ASSOCIATED RECOVERIES (ORIENT) LTD v. PHILIP JOHN ASHBY

IN THE COURT OF APPEAL

1987, No. 41
(Civil)

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J U D G M E N T

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Fuad, J.A.:

1. This is an appeal by the unsuccessful Plaintiff in an action in the District Court, decided by Judge Scriven on 24February this year.  He refused leave to appeal but a member of this Court granted leave on 15 April.

2.Associated Recoveries (Orient) Ltd. (“the Company”) had, by their Particulars of Claim, claimed $49,280 from the Defendant, Mr. Ashby, who had at one time been their General Manager and later one of their directors.  The claim was made up as follows:

(a) $2,171:  paid by the Company to Blue Cross on 20July 1984 in respect of Mr. Ashby’s personal health insurance;

(b) $14,612:  paid by the Company to American Express in respect of Mr. Ashby’s personal expenses incurred, between February 1984 and January 1985, by the use of one of the Company’s supplementary credit cards;

(c) $35,600, advances made by the Company to Mr. Ashby between April 1984 and December 1985;

(d) $11,897:  paid by the Company to the Hong Kong Government on 12 February 1985 in respect of Mr. Ashby’s salaries tax liability.

All this adds up to $64,280.  Credit of $15,000 was given to Mr. Ashby in respect of a dividend to which he was entitled by virtue of his holding of 25,000 fully paid up shares in the Company. That is how the figure of $49,280 claimed by the action was reached.

3. It is not necessary to refer to the whole of the Defence filed by Mr. Ashby.  He admitted that advances had been made to him but denied that they had been loans or that he was liable to repay them.  It was then averred that the Company, through its Chairman, a Mr. Ralph, had agreed with Mr. Ashby that any sums paid by the Company to him or on his behalf would be made as advances of sums due to him from the Company in respect of:

(a)    shareholder’s dividends;

(b)    bonus;

(c)    director’s fee.

4. Mr. Ashby also pleaded that it was a term of that agreement that the Company would not seek to recover the advances from him, and that they would be deducted from dividends due, when declared, and from bonuses and director’s fees.  He counterclaimed $5,500 in respect of his fees as a director for the year ending 31 December 1985.

5. The judge entered judgment in favour of Mr. Ashby on the claim and on the counterclaim.

6. By their Notice of Appeal the Company have now limited their claim to $23,100.  This figure is arrived at, firstly, by abandoning their claims in relation to the amounts they had paid on Mr. Ashby’s behalf to American Express, Blue Cross and the Hong Kong Government and, secondly, in respect of the total of $35,600 they had paid in cash to Mr. Ashby, by no longer claiming two amounts ($6,000 and $6,500) advanced to him before the statutory provisions upon which they rely came into force.

7. The judge gave judgment immediately at the conclusion of the hearing and supplied written reasons for his decision later.  In his Reasons, he noted that Mr. Ashby had admitted receiving all the sums which the Company had claimed, while saying that they were advances against his future dividends, bonuses and director’s fees.

8. The judge expressed the view that Mr. Ralph’s evidence had been “vague” about the arrangements, and set out part of his evidence.  He then said:

“With that evidence I had no hesitation in preferring Mr. Ashby’s positive assertion that when he drew the sums now claimed from him it was in each case generally on account of dividends and bonuses and director’s fees.”

9. The judgment saw his task as “only to find if the circumstances amounted in law to the true case of indebitatus assumpsit”, and quoted the definition of a loan given in the first four lines of para. 3157 of CHITTY ON CONTRACTS (25^th Edition).  He said that the Company’s evidence had not sought to show any true distinction between the sums paid to third parties and those they described as loans.

10. The final paragraphs of the judge’s Reasons were as follows:

“I found the payments all to be of the same indeterminate character, none paid or otherwise made on terms including a determinable date of repayment, and all really falling to be described truly as an account between the parties.  There was no plea that it was implied that the account would be settled when the Defendant left the Plaintiff’s employment nor that a reasonable time for the settlement was implied and had elapsed.

In all the circumstances I accepted the Defendant’s evidence that it was agreed that repayment should be set off against future dividends (inter alia):  the Defendant is still a shareholder.  Dividends which had, surprisingly I felt, not been declared for 1985 might still be payable so that in all the circumstances the sums of money advanced are not yet repayable.  The Plaintiffs had not proved their case.”

11. I will interpolate here that there was clear evidence from Mr. Ralph;  from another director, Mr. Lam; and from the accountant, Mr. Yu, that because the Company had not made a profit for the year ending December 1985, no dividend was declared, and no director’s fees finally approved, for that year.

12. It is necessary to examine precisely what was said in evidence by Mr. Ralph and by Mr. Ashby about the arrangements under which the advances etc. were made.  Mr. Ralph said, in his examination-in-chief:

“Loans to Defendant were made to meet Defendant’s individual expenses.  Personal loans except one for salaries tax.  Company employed policy of indulgence.  No specific date for repayment.  I would expect them to be repayable when in funds or when recipient left service of the Company.”

13. He went on to say:

“The item of $11,897 was paid to Hong Kong Government for taxation.  American Express expenses were met by the Company for Company expenses.  Private expenses met by Defendant.  As to Blue Cross they threatened to cancel policy.  I authorized payment to prevent loss of policy to Defendant.  We provided no medical insurance to other staff.”

14. In cross-examination, he was asked:

“These advances could be set off against dividends, director’s fees, bonus and any other sum due to Ashby?”

15. He answered:

“Yes, this is Company policy.  It is a normal indulgence.  Yes, it must have been agreed with Ashby.  As to American Express card I had no discussion, I left it to accounts.”

16. Later he said:

“We had no hard and fast rule about repayment.  They were interest free.  I would expect any indebtedness to be paid on debtor leaving Company.  When they leave they owe no loyalty.”

17. The learned judge seems to have considered that there was a stark conflict between Mr. Ralph’s evidence and that given by Mr. Ashby about these arrangements, but when one looks at the latter’s evidence it can be seen that in practical terms they were saying much the same thing and it is to be noted that Counsel for Mr. Ashby is recorded to have said:  “Accept Ralph as frank and honest witness.”  Mr. Ashby testified as follows:

“When I spoke to Mr. Ralph he said I could draw on account of dividends to be declared.  This was interest free.  This was not a loan but an advance against dividends.  I never signed for repayment – except actual receipts.  Cheques given for Amex and Blue Cross.  I never repaid in 1984 except by set off or dividends.  I was never asked to pay by any other method.  Subject of paying if I left was never mentioned.”

18. In cross-examination, he said:

“I acknowledge I have received the money from the Company.  If Company had no dividend, and, in winding-up, I never considered the consequences.”

19.In re-examination, Mr. Ashby said:

“In March 1984 there was no agreement that I should repay on demand or at a fixed time or any determinable future time. Drawings took about 21 months:  March 1984 – September 1985.  Drawings not steady.   Used as and when I needed the card.  Up to the time I left no one asked me to repay the sums.”

20. The Company first claimed the $49,280 from Mr. Ashby by a letter dated 20 January 1986.  A very full statement of account was enclosed with supporting vouchers, etc.  There was a follow-up letter of 25 February 1986, enclosing a copy of the minutes of the A.G.M. held on 31 December 1985.  Mr. Ashby replied on 6 March:

“…….

For the record it is my recollection that it was agreed at the Annual General Meeting that the question of my indebtedness to the company would be resolved once the question of disposal of my shares had been finalised…..”

21. Then Mr. Ashby was sent a letter before action by the Company’s solicitors.  This was dated 10 March.  Mr. Ashby replied on the same day:

“…….

In case a company has not been passed to you I enclose a copy of my letter of the 6th March to your clients.

“In my view it is inappropriate for threats of litigation to be made at this premature stage having regard to the agreement that was reached at the annual general meeting.  Once there has been a proper supported valuation of my shares in your clients it will be possible for proper discussions to take place on my indebtedness to them or, if appropriate, theirs to me.

…….”

22. On 12 March, the solicitors wrote saying that their instructions were that no agreement of the kind alleged had been reached.

23. Mr. Ashby responded on 18th March, and the penultimate paragraph of his letter was in these terms:

“The situation remains that I acknowledge the debt and will be in a position to attend to it once the question of my share values is assessed and due credit given against the debt.  Your clients may like to bear in mind that if they persist with a vexatious action I shall take every possible action to defend myself and seek damages and at the same time devote very careful attention to my rights as a minority shareholder of the company with a concern at the operation of the company.”

24. The importance of these letters, which were not mentioned by the judge in his Reasons, was, it seems to me, that Mr. Ashby was clearly acknowledging his indebtedness to the Company and was giving a reason for not then meeting his obligation to repay the money which was very different from that raised by his Defence.  When asked about the contents of this letter of 6 March during cross-examination, Mr. Ashby accepted that there had been no mention of his present stand in that letter, or anywhere else before it had been formulated in his defence.  About his letter he said:

“I did not raise this [his present defence] in my letter of 6th March as that was just a record of the tidying up at the A.G.M.  I recognised that the amount was outstanding.  I wanted to resolve this situation.”

25. As regards what was discussed about Mr. Ashby’s holding of shares at the A.G.M., he said:

“General discussion ensued.  Agreed that company should purchase my shares.  In amount agreed with balancing payment.  Nothing was said to adjudicate I should pay in specie ….. I thought value was $3 per share.  This was figure I was prepared to offer Ralph.  I had [I think it must be “was”] never offered this …..  They insisted that I pay $49,000.  At same time Yu asked me if I would dispose of my shares at valuation of 76 cents per share.  I asked how valuation reached.  The response was a demand letter.”

26. It is obvious that Mr. Ashby could not have founded a defence to the action upon what he had been saying in his letters because, in the event, no binding agreement was reached about the purchase of his shares.

27. With every respect to the learned judge, I conclude that he lost sight of the real issues in this case by his concern to test the evidence against the definition of a loan in CHITTY.  It is only necessary to quote from the rest of para. 3157 of CHITTY to show that in a case like the one before us, it is not relevant to determine whether the sums advanced to, or paid on behalf of, Mr. Ashby could be categorized as loans:

“In many circumstances, the question whether a particular transaction is, in law, a loan or not will be immaterial, since the transaction will take effect according to the intention of the parties, however, the contract may be classified.  But in some circumstances it is necessary to define the nature of a transaction because of particular statutory provisions which may apply to contracts of loan but not to other contracts…..”

28. Where one reads the judge’s note of the submissions made by Counsel (Mr. Clifford Smith was not in the case then), it is not perhaps surprising that he was diverted from the simple question he had to decide which was not how the arrangements between the Company and Mr. Ashby leading to his admitted indebtedness should be classified, but whether Mr. Ashby was under an obligation to reimburse the Company for the sums advanced to him and, if so, when.

29. In my judgment, Mr. Ashby’s defence was entirely misconceived.  His Counsel relied on Potts’ Executors v. I.P.C. [1951] A.C. 443.  This reliance was misplaced.  That case merely decided that arrangements not unlike those we have here, between a director and his company, were not, for the purposes of the relevant taxation statute, to be regarded as payments by way of loan to the director.  That case, of course, did not decide that payments of this nature were not liable to be repaid.

30. Clearly, no formal agreement had been reached between the Company and Mr. Ashby about the method and time of repayment of the Company’s money, if Mr. Ashby should leave the Company.  One would not have expected it.  So long as he remained with them, no doubt they were content to allow Mr. Ashby to remain “in debt” in the expectation that amounts due to him from the Company, for whatever reasons, could eventually be set off against his debt.

31. But, surely, the position changed when, at the end of 1985, Mr. Ashby left the Company (of his own accord, and without notice).  How much longer is it to be suggested that Mr. Ashby’s plain obligation to the Company should remain outstanding?  Can it really be contended that if nothing was then due to Mr. Ashby, he was not expected to pay up simply because, so long as he held shares in the Company, there was always the possibility that dividends might be declared, and if not, the Company would be denied the money he owed for ever?  This would be a proposition from which reason must recoil. 

32. It seems to me that the matter can, and should, be decided on ordinary principles, and that there is no need to resort to the complicated provisions of ss.157H and 157I of the Companies Ordinance to determine the extent of Mr. Ashby’s liability.

33. Mr. Ashby admitted, as we have seen, that when the arrangements he relied upon were made, the subject of what should happen if he left the Company while still indebted was not raised, and that he had not considered the position if no dividend were to be declared.  If at the material time, it had been pointed out to the parties that their arrangements did not cover such eventualities, they would surely have responded that there was no need to state the obvious:  that, of course, if Mr. Ashby left the Company he would have to repay any sum he owed, just as the Company would have to pay him any sum to which he was entitled if the account stood in his favour.   It could not have been within theircontemplation that in such circumstances, Mr. Ashby’s debts would be allowed to remain unpaid for all time.

34. Assuming the arrangements made were as pleaded by Mr. Ashby, as supported by his evidence, a term would have to be implied into them that he would be obliged to settle up upon his departure, if not immediately, then certainly upon demand.  What Mr. Ralph, correctly to my mind termed as an “indulgence” would have come to an end.  On any view of the evidence, the Company was not making a gift of the money to Mr. Ashby.

35. I am bound to say that I am surprised that the Company felt it necessary (and, indeed, felt able) at the appeal stage, to abandon their claims to sums totalling $28,680 which they paid to third parties on Mr. Ashby’s behalf, and for his benefit.  One would have thought that he would have had great difficulty in countering the argument that the Company was entitled to recover those sums on the basis that the money had been paid to third parties at his request, express or implied, upon an undertaking by him, again express or implied, that he would repay it.

36. It appears that those advising the Company did not realize how uncomplicated their case was so that they were constrained to rely only on the Companies Ordinance.  This misconception about the position in law also, it seems, led the Company, despite Mr. Ashby’s acknowledgment of indebtedness, on appeal, to subtract from an apparently valid claim, $12,500 advanced to him.

37. The Particulars of Claim, though not perfect, were adequate and the evidence was really all one way.  Speaking for myself, I would have needed to be persuaded by the most cogent and compelling arguments that the Company should not have recovered the full $49,280 they had originally claimed, but the appeal has not been presented on this basis.

38. In my judgment, Mr. Ashby’s defence, with its counterclaim, was wholly without merit and should not have succeeded.

39. I would, therefore, allow the appeal and enter judgment in favour of the Company for $23,100 they now claim and dismissed the counterclaim.

Cons, V.-P.

40. I agree with my Lord, and the order that he proposes.

Clough, J.A.:

41.I also agree.

Representations: