WONDERYOUTH INDUSTRIES LTD v. CHINA GREAT WALL FINANCE CO

Dates of Hearing : 26 and 27 October 2005

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J U D G M E N T

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Mr Justice Bokhary PJ :

1.  The appellant Wonderyouth Industries Ltd (“Wonderyouth”) was indebted to the respondent China Great Wall Finance Co. (“Great Wall”).  When sued by Great Wall for repayment, Wonderyouth referred to various payments which it had made to other companies.  Wonderyouth said - and therefore bore the burden of proving - that those payments were made in reduction of its indebtedness to Great Wall.  The trial judge refused to find that proved.  And the Court of Appeal supported his refusal.  It is true that the Court of Appeal did so without much (if any) analysis of the evidence.  But, as Lord Atkinson put it in Owners of S.S. Mendip Range v. Radcliffe [1921] 1 AC 556 at pp 573-574, “a judge equally finds upon an issue of fact if he clearly expresses his concurrence with the decision of another judge who has decided that issue.”  So Wonderyouth is confronted with concurrent findings of fact against it.

2.  What does Wonderyouth have to show in order to succeed before us?  It is not enough that there are material aspects of the trial judge’s reasons, not discernibly analysed by the Court of Appeal, which cannot be supported.  The question is whether the evidence compels a finding, which the trial judge refused to make, that Wonderyouth had discharged its burden of proving that it was in reduction of its indebtedness to Great Wall that the payments in question were made.  In my view, the evidence - dealt with in Mr Justice Nazareth NPJ’s judgment with which I agree - does not compel such a finding.  Accordingly I would dismiss the appeal with costs.

Mr Justice Chan PJ :

3.  I agree with the judgment of Mr Justice Nazareth NPJ.

Mr Justice Ribeiro PJ :

4.  I agree with the judgment of Mr Justice Nazareth NPJ.

Mr Justice Nazareth NPJ :

5.  This appeal in its final depleted form is concerned with a single matter, namely, in the context of disputed repayments under a loan agreement, the balance to be repaid. 

Introductory facts

6.  The plaintiff (“Great Wall”) is a state-owned company set up under the laws of the People’s Republic of China.  It is a subsidiary of a Chinese state-owned company which has several other subsidiaries mostly on the Mainland (“the Group”).  The defendant is a Hong Kong private company.

7.  According to its executive director Yip Heon Wai Dennis (“Yip”), the General Manager of Great Wall Mao Zhi-ren (“Mao”) approached him and asked to invest in Wonderyouth’s business so as to use Wonderyouth as an investment opportunity vehicle in Hong Kong.  Mao then invested the sum of USD4.3 million in Wonderyouth, and it was used for various investment projects.

8.  Great Wall’s case is that the money advanced was a loan made under two loan agreements and that it has been only partly repaid.

The loan agreements

9.  Great Wall’s claim was based upon two documents : A “Loan Agreement” in Chinese dated 6 January 1991, purporting to be signed by Mao for Great Wall and by Yip for Wonderyouth.  It provided for a loan of USD4.3 million to be made by Great Wall to Wonderyouth for property investment.

10.  The other document was a “Supplemental Agreement” signed for Great Wall by Wang Zhi (“Wang”) who had by then replaced Mao, and also by Yip on the 28 March 1996 for Wonderyouth.  It stated that it was made on 19th March 1996.  In effect, it confirmed the Loan Agreement subject to the terms of the Supplemental Agreement.  Its text is as follows :

“	Based on the loan agreement between [Wonderyouth] and [Great Wall] dated on Jan. 6, 1991, the two parties agreed to settle all issues according to the following :
	1)	[Wonderyouth] will make a repayment of total USD4,100,000 or its equivalent currency amount to [Great Wall] 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 [Wonderyouth] had paid to [Great Wall] on March 15, 1996.
	2)	[Wonderyouth] will make an interest repayment on or before 30th September 1996 for the total interest of the loan (based on attached loan agreement) minus any previous payment that [Wonderyouth] had repaid to [Great Wall] or its affiliated Companies in the past.
	3)	In appreciation of the extended loan, [Wonderyouth] agreed to let [Great Wall] share 50% of the selling profit for La Salle Court property after minus all related costs.
	4)	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.
	5)	This agreement is under the law of Hong Kong.
	[Wonderyouth]		[Great Wall]
	[Defendant]		[Plaintiff]
	Name : Mr Dennis Yip		Name : Wang Zhi
	Title : Managing Director		Title : Chairman of the Board of Directors
	Dated signed : 28th March 96		Date singed :
	Attachment : Loan agreement between the two parties dated Jan 6, 1991.”

The Action

11.  Great Wall’s claim was for repayment of the balance of the loan and interest at 7% under the two agreements.  Wonderyouth denied entering into the Loan Agreement.  But it was common ground that Yip had signed the Supplemental Agreement on Wonderyouth’s behalf.  Nonetheless, Wonderyouth’s Defence averred that the USD4.3 million was a cash injection and that it had been fully or partly repaid. 

12.  The action came before Reyes J in the High Court in October 2003.  All of the oral evidence was taken from only two witnesses, Yip and Wang.  By then, Mao had departed to the United States and settled there.  Reyes J found that the Loan Agreement did not accurately reflect the terms upon which the USD4.3 million transfer was made.  He was also extremely sceptical about the signature purporting to be that of Yip.  For those and other reasons he rejected the Loan Agreement as a document accurately reflecting the terms upon which the USD4.3 million sum was transferred to Wonderyouth in 1990.  He held, however, that as Wonderyouth had accepted that it had received that sum as a loan from Great Wall, the consequence was that Wonderyouth came under an obligation to repay the sum to Great Wall.

13.  Reyes J also went on to find that the Supplemental Agreement was a settlement agreement, as described in that Agreement, and that in consideration of Great Wall not pursuing whatever claims it might have under the Loan Agreement, Wonderyouth agreed to abide by the repayment terms in the Supplemental Agreement.  Therefore, he held, whatever the strength of Great Wall’s case on the Loan Agreement as a stand alone document, the Supplemental Agreement was a valid enforceable contract in its own right. 

Decisions and orders below

14.  Reyes J found that the loan had not been fully repaid and ordered Wonderyouth to pay Great Wall the outstanding principal USD2,997,933.18 with interest thereon from 5th April 1990 up to 27th October 2003 in the sum of USD3,313,111.64, and further interest on the outstanding principal of USD2,997,933.18 at the rate of 7% per annum from 28th October 2003 to 18th November 2003; and further interest on the judgment sum and interest from 18th November 2003 (the date of judgment) at the judgment rate until payment.

15.  Wonderyouth’s appeal to the Court of Appeal was dismissed by in a concise but somewhat overly brief judgment.  In respect of the repayments, it held that “Wonderyouth had the evidential burden of proving that payments made to other companies should be treated as repayments to [Great Wall]”, and that on the evidence before him Reyes J was entitled to come to the conclusion that Wonderyouth had failed to discharge that burden.

Disputed repayments – the judgment

16.  The Judge dealt shortly with 8 disputed payments in the following paragraphs of his judgment :

“	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 (Great Wall) was the finance or treasurer company of the CGW Group (the 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.”

The Judge then proceeded to examine each of the 8 disputed items.  Having identified at least one compelling reason in respect of each item, he proceeded to “reject Wonderyouth’s case that the 8 disputed items constituted repayments of the US$4.3 million loan”.

The appeal

17.  With the leave of the Court of Appeal granted as of right in the light of the monetary value at stake, Wonderyouth appealed to this Court.  Before the commencement of the hearing this Court was notified that one of the 3 main issues would not be pursued as its new counsel Mr Bleach SC considered it unarguable.  The issue was whether the Supplemental Agreement was valid and enforceable.  Additionally, at the hearing, Mr Bleach abandoned the appeal in relation to interest and also in relation to 2 of the 8 disputed payments.  The remaining issues therefore relate only to 6 disputed repayments.

18.  The main thrust of the grounds relating to the 6 disputed repayments, is that the payments were made on behalf of Wonderyouth at the behest of Mao who had the necessary authority, and therefore they were valid and effective repayments of the USD4.3 million loan.

Validity of disputed repayments

19.  Wonderyouth’s case is that the decisions to uphold Great Wall’s rejection of the disputed repayments by both the courts below were wrong.  By reference to authorities, and to Great Wall’s corporate Articles that conferred executive powers almost exclusively upon the General Manager, Mr Bleach SC persuasively argued that Mao was authorized to direct Wonderyouth and others indebted to Great Wall to make repayments to other subsidiaries of the Group and also other entities, and to bind Great Wall in doing so.  But the difficulty in the submission is not so much whether Mao had authority, as opposed to whether Mao himself effected the payments or instructed Wonderyouth to do so, and whether the repayments were actually made to the companies as claimed and what ultimately became of them.  There is simply no paper trail and such evidence as there is, has come only from Yip.  Reliance on Mao’s authority does not obviate the necessity to establish that Mao directed the repayments to be made.  The only evidence has come from Yip.  The probity of Yip’s evidence is thus crucial. 

Probity of Yip’s evidence

20.  In determining the validity of the two loan agreements, Reyes J had to assess Yip’s evidence in respect of the Supplemental Agreement.  He found the evidence contrary to what Yip had maintained, adding that Yip was unconvincing and evasive.  He also rejected or took an adverse view of Yip’s evidence in several respects eg. Yip’s understandings with and of Mao (see paras.124 and 126 of the Judgment reproduced above).  He appears only to have accepted Yip’s evidence that he did not sign the Loan Agreement.  But on closer examination there too, it can be seen that Reyes J had other compelling reasons eg. the suspicious appearance of the signature even to a layman’s eyes, and the unexplained absence of the signature in copies of what should have been the Loan Agreement as executed.  Although the Judge did not actually make a finding that Yip was an untruthful witness, he could not have regarded him as reliable or truthful.

21.  Wonderyouth nevertheless relies upon Yip’s evidence to establish that Mao effected or directed the repayment to payees other than Great Wall.  In his submissions Mr Bleach SC relied specifically upon a single sentence i.e. the 4th sentence, in para.101 of the judgment, taking the Court repeatedly back to it as a finding by the Judge, upon Yip’s evidence, that the payments were effected by or directed by Mao.  The text of para.101, with the sentence emphasized, is as follows :

“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.”

22.  Mr Bleach SC also points to the last sentence of para.138 of the judgment :

“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?”

Taken in conjunction, Mr Bleach SC insists they can only mean that the Judge accepted Yip’s evidence that Mao handled or instructed the disputed repayments to be made.  At first blush that might seem to be so.  But there are compelling considerations that point to the contrary.  Paragraph 101 appears in the group of paras.93 to 109, in which the Judge addressed the question whether Wonderyouth regarded itself bound by the Loan Agreement, not whether Mao himself effected or instructed the repayments to be made.  Likewise the last sentence of para.138 was concerned not with whether Mao himself effected or instructed the repayments to be made, but with Mao’s suspicious conduct.  Incidental observations made while very different questions are being addressed, are perhaps more susceptible to inadvertent error.

23.  Whether Mao personally effected or directed the repayments was an important question in the proceedings; the Judge would simply not have failed to have answered it in context.  And certainly he would not have answered it in the oblique, obscure language in para.101, or as an aside in para.138.  In the former, “good” may well have been used in its qualification of “reason” as meaning effective or motivating, and not to import conformity with legal or other requirements, particularly as Mao may have had his own personal agenda.

24.  The sense of the two passages for which Mr Bleach SC contends, conflicts with the Judge’s conclusion that the disputed repayments had to be rejected.  It is inconsistent with the Judge’s unfavourable view of Yip as a witness and the rejection of his evidence mentioned earlier.  And it is inconsistent with the Judge’s concluding observation in para.138, that “explanation is called for on Mao’s part : what were those payments for and what has become of the sizeable monies remitted?” 

25.  It must follow from the foregoing reasons that the meaning of the 2 passages in paras.101 and 138 of the judgment contended for by Mr Bleach SC must be rejected.

26.  None of Mr Bleach SC’s other submissions go to validation of the disputed payments as payments to Great Wall.  It nevertheless has to be said that some of his ably presented submissions did reveal flaws and deficiencies in the judgment.  But those did not even begin to disturb the fundamental positions of the parties.  Great Wall’s entitlement to repayment of the balance of the loan was beyond dispute and the onus was always upon Wonderyouth to prove the disputed repayment; quite simply Wonderyouth failed to discharge that onus.  Deficiencies or flaws in the judgment could not provide Wonderyouth with the positive evidence it required.

27.  Relevant to Wonderyouth’s invitations to this court to set aside findings of the courts below is Mao’s position.  What the Judge had to say of him was this :

“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?”

Counsel for Great Wall, Mr Anthony Chan SC submitted that clearly something was going on.  That is a suspicion exposure to the evidence in the appeal renders unavoidable.  By reference to documents before the court Mr Chan not only strengthened that suspicion, but extended it to Mao having an agenda very different from that one would expect of a General Manager of Great Wall or executive director of Wonderyouth.  As the Judge said with reference to Yip being aware of Mao making payments out of Wonderyouth, he must have known something of what was going on.  That sort of murky background must call for even greater caution and reserve in disturbing the findings of courts below. 

28.  Furthermore Wonderyouth has to contend with concurrent findings in the courts below, which it was sought to deflect by a submission that it was apparent from Yuen JA’s judgment, that essential findings were not made or did not have their basis analysed.  However the submission must be rejected in the light of Lord Atkinson’s observations in Owners of S.S. Mendip Range v. Radcliffe [1921] 1 AC 556 at pp 573-574.  This leaves Wonderyouth to contend with the position that the practice of this Court is not to disturb concurrent findings of fact by the courts below, although that practice is not cast-iron and there might occur cases of such an unusual nature as would constrain the court to depart from it; see Sky Heart Ltd v. Lee Hysan Co Ltd (1997-98) 1 HKCFAR 318, 333-338.  This case is not such a case.

29.  Wonderyouth’s appeal in respect of the 6 disputed repayments therefore fails and the appeal must be dismissed with costs.

Lord Millett NPJ :

30.  I agree with the judgment of Mr Justice Nazareth NPJ.

Mr Justice Bokhary PJ :

31.  The Court unanimously dismisses this appeal with costs.