SKYTRUCK INTERNATIONAL LTD. v. LAU NAI KEUNG

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

1998, No. 226
(Civil)

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J U D G M E N T

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Nazareth, V-P:

1. This is an appeal by the defendant/appellant against the order of Barnett J given on 6 August 1998 whereby he ordered that judgment be entered for the plaintiff in respect of the entire claim of HK$5,499,009.60 and set aside the earlier judgment given by a master for only part of that sum.

2. The facts can be shortly stated. The plaintiff is a Hong Kong company carrying on the business of container haulage and was the holder of a 30% share in Martin Transportation Limited ("Martin"). The other 70% in Martin was held by Shenzhen Martin Industrial Company Limited ("SMI") which was a company incorporated on the Mainland. Martin was also a Hong Kong company. It carried on transportation business and was a joint venture business between the plaintiff and SMI. It had three directors, Li Guo Fei ("Li"), the defendant and John Lau.

3. It appears that from the very beginning the business of Martin did not do well and in or about 1995 started to run out of funds. It was then arranged that the plaintiff would make advances by way of loan to Martin. The defendant proposed that he would provide a personal guarantee in respect of the liability of SMI under the arrangements and did so ("the guarantee"). The plaintiff's version is that by 30 June 1996 he had advanced to Martin a total of $7,855,728.00. Seventy per cent of that was to be borne by SMI. A statement of account dated 10 January 1998 issued by the plaintiff showed that at 30 June 1996 the amount due and payable by SMI to the plaintiff was $5,499,009.60.

4. On 12 September 1996 the plaintiff issued its writ averring in the Statement of Claim the following:

"4. As at the close of business on 30th June 1996, SMICL was indebted to the Plaintiff in the sum of HK$5,499,009.60 being advances made by the Plaintiff to SMICL.

5. by a letter dated 27th August 1996, the Plaintiff ... demanded from the Defendant immediate payment of the sum of HK$5,499,009.60."

By its defence the defendant did not admit the claim and put the plaintiff to strict proof. The matter then seems to have gone to sleep for a couple of years. On 28 February 1998 the plaintiff took out an Order 14 summons for summary judgment against the defendant. It came before Master Jones and on 19 May 1998, he gave judgment for the plaintiff in the sum of $4m. The defendant then appealed against Master Jones' decision. The appeal was heard by Barnett J who made the order mentioned on 14 August 1998.

5. Barnett J commenced the material part of his judgment by addressing what came to be called the conclusive evidence clause contained in the guarantee. It reads:

"(ii) Any statement of account purporting to show the amount due from the Borrower signed as correct by duly authorised officer of the Lender shall be evidence as against the Guarantor of the amount so due subject to future adjustment in accordance with the audited financial statement of the Company for the relevant financial year. It is declared that the Guarantor shall not be entitled to relied on the unavailability of audited financial statement as an excuse for delaying making payment hereunder."

6. Of that clause this is what the judge had to say:

"That clause is not a conclusive evidence clause in the accepted sense because it does not contain the word 'conclusive' and provides for future adjustment. However, upon receiving the demand for payment, the Defendant was under an obligation either to pay or to ask for a statement of account on receipt of which he would have been obliged to pay. As the Defendant did nothing, prima facie, he is in breach of his obligation under the guarantee to pay the Plaintiff and is liable therefor.

It was accepted, however, on the authority of Bache & Co (London) Limited v Banque Vernes et Commerciale de Paris SA (1973) 2 Lloyds LR 437 that the evidence adduced under such a clause is conclusive unless it is inaccurate on its face or fraud is shown. Mr Xavier submitted that, on the material before me, he has shown that there is a defence that should go to trial or at least matters which ought to be investigated."

The judge then addressed the acquisition by Martin from the plaintiff of tractors and trailers which accounted for a significant proportion of Martin's indebtedness. The defendant's case is that the acquisition was fraudulent. The judge examined the matter in the context of the question of whether the evidence showed that the certificate was inaccurate on its face or fraud was shown. Having done so, and taken what was not a flattering view of the defendant, he concluded in the following way:

"These are Order 14 proceedings. I should not shut out the Defendant from his day in court unless I find him to be wholly unbelievable or the defence a sham. For reasons which I hope have emerged, I am unable to place any reliance whatsoever upon the Defendant's evidence. In the light of all the documentary evidence, the Defendant simply cannot be believed.

I accept that the auditors had reservations about certain expenses and the vehicle acquisition. In my view, however, the concern about the vehicles has been satisfactorily allayed. As to the expenses, the auditors have not identified any particular items of expense but unable to find anything in the auditors' concerns to support the defendant's case.

In my judgment, the Defendant has failed to show that there was any fraud on the part of the Plaintiff. Further, he has not particularised any items of expense which he considers improper. Accordingly, I see no reason why the Plaintiff should any longer be kept from the money which it has demanded."

For the defendant, Mr Robert Tang SC, who with Mr Albert Xavier, appears before us but did not appear below, submits that the judge having found that the clause was not a conclusive evidence clause erred in proceeding to decide the case upon the basis that it was, i.e. treating it as conclusive upon his finding that the defendant failed to show that there was any fraud on the part of the plaintiff or in fact demonstrate that the account was inaccurate upon its face.

7. However, it is apparent that the judge did so upon what he understood as the acceptance by Mr Xavier for the defendant below, of the clause as a conclusive evidence clause. In that regard, we are told that while Mr Xavier did concede that matter in his written submission, he disavowed it when he came to make his oral submissions. However, Mr Kenny Lin who also appeared for the defendant below, disputes this. In the end, we gave Mr Tang leave to pursue his submission, particularly as it concerned the legal position, which we felt ought not to be dealt with as a matter of concession. In any case, we record that we did not take a view upon the question whether such a concession was made; also we record that Mr Lin reserved the plaintiff's position upon costs in relation to that matter.

8. It can be seen, therefore, that the conclusive evidence clause came to occupy a crucial place in resolving the appeal. I have to say that I had no difficulty in concluding that the clause was not a conclusive evidence clause. In particular it does not seem to me that the words "shall be evidence" are apt to provide that the evidence is to be conclusive. Moreover, there is nothing to that effect in the clause. Finally, that "evidence" is, under the clause, to be subject to future adjustment.

9. In the absence of a conclusive evidence clause, the matter before the judge would have to be determined in the ordinary way applicable to an Order 14 proceeding which was what it was. As the judge observed, the defendant should not be shut from his day in court unless he is found to be wholly unbelievable or the defence is a sham. Put another way, if the defendant has an arguable defence, it should not be shut out.

10. Approaching the matter in that way, I turn back to the plaintiff's Statement of Claim. It is for HK$5,499,009.60 as being the amount of the plaintiff's indebtedness at the close of business on 30 June 1996. It can be seen that to establish that amount the plaintiff relied upon a balance sheet as at 30 June 1996 exhibited at B358 of the appeals bundle. However, the defendant before us has sought leave to put in evidence another balance sheet of Martin also as at 30 June 1996 which had been supplied to him by Martin (B457) the significance of which, particularly the discrepancies between the two, the defendant was late in appreciating. We deferred our decision on the defendant's application to adduce it in evidence before us. Having now addressed the submissions upon that matter in the light of all the considerations that have now become clear to us, we grant leave. This second balance sheet shows a significantly different picture from that of the balance sheet presented by the plaintiff. That is not the only question or consideration that arises in relation to the plaintiff's claim as to Martin's indebtedness, which of course is the basis of the plaintiff's claim by virtue of the guarantee. Having come to a late realisation of the differences between the two balance sheets and the implications, the defendant commissioned and obtained a report from a firm of accountants which raises serious questions about the reliability of the balance sheets. There appear also to be questions about the validity of directors' resolutions authorising the acquisition of the trailers and tractors.

11. Altogether, I have no hesitation in concluding that this is a case in which the defendant ought to be allowed to defend; it is of incidental interest that the judge himself in the end seems to have harboured doubts about his decision to enter summary judgment. However, that is not to say there are no questions, even serious questions, about the defendant's case and his credibility. Indeed, as to the latter, the judge was so unfavourably impressed with the defendant's evidence. In these circumstances it seems to me that the leave I would grant should be conditional. I would accordingly allow the appeal and grant conditional leave to defend. To assist the parties in coming to an agreement as to the conditions, and to save costs, I would indicate to the parties that the lodging of the defendant's shares with the court registry or with the plaintiff's solicitors as stakeholders, it prima facie seems to me, might prove to be an appropriate and acceptable solution as to the security which ought to be provided.

12. Since upon my view the matter would have to go to trial, I have endeavoured to confine the expression of my reasons and views to the minimum necessary.

Liu JA:

13. I agree.

Leong JA:

14. I also agree.

Nazareth V-P:

15. The appeal is accordingly allowed, the order below set aside and leave to defend is granted to the appellant subject to such conditions as the parties may agree and this Court may order. In default of agreement, the matter is to be set down for argument. There will also be an order nisi that the costs of the appeal and of the summons below are to be costs in the action.