excess is unclear from Liu's opinion. He highlights the 10 September 1990 Reply which suggests that the loan is void. But he also notes that the Mainland Court "may" (not "will") hold the loan as invalid. Further, he does not explain what happens under Mainland law if a loan is deemed invalid. For example, does it mean that any monies already loaned are irrecoverable? Or does it mean that the borrower cannot enforce the loan, but the lender is able to seek repayment of any monies wrongly loaned? Finally, even if it is to be inferred from Liu's opinion that an ultra vires loan is automatically invalid and illegal, the effect of illegality under Mainland law is not discussed.
111. CGW Finance tendered a report by Professor Bing Ling of the Law School at City University. The report may be summarised as follows:-
(1) Professor Bing says:-
"Whilst I agree with the conclusions of Defendant's [Wonderyouth's] expert report to the effect that the Loan Agreement is void, I note that the principal line of reasoning relied on by Defendant's expert in support of the conclusion is flawed. Defendant's expert focused primarily on the ultra vires character of the Loan Agreement in impugning its validity. In fact, the pre-1999 Chinese law was unsettled in regard to the effect of ultra vires contracts... The Supreme People's Court Interpretation on Certain Questions Concerning the Application of the Contract Law of the People's Republic of China (I) (1999) ..., art. 10, declares that an ultra vires contract is not invalid so long as it does not convene statutory restrictions or prohibitions on business. This provision could apply retroactively to the Loan Agreement... As such, the ultra vires character of the Loan Agreement would not render it void. It is non-compliance with the statutory restriction on Plaintiff's business that, in my opinion, invalidates the agreement."
(2) Under Mainland law, although the Loan Agreement would be void, CGW Finance can claim restitution of any principal advanced plus interest thereon. In the Mainland:-
"in the absence of the agreement of the parties, the computation of interest arising from late payment of money debt is based on the interest promulgated by the [PBOC] for default on loans of financial institutions. In the past decade, the interest rate applied in practice has been based on simple interest and ranged between 0.03-0.05% per day. At present, the Supreme People's Court has no fixed interest rate in that regard and reference must be had to the current PBOC rate."
(3) In contrast, "[t]he Supplemental Agreement was agreed to be governed by Hong Kong law. Its validity and effect as a question of Hong Kong law and I do not express any opinion thereon".
112. I note that, if one takes the simple interest of 0.03% per day mentioned by Professor Bing and multiplies that by 365 days, one arrives at 10.95% per day which is higher than the 7% interest claimed by CGW Finance in this action.
113. Neither expert assists Wonderyouth's case. On the one hand, Liu does not go so far as to say that the US$4.3 million loan (on whatever terms advanced) was automatically invalid as ultra vires, irretrievably illegal by reason of statutory contravention and thus completely irrecoverable under Mainland law. Liu's opinion is more circumspect and limited. On the other hand, although Professor Bing says that the Loan Agreement is illegal and void because it contravenes statute, he also says that monies advanced under the Loan Agreement would be recoverable with interest at a higher rate than that claimed by CGW Finance in this action. Further, Professor Bing expresses no view on the validity and effect of the Supplemental Agreement, the document which I have concluded to be operative in this case.
114. Wonderyouth is bound by the Supplemental Agreement. The latter is expressly governed by Hong Kong law. Assume, however, that Mainland law is relevant in assessing that document's validity. The Supplemental Agreement was a contract whereby CGW Finance sought to recover monies loaned in 1990. No further monies were loaned under the Supplemental Agreement. Even if the original advance of US$4.3 million (whether or not on the terms of the Loan Agreement) was invalid, there could be no objection under Mainland law to CGW Finance seeking to recover the monies advanced with interest by way of restitution. It follows that, insofar as it provides for recovery of monies advanced illegally, the Supplemental Agreement would merely have been a means by which CGW Finance was seeking to enforce its restitutionary rights against Wonderyouth. On the evidence before me, I do not see that Mainland law (even if applicable) could render the Supplemental Agreement unenforceable.
115. Alleged illegality under the MLO. The relevant provisions of the MLO are:-
"7(1). No person shall carry on business as a money lender:-
(a) without a licence;
(b) at any place other than premises specified in such licence; or
(c) otherwise than in accordance with the conditions of a licence.
...
23. No money lender shall be entitled to recover in any court any money lent by him or any interest in respect thereof or to enforce any agreement made or security taken in respect of any loan made by him unless he satisfies the court by the production of his licence or otherwise that at the date of the loan or the making of the agreement or the taking of the security (as the case may be) he was licensed;
Provided that if the court is satisfied that in all the circumstances it would be inequitable if a money lender who did not satisfy it that he was licensed at the relevant time was thereby no entitled to so recover such money or interest or to enforce such agreement or security, the court may order that the money lender is entitled to recover such money or interest or to enforce such agreement or security to such extent, and subject to such modifications or exceptions, as the court considers equitable."
116. The suggestion of illegality under the MLO can be dealt with shortly. There is no basis for it. There is no evidence that CGW Finance was carrying on a money lender's business in Hong Kong. Even on Wonderyouth's own case, CGW Finance advanced US$4.3 million for "investment" purposes, not as part of a Hong Kong business of earning interest on money lending. The US$4.3 million advance was a single transaction and Wang's evidence is that, apart from that one-off loan, CGW Finance has not lent money to any other Hong Kong company. This is not surprising. It is also Wonderyouth's case that CGW Finance cannot under the law of the place of its incorporation and the Articles lend money to companies outside the CGW Group.
117. Pleading of the Loan Agreement. This, too, can be dealt with briefly. There is no substance to the point either. The pleadings do not confine the Court to a determination of the narrow question whether US$4.3 million was or was not advanced under the terms of the Loan Agreement.
118. For example, RAMSOC puts Wonderyouth's liability under the Supplemental Agreement squarely in issue. See RAMSOC §§7, 9 and 10. RAMDEF specifically responded to CGW Finance's case on the Supplemental Agreement. RAMDEF §17(a) alleged that there was an oral agreement on 28 March 1996 that "the Defendant should pay to the Plaintiff the sum of USD4,100,000.00 within 30 days and interest (less any previous payments that had been made by the Defendant to the Plaintiff's affiliated companies) on or before 30th September 1996". RAMDEF §17(b) pleads that it was further orally agreed that "the Defendant would give to the Plaintiff 50% of the net profits from the future sale of the Property if and only if the Plaintiff would agree to postpone the repayment of the monies until after the sale of the Property and waive all interest thereon". RAMDEF §17(b) pleads that the Supplemental Agreement "did not correctly reflect the oral agreement reached between the Plaintiff and the Defendant and was drafted in that way by mistake". At the trial before me, contrary to the case in RAMDEF, Yip simply denied that there was any binding agreement on 28 March 1996, oral or written. But that does not affect the fact that liability under the Supplemental Agreement was at issue on the pleadings.
119. Finally, Wonderyouth itself spotlights the US$4.3 million advance made in 1990 and its alleged repayment by Wonderyouth in RAMDEF §§6(3), 7, 8, 9, 14, 19, 20, 21 and 22. Those paragraphs in RAMDEF require investigation by the Court as to the alleged "investment" nature of the US$4.3 million advance and as to the accuracy of the contention that such "investment" has been fully repaid by Wonderyouth.
C. Wonderyouth's alleged repayments and set-offs
120. Mr Coleman submits that, if the Court holds Wonderyouth liable to make repayment in respect of the US$4.3 million advanced in 1990, the Court should nonetheless find that Wonderyouth has more than paid back that sum.
121. Wonderyouth relies on the following 14 transactions as repayments of or set-offs against the US$4.3 million loan:-
(1) The Caroline Hill Payment.
(2) The December 1993 Payment.
(3) The March 1996 Yen Payment.
(4) The Homko Payment.
(5) The Summer Palace Payment.
(6) The June 1996 Yen Payment.
(7) The GWC Payment.
(8) The Macau Lawyer Payment.
(9) The US$160,000 claimed by the Prosten Computer Document.
(10) The ESI Payment.
(11) The 2 Silver Good Payments.
(12) The Silver Dragon Payment.
(13) The US$843,280.40 lost on the FX Account.
(14) The US$1,795,768.78 transferred by Lehman Brothers to Silver Good.
CGW Finance is prepared to accept the first 6 payments just listed as going towards reduction of the US$4.3 million advance. It disputes the remaining 8 items.
122. Wonderyouth's general argument. The thrust of Wonderyouth's case on the 8 disputed items is that these related to transactions handled by Mao or were payments made on Mao's instruction. Since CGW Finance was the finance or treasurer company of the CGW Group and since Mao was General Manager of CGW Finance, payments by Wonderyouth to companies related to CGW Finance can be treated as payments made by Wonderyouth on behalf of CGW Finance. Mao would have caused Wonderyouth to make such payments out to CGW Group-related companies in discharge of CGW Finance's function of CGW Group financier or treasurer. Rather than route the payment through CGW Finance which would then only pay out the same to a CGW Group-related company, Mao streamlined the process by causing Wonderyouth to make the payment to the related company directly.
123. Wonderyouth's argument lacks merit. There is no evidence that in causing payments to be made by Wonderyouth Mao was acting in the capacity of CGW Finance's General Manager as opposed to Wonderyouth's executive director. Wonderyouth produced no document substantiating its contention that the 8 disputed payments were made at the behest of CGW Finance in discharge CGW Finance's obligations towards other companies. Nor is it apparent from the Articles that Mao as General Manager had the power to act as Wonderyouth alleges.
124. Yip says that he had an "understanding" with Mao that Wonderyouth's payments to various companies could be treated as reducing the US$4.3 million loan. Yip was vague on the details of this alleged understanding. I do not see, why Mao in coming to any understanding with Yip should be regarded as acting otherwise than as a Wonderyouth director or, possibly, in Mao's personal capacity.
125. If the 8 disputed payments were truly supposed to be set off against CGW Finance's loan, one would have expected Wonderyouth to have accounting records showing at any given time what amounts were being paid out to whom to reduce the US$4.3 million loan pursuant to what instruction received when from CGW Finance. There should also be receipts. There should be some paper trail. But there is none. There is only Yip's assertion at trial that such was his understanding with Mao who was left to run things as he saw fit.
126. Further, I am sceptical about Yip's evidence to the effect that, because eventually he and Mao "understood" that more funds had flowed out to companies associated with Mao or the CGW Group than the US$4.3 million that had flowed in from CGW Finance, Yip and Mao mutually agreed that Mao should cease to be a director and surrender his shares in Wonderyouth in 1996. If the US$4.3 million loan was an "investment" loan from CGW Finance and if Mao became a 51% shareholder of Wonderyouth to reflect CGW Finance's contribution to Wonderyouth's funds, why should Wonderyouth curtail Mao's representation on the board and Mao's 51% shareholding by reference to Mao alone without consultation with CGW Finance? By early 1996 Mao was no longer CGW Finance General Manager, Wang had replaced him. Why were matters such as CGW Finance representation on the board and any shareholding for CGW Finance by way of security for its loan not broached with Wang, for example? There are simply too many logical gaps in Yip's account of an "understanding" with Mao for me to accept it as any answer to CGW Finance's claim.
127. I now examine each of the 8 disputed items.
128. The GWC Payment. There is no evidence of the rationale behind this payment. GWC, although a member of the CGW Group, is a different entity from CGW Finance. Without more, it is not possible to treat the remittance to GWC for an unknown reason as a payment in partial discharge of Wonderyouth's $4.3 million debt to CGW Finance.
129. The Macau Lawyer Payment. FCLK's letter dated 25 March 1992 indicates that this payment went towards a deposit made on CGW Computer HK's behalf. Again, although CGW Computer HK is a member of the CGW Group, that by itself is not a reason to treat the payment as having been made to CGW Finance.
130. The Prosten Computer Document. There is no evidence of computers having been delivered at any time to CGW Finance. Even if delivery had been made, the right to receive payment would belong to Prosten not Wonderyouth. Wonderyouth and Prosten may be closely associated companies. But that is no reason in law for treating debts due to Prosten as amounts capable of being set-off by Wonderyouth.
131. The ESI Payment. Apart from hearsay evidence in ESI's letter of instruction dated 24 September 1993 to the effect that CGW Finance owed ESI money, there is no evidence of the alleged debt of US$300,000. Wonderyouth paid ESI on 7 October 1993 without first obtaining written authorisation from CGW Finance or any evidence that the alleged debt truly existed. Wonderyouth accordingly paid ESI at Wonderyouth's peril.
132. The 2 Silver Good Payments. Mr Coleman says that the 2 payments were effected through Silver Good because CGW Finance had no Hong Kong bank account. He infers from the fact that Silver Good shared registered offices with Silver Dragon and (eventually) TRC that Silver Good must be part of the CGW Group. This conclusion (Mr Coleman submits) is bolstered by the fact Mao and Gao were both directors of Silver Good. Assume that Silver Good is part of the CGW Group. I do not see how that transforms any payment by Wonderyouth to Silver Good (even if made on Mao's instruction) into a payment in reduction of the debt owed by Wonderyouth to Silver Good. It would have been a simple matter for Wonderyouth to have obtained contemporaneous documentary evidence from CGW Finance acknowledging the 2 payments to Silver Good. That appears not to have been done.
133. The Silver Dragon Payment. Mr Coleman submits that Silver Dragon is part of the CGW Group, especially since CGW Computer HK became a substantial shareholder in 1993 and Gao and Mao became directors in 1993 and 1996 respectively. Assume again that Mr Coleman is right. It would still be no reason to treat the cheque paid to Silver Dragon and received on behalf of CGW Computer HK as a payment made to CGW Finance.
134. The FX Account. The FX Account was run for Wonderyouth's benefit. That is clear from the resolution of 30 October 1990. There is thus no reason why losses incurred on margin trading should now be attributed to CGW Finance. The only reason suggested is that Yip allowed Mao freely to operate the FX Account. That was Yip's decision. His company must bear the consequences if that decision proved unwise.
135. I note that, according to RAMDEF §§ 7 and 8, some of the US$4.3 million loan was used to fund the FX Account. The Property cost $26 million or about US$3.34 million. That would have left an unused balance of about US$960,000. The FX Document suggests that the immediate sources of monies injected into the FX Account were the time deposits listed in the previous paragraph. If RAMDEF is right, the ultimate source of some or all of those time deposits may have been the unused balance (or part of it) of the US$4.3 million loan from CGW Finance. Were that the case, Wonderyouth and Mao would in effect have been speculating I foreign currencies with CGW Finance funds. This aspect of RAMDEF was not explored at trial.
136. The Lehman Brothers transfers. These were made to Silver Good. There is no evidence showing why they should be treated as transfers to CGW Finance.
137. I reject Wonderyouth's case that the 8 disputed items constituted repayments of the US$4.3 million loan.
D. Miscellaneous
138. Mao. Mao, who now lives in the United States, did not give evidence in these proceedings. Both counsel before me were scrupulously fair in not accusing Mao outright of criminal wrongdoing. But I am bound to say that the evidence raises many unanswered questions in respect of Mao's conduct of the business of CGW Finance and Wonderyouth between 1990 and 1996. That conduct is, to say the least, highly suspicious. If I am right, for example, that Yip's signature on the Loan Agreement is suspect, Mao must account for the presence of that signature on the Loan Agreement provided to CGW Finance. Further, insofar as mysterious payments were made from Wonderyouth's accounts to other companies on Mao's instruction, explanation is called for on Mao's part: what were those payments for and what has become of the sizeable monies remitted?
139. Gao. Mr Coleman submitted that I should draw adverse inferences against CGW Finance because it failed to call Gao. He noted that Gao, having been a director of Silver Good and Silver Dragon, could have shed light on the nature of the payments made to both entities. Gao was also involved with the Supplemental Agreement and could have given evidence on it.
140. I think that Mr Coleman's submission reverses the correct position. It is Wonderyouth which asserts that the Supplemental Agreement should not be read at face value. It is also Wonderyouth which asserts that payments made to apparently different companies such as Silver Good and Silver Dragon should be treated as payments to CGW Finance. There is an evidential burden on Wonderyouth to establish its defence. Gao could certainly have been instrumental in that enterprise. The failure to call Gao redounds against Wonderyouth, not CGW Finance.
141. CGW Finance had to prove the reliability of the Loan Agreement as evidence of the terms agreed between CGW Finance and Wonderyouth regarding the 1990 advance. Gao was not involved in the 1990 loan and could not be of much assistance in proving or disproving its terms. As for the Supplemental Agreement, there was no need for CGW Finance to call Gao. Yip admitted that he signed it and all CGW Finance needed to do was to rely on the plain meaning of the Supplemental Agreement's terms. Gao was superfluous to such a case. I am thus unable to draw an adverse inference from CGW Finance's failure to call him.
142. Interest. MacGregor on Damages (16th ed.) §668 (p. 450) states that:-
"[D]elay by a plaintiff may affect the time from, or the time to, which interest runs; interest may be cut down either at the beginning or at the end of the period of accrual of cause of action to judgment."
143. Mr Coleman invites me to disallow some of the interest accruing to CGW Finance on any outstanding balance of the US$4.3 million loan because of the long time which it has taken CGW Finance to bring this action to trial.
144. The writ was taken out on 19 June 1996 and has only now been tried more than 7 years later. Wonderyouth unsuccessfully applied to strike out CGW Finance's action for want of prosecution in November 2000.
145. Wonderyouth did not plead its positive case on the falsity of the Loan Agreement until RAMDEF was filed on 4 January 2000. The action did not attain its present complexion until then. Between that time and the present more than 3 years has elapsed. Although I accept that such period is indicative of delay, I do not think that the amount of delay since RAMDEF was filed, is such as to warrant depriving CGW Finance of any part of the interest due on the monies advanced to Wonderyouth.
III. Conclusion
146. CGW Finance succeeds on its claim.
147. There will be judgment for CGW Finance on the outstanding principal of US$2,997,933.18. I take that figure from tables handed to me by Mr Chan setting out the amount of outstanding principal by subtracting the 6 accepted payments discussed above from the original loan of US$4.3 million.
148. Mr Chan calculated interest at 7% on 2 scenarios: one based on a 360-day, the other on a 365-day year. He tells me that it is conventional to calculate interest on US$ amounts on the basis of 360-day years. Nonetheless, I award interest on the principal outstanding from time to time as calculated in Mr Chan's table based on a 365-day year but with further interest added to cover the period from 27 October 2003 (the date up to which the Table was prepared) to date of judgment. As at 27 October 2003, interest calculated on the 365-day basis amounted to US$3,313,611.647.
149. Interest is to run on the judgment sum (that is, outstanding principal and interest up to 18 November 2003) from date of judgment at the judgment rate.
150. CGW Finance applies for a charge on the Property based on the Loan Agreement. Mr Chan argues that the term: "Guarantor: The property, LASA Court in Kowloon Tong, as security" in the Loan Agreement means that CGW Finance is entitled to an equitable charge over the Property in respect of unpaid loan monies due to CGW Finance. I do not think that the term can be read as creating a security interest in the Property. The term is too vague and obscure in meaning to have such effect, especially in light of cl. 8 of the Loan Agreement. Thus, even if by signing the Supplemental Agreement Wonderyouth agreed to be bound by the Loan Agreement as modified by the Supplemental Agreement, I do not think that I can order a charge on the slim basis of the "Guarantor" term in the Loan Agreement.
151. I make a Declaration pursuant to the Supplemental Agreement that CGW Finance is entitled to 50% of the net profit arising from any sale of the Property. Mr Coleman suggests that the expression "50% of the selling profit for La Salle Court property after minus all related costs" is too vague to be enforceable. I disagree. Accountants routinely calculate net profit arising from the disposition of a capital asset. The expression must refer to half of the net profit arising from a sale of the Property. Insofar as the precise wording of the Declaration is concerned, I give the parties liberty to apply.
152. I am conscious that, in holding that CGW Finance is entitled to 50% of the net sale profit from the Property, it may be felt that CGW Finance is receiving a substantial windfall. There is evidence that the Property has appreciated in value since its purchase by Wonderyouth in 1990. Not only does CGW Finance obtain interest from the US$4.3 million loan, but it also derives a capital benefit from the Property which the loan was used to acquire. But this is merely the result of the bargain struck under the Supplemental Agreement. The term granting CGW Finance 50% of the net sale profit from the Property appears to have been included in the contract as a "sweetener" to persuade CGW Finance to allow more time for the payment of the then substantial principal and interest outstanding. The Court does not measure the adequacy or inadequacy of consideration. It is not for a Court to rewrite agreements negotiated between parties at arm's length, even if the result of enforcing the same is that one party may obtain a windfall benefit.
153. I make an Order Nisi that CGW Finance is to have the costs of this action, such costs to be taxed if not agreed.
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(A. T. Reyes) |
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Judge of the Court of First Instance |
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High Court |
Representation:
Mr Anthony Chan SC, instructed by Messrs Fairbairn Catley Low & Kong, for the Plaintiff
Mr Russell Coleman, instructed by Messrs Deacons, for the Defendant
1 The figure is barely legible on the document produced at trial.
2 Hennessy House appears to have changed name to CLI Building between September 1992 and September 1994.
3 The Loan Agreement does not have a clause 5.
4 "Departments, large enterprises and groups may establish a finance company after obtaining approval. However, a finance company may only engage in the business of internal capital adjustment and administration. It may not engage in the business of external deposit taking and lending. It is inadvisable for an industry to establish a bank."
5 "The scope of business of a finance company must be strictly restricted to business between the member units of an enterprise or a group and may not exceed the scope of business without the approval of the People's Bank of China."
6 "Where the parties concerned enter into a contract which is beyond the scope of business, the people's court shall not thereupon make it invalid except where the aforesaid contract involves the operation of a business which violates the stipulations of the State or is subject to special permission of the State, or which is prohibited by laws or administrative regulations."
7 Interest as at 27 October 1993 on the 360-day basis came to US$3,359,634.03.
Appeal by the Defendant to Court of Appeal. Appeal allowed. Please refer to CACV394/2003
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