XCHRX CHINA SOUTHWEST AIRLINES v. CHINA EXPRESS INTERNATIONAL LTD. AND ANOTHER

HCA 9047/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9047 OF 2000

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J U D G M E N T

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1. This is an appeal from the order of Master C B Chan of 23 July 2001 when on the Plaintiff's application for summary judgment under Order 14 of the Rules of High Court she gave the Defendants unconditional leave to defend the action.

2. The Plaintiff is an airline company engaged in the air-transportation business in the PRC. The 1st Defendant is a company incorporated in Hong Kong operating a tourist business between Hong Kong and China. 2nd Defendant is the majority shareholder and a director of 1st Defendant.

3. With the object of co-operation in the provision of charter flights between Hong Kong and Chengdu in the PRC, the Plaintiff and the 1st Defendant incorporated a company known as Falcon Development (HK) Limited (Falcon Development) in August 1994. The Plaintiff and the 1st Defendant became shareholders in that Company. The Plaintiff held 51% of the shares of Falcon Development and the 1st Defendant 49% of the shares. Falcon Development subsequently acquired a subsidiary, Falcon Finance Limited (Falcon Finance) whose shareholders were Falcon Development, which held 499,999 shares, and 1st Defendant which held 1 share.

4. In 1998 matters arose which for the purpose of these proceedings it is not necessary to go into, but which led to a desire that the Plaintiff and the 1st Defendant should cease their co-operation in the business. A deed of agreement was signed by 4 parties, the Plaintiff, Falcon Finance, 1st Defendant and 2nd Defendant on the 3 February 1999, under the terms of which 1st Defendant was to transfer all its shares in Falcon Development (HK) Limited and Falcon Finance Limited to the Plaintiff and whereby it was agreed that certain sums of money would be paid by 1st Defendant to the Plaintiff. In addition the 1st Defendant and 2nd Defendant (as the 1st Defendant's majority shareholder) entered into certain warranties, one of which was that full provision had been made for the taxation of inter alia Falcon Development and Falcon Finance. The 1st Defendant and 2nd Defendant agreed to be responsible for breach of those warranties. Under clause (8) of the deed, the 2nd Defendant guaranteed the discharge by 1st Defendant of all its obligations under the deed. As an additional security for the Defendants' obligations, the 2nd Defendant mortgaged a property owned by a company owned by him to the Plaintiff. The Plaintiff's claim is under the deed for sums which 1st Defendant agreed to pay the Plaintiff including tax liabilities of Falcon Development and Falcon Finance for which in breach of warranty, provision had not been made.

5. The sums involved are not in issue.

6. There are only two grounds of defence advanced by the Defendants. The first ground is that the 2nd Defendant, despite having signed the deed, denies that he had given any guarantee to the Plaintiff in respect of the performance of the deed by the 1st Defendant. He claims that throughout the negotiations between the parties prior to the date of the deed, there had been no mention, let alone agreement, of him providing any personal guarantee to the Plaintiff. He pointed to a document signed by him and the representatives of the Plaintiff in the Shangri-La Hotel in Shenzhen on 16 December 1998 when they had discussed the difficulties between the parties. The contents of the discussion had been reduced into written minutes which confirmed that there had been no reference to an agreement whereby he personally had to guarantee the 1st Defendant's obligations under the agreement rather than using his residence (held by the company owned by him) as a guarantee.

7. The 2nd Defendant does not deny signing the deed nor does he allege that any misrepresentation was made to him at the time of its signing, but he merely alleges the Plaintiff's solicitor did not explain the terms of the deed, which was in Chinese, and which was drafted by the solicitor. He maintains that he believed that he was signing a document for the transfer of shares of Falcon Development and Falcon Finance. In other words, he alleges the defence of non est factum.

8. The second defence put forward is that the Plaintiff's business activities in Hong Kong were not within its powers or alternatively sanctioned by the State Council and were therefore ultra vires. The 2nd Defendant says somewhat curiously that he was "advised by his solicitor" that the Plaintiff carried on business in Hong Kong by actively taking part in the speculation of property in Hong Kong through managing Falcon Development and Falcon Finance under the Falcon Group of Companies and also by charging interest as a mortgagee pursuant to the terms of mortgage.

9. Mr Wong has attempted to elaborate the argument on ultra vires by relying on the legal opinion obtained by the Plaintiff to the effect that from 1996 a company in the position of the Plaintiff required approval for overseas investments of US$1m or above. He argues that the acquisition of a property or properties in United Centre in 1995 for a consideration of over $13m and a property in Great Eagle Centre in 1997 for in excess of HK$20m by Falcon Development and Falcon Finance constituted investments by the Plaintiff for which approval was necessary. He further argues that the acquisition of all the shares in Falcon Development under the deed, although nominally for, only HK$1, constituted an investment of a greater sum because Falcon Development's liabilities exceeded its assets by HK$17m.

10. Under the Order 14 procedure, the obligation upon the Defendant is to show that he has a triable defence and that his assertions are believable. Mere assertion in an affidavit of a given situation does not ipsofacto provide leave to defend since the Defendant must satisfy the court that he has a fair and reasonable probability of showing a real or bona fide defence, in other words, that the evidence is reasonably capable of belief. (per Ackner LJ in Banque de Paris et des Pays-Bas (Suisse) SA v Costa de Naray [1984] 1 Lloyd's Rep. 21 at 28 which was followed in B K Murjani v Bank of India [1990] 1 HKLR 586 at 588.)

11. As Mortimer JA said in Manciple v Char On Man [1995] 3 HKC 459 at 499:

"There is a difficulty because the court cannot resolve the issues of fact on affidavit. However, there are some cases in which the Defendant's own case, although apparently it raises issues which, if found in his favour, would provide him with a defence, are so incredible or so contradicted by contemporaneous documents or circumstances that it becomes clear that his defence is a sham".

12. The footnote of Order 14/4/8 in the Rules of the High Court puts the matter in this way:

"Two tests are appropriate, namely, 'Is what the defendant says credible?' and 'Is there a fair or reasonable probability of the defendant having a real or bona fide defence?' Where an issue of fact is raised, the first question must be answered in the affirmative before considering the second".

13. In so far as the purported defence of non est factum is concerned, I find that the 2nd Defendant has failed to show that his defence is credible.

14. Miss Elsa Chan Sai Chee, a solicitor with Baker & Mackenzie, in her affidavit has deposed that far from their being no mention prior to the date of the deed of the 2nd Defendant providing any personal guarantee, the giving of a personal guarantee by the 2nd Defendant was an area of dispute involving the 2nd Defendant in the negotiations leading up the signing of the deed. Initially, the 2nd Defendant had attempted to have a draft of the deed amended to delete the reference to his personal guarantee; but ultimately he had been obliged to accede to such a term. Miss Chan exhibited the draft deed which the 2nd Defendant had amended and the letter by which she informed the 2nd Defendant that the Plaintiff refused to accept such an amendment.

15. She deposed that the 2nd Defendant has been faxed two further drafts of the deed containing the guarantee for his comments. She exhibited copies of these drafts. The 2nd Defendant had not raised any comment.

16. She also deposed that she had explained the contents of the deed in the 2nd Defendant's presence at the time he had signed it. That explanation had included the 2nd Defendant's obligations as a guarantor.

17. In such circumstances given the cogency of Miss Chan's evidence supported as it is by the documents, I find that the 2nd Defendant's account is so incredible that it is clear that his defence in this respect is a sham.

18. I would add that even on the 2nd Defendant's account, I am satisfied that he could not bring himself within the defence of "non est factum" if he had taken no steps to ascertain the contents of the document he was signing which was in Chinese and nobody had misrepresented its contents to him.

Ultra Vires

19. In so far as the "ultra vires" defence is concerned I find that it also has no merit. As it was raised by the 2nd Defendant in his affirmation or affirmations it was vague and unspecific. It fails to provide any evidence of property speculation by the Plaintiff or to say how, even if the Plaintiff had engaged in such speculation, that would affect the liability of the Defendants under the deed.

20. It failed to show how investment in real estate or charging interest as a mortgagee in the circumstances of the particular mortgage concerned could be "ultra vires" the Plaintiff's powers. The 2nd Defendant himself did not point to any limitation on the Plaintiff's powers under the terms of its incorporation or under PRC legislation which could affect the Plaintiff's ability to sign the deed. The defence has not relied on its allegation that the fact that the Plaintiff was not incorporated in Hong Kong, had not registered itself as an overseas company under Part XI of the Companies Ordinance and had not registered under the Business Registration Ordinance had somehow affected the position.

21. The defence has belatedly attempted to rely on the legal opinion produced by the Plaintiff to the effect that investments over US$1m require approval but it has not demonstrated that any investment by the Plaintiff at any time, let alone after 1996, exceeded this sum. The acquisition of assets by a company in which the Plaintiff has shares, even if it owns the majority of those shares, does not constitute an investment by the Plaintiff. Nor does the acquisition by the Plaintiff of shares in a company with net liabilities exceeding US$1m constitute an investment by the Plaintiff of the sum representing those liabilities. It has not shown that the acquisition of the 1st Defendant's shares under the terms of the deed for HK$1 constituted an investment of more than US$1m acquiring approval.

22. I conclude that the Defendants have failed to show that they have a triable defence to the Plaintiff's claim.

23. I accordingly allow the appeal.