SECRETARY FOR JUSTICE v. CHUN KAM CHIU

HCA919/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.919 OF 2002

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J U D G M E N T

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1. This is the trial of an action which commenced on 6 June.  It is a trial of action that was listed for three days, but has lasted a great deal more than a week.  I have heard today submissions from both parties and I have also received the written submissions of both parties.  I have allowed and directed special arrangements be made so that Mr Chun Kam Chiu, the defendant, who is acting in person, could be given special access in prison to prepare for the written submissions. 

2. The trial has been doubled by interruptions and by wastage of time, all coming from the defendant.  The two judgments that I have delivered, one on 8 June, dismissing the application for amendment of the defence, and the other on 13 June, rejecting the application for adjournment of the trial, are indications of the trouble the trial was subjected to. 

3. We have now come to the end of the trial.  Five witnesses gave evidence for the plaintiff.  The defendant gave evidence for himself.  The trial was in relation to a claim by the Government for an enforcement of a guarantee given by Mr Chun in respect of a judgment debt due to the Government by the company Keen Lloyd (Holdings) Ltd (hereinafter called “Holdings”) in which he had a substantial beneficial interest as well as being a controlling director. 

4. The circumstances of the giving of the guarantee can be very briefly summarized.  Holdings was a company that was to use perhaps a neutral word, involved in substantial business on the property side in the 1990s and the Government was owing by Holdings substantial sum of tax.  The collection of the tax by the Government was not very successful which resulted in the first round, if I may call it that way, of an agreement by the Government for the payment of tax of Holdings in the form of instalment payments and resulting in, also, a giving of a guarantee by Mr Chun ― this can be seen at page 83 of the Bundle, a Guarantee dated 28 May 1999 whereby Mr Chun guaranteed that the company Holdings would pay by instalments a total of some $30 million of tax.  A few payments were made but then there was default, which resulted in the Government taking action in the District Court and obtaining a judgment in the District Court on 8 October 1999 (page 154) in the sum of $23 odd million.  It is as a result of the Government having obtained that judgment and putting pressure on Holdings to effect payment that then came what I will call the second round of attempt to effect payment by instalments.  Negotiations started with a letter dated 3 January 2000 (page 167) with Deloitte Touche Tohmatsu, the accountant, writing to the Inland Revenue, representing Holdings and also Ever Lucky, a sister company, to settle the outstanding profits tax liability.  The role of Deloitte was to negotiate and act on behalf of Holdings to pay the outstanding amount by instalments.  It was largely a cash flow problem of course.  The company was in financial difficulty.  It did not had the cash flow, I assume, to pay the $23 million and attempt, therefore, was made with the help of the accountants to negotiate with the Inland Revenue to effect payment by instalments.  This, of course, was the second time that this had happened. 

5. There was, leading on from this, an offer by the Government in the form of a crucial letter dated 14 March 2000 (pages 282 to 283) whereby a deal was offered by the Government for payment by instalments as requested by Deloitte.  I would read the key paragraph which has been the subject matter of much debate in the course of the trial :  

“After various discussions between your tax representative and our officers, I write to advise that approval has been given for you [i.e. Keen Lloyd (Holdings) Ltd] to settle the outstanding Profits Tax, costs and judgment interest as provided under Section 49 and 50 of the District Court Ordinance in the manner as set out in Appendix A enclosed subject to (a) receipt of the sum totalling $100,000.00 on or before 27 March 2000, (b) application for charging orders on the properties listed in Appendix B enclosed, and (c) the provision of personal guarantee by Mr Chun Kam Chiu in the format as per the guarantee enclosed, on or before 27 March 2000, for security of the full settlement of all payable sums set out in Appendix A.  In connection with the provision of the personal guarantee, please arrange to complete and sign the enclosed guarantee and return the original and one copy of the signed guarantee to this Department on or before 27 March 2000.”

6. Appendix A attached to this letter set out a schedule of the timetable for the payment of the tax.  Two payments were supposed to be made on 27 March of $50,000.00 each, and these two payments are the ones the subject matter of (a) ― the $100,000.00 referred to in the paragraph that I have just read out.  

7. This offer was accepted by the letter dated 27 March 2000 (page 308) from Deloitte.  It says :

“	We refer to your letter dated on 14 March 2000.  On behalf of our above-named client, we enclose the following documents for your attention :—
	1.	a cheque of HK$100,000 payable to the Hong Kong Special Administrative Region being the company’s 1st & 2nd tax installments due on 27 March 2000;
	2.	an original signed letter for charging orders on the selected properties; and
	3.	an original signed letter for the personal guarantee by Mr Chun Kam Chiu.”

Attached to that letter of 27 March from Deloitte are : (1) a cheque dated 27 March in the sum of $100,000.00 (page 309); (2) the Guarantee of Chun (from page 310 to page 313) dated 27 March; and (3) Schedule B, a list of the properties which charging orders will be applied. 

8. The parties thereafter acted on the basis that the deal had been struck, that the offer of 14 March of the Government had been accepted, that the cheque was cashed and the payment of $100,000.00 was received — although there is no clear evidence as to whether it was actually received into the bank account of the Government on 27 March or a day or two later.  The old guarantee under the first set of instalments was returned to the defendant.  

9. Pursuant to this deal of payment by instalments, many of the instalments set out in the Schedule and also set out in the Guarantee were paid.  I think there is little dispute that the last payment made was the 15^th instalment.  So very substantial sum was paid pursuant to the arrangement and everyone acted on the basis that there was a valid agreement — a deal of payment by instalments, and in return, of course, the Government obtained a guarantee, a charging order and payments by instalments.

10. The cash flow problem caused Holdings to have difficulty in effecting from the 16^th instalment onwards and by letter dated 24 May 2001 (at page 448), notice was given that there had been default and that there should be payment of the outstanding sum of $400,000.00.  

11. Eventually, there were something like four instalments totalling the sum of $1.65 million that were unpaid and by a letter dated 7 September 2001 (at page 451) which was a registered letter sent to Mr Chun and which was never returned to the Inland Revenue, the Inland Revenue gave notice to the defendant of the four payments which had gone into default.  The last paragraph of the letter says :

“This is to give you notice that the amount of $1,650,000.00 is due and payable by you at the expiration of seven days after the date of this letter.  If you fail to make payment of $1,650,000.00 within twenty-eight days of this notice, I shall refer the case to the Secretary for Justice to enforce the guarantee to recover the whole of the outstanding total debt.”

This was sent to Mr Chun at his registered office address and was never returned.  I have, therefore, no doubt that this was received and the appropriate notice as required in the Guarantee had been given.  No payment was made after the issue of this notice.  The Government therefore issued the present action to pursue Mr Chun for recovery of his liability under the Guarantee.  

12. The Defence that was filed consists of, if I may call it, principally one defence, a principal defence of global settlement.  The global settlement is alleged to be an arrangement whereby it was alleged the Government had agreed that time would be given to the sister company, i.e. Keen Lloyd Energy Ltd to put together its accounts and no assessment would be made until Energy could prepare its accounts and then file its returns. 

13. That principal defence was refined somewhat in the challenged board minute to the effect of the time given was 12 months.  The substance of that original defence of the global settlement defence is Keen Lloyd Energy was given time to put in its returns and because the Government had broken that undertaking, therefore the Guarantee should not be enforceable. 

14. The solicitors were, of course, representing Mr Chun until about three or five days before the trial.  Witness statements have been filed and, as I have described in my earlier judgment on the events leading up to the trial, the defendant dismissed the solicitors and filed a notice to act in person literally days before the trial so that when the trial started Mr Chun himself acted in person.  

15. During the course of the trial, as a result of what I may call incremental development, the defendant decided that his original defences were not viable and informed the court that he was abandoning the global settlement defence.  First he attempted to raise a new defence of misrepresentation ― this was the subject of my judgment given on 8 June 2005 rejecting that amendment application.  Then on 10 June, the defendant submitted to the court Exhibit D-3 stating his abandonment of global settlement defence and raising two new issues :

(1)	whether the agreement of 14 March reached between the parties are valid or not; and
(2)	whether the defendant needs to shoulder the responsibility under the defendant’s signed guarantee provided to the Inland Revenue on 27 March 2000.

16. What was extraordinary, having abandoned the global settlement defence, was for Mr Chun, despite repeated warnings from the bench of the dangers inherent in the course he was adopting, to decide not to adopt his witness statement prepared by lawyers, which was signed by him, but instead he wished to give his evidence, verbally by examination-in-chief without regard to his witness statement.  His evidence-in-chief of course, unfortunately, did not deal with many of the areas covered by his witness statement.  The various areas in the witness statement not covered by his evidence-in-chief (as stated in paragraph 2 of Mr Mok’s Final Submission) include defences under the Heading The Global Settlement, Provisions of Guarantee, Inland Revenue Breach of the Global Settlement, Prejudice Suffered by the Defendant and Dubious Evidence from the Plaintiff.  Therefore the whole of the witness statement relating to his possible defences were abandoned. 

17. In the circumstances, the court is left with no choice but to come to the view that as all the original defences had been abandoned because there is no evidence on it, therefore, the real question is really what is left?

18. Before I come to the new defence which Mr Chun now seeks to rely on in his final submissions, I should say first a few words about one document which was the subject matter of his evidence and where its relevance would have had disappeared as a result of the abandonment of the global settlement defence.  This is the document Exhibit D-4 which is a purported copy of a Board Minute of Holdings held on 27 March 2000 in relation to this proposed deal with the Inland Revenue as to instalment payments.  The original of this was not produced in court.  Various reasons were given or rather were speculated upon by Mr Chun as to the non-availability in court of the original of this document which is the subject of authenticity notice.  There is therefore a dispute as to whether the document is genuine.  Having regard to the global settlement defence being no longer on the menu, strictly speaking, the materiality of this document has disappeared.  But for our present purpose, the materiality of this document is in paragraph 1 where there was reference to the 12 months being allowed by the Inland Revenue to Keen Lloyd Energy to file its return.  The inference now sought to be drawn from this document by the Government is that the document is false and that it shows the lack of bona fide or the lack of credibility of Mr Chun throughout this case.

19. I accept the submission made by Mr Mok on behalf of the plaintiff set out in paragraph 4 of his skeleton on this.  There is however one point, perhaps, I should emphasize that, in relation to paragraph (e), if there was any substance in the allegation contained in paragraph 1 of the Board Minute (which is a disputed minute), then that is totally contradicted by the contemporaneous actions or non-action of Mr Chun and his company Enercy.  If one merely looks at pages 330, 364 and 365, these are all steps taken contemporaneously in relation to Keen Lloyd Energy in respect of its non-filing of returns for the relevant years, and if there had been an agreement in March to extend time by 12 months as alleged, then it is inconceivable that pages 330, 364 and 365 would have taken that form.  I have therefore very little doubt that the document is not genuine.  I have very little doubt that nothing put forward by Mr Chun can be believed unless it is corroborated by either agreement of the parties, that is, lack of dispute by the Government or by undisputed contemporaneous documentation.

20. Having made that observation, I can now turn to the only three defences put forward now by Mr Chun.  I say three, but really there is only two, because the 2^nd and 3^rd is a variation of the same.  I would, perhaps, summarise it briefly in this way.

21. The 1^st defence is what I have been calling “the cash point”.  The cash point being this : Mr Chun’s argument, which is totally not pleaded, nowhere raised earlier, is that the letter of 14 March 2000 stipulated three conditions.  The first of the three conditions being (a) receipt of the sum totalling $100,000 on or before 27 March 2000 — he says the cheque was not actual payment because there was no cash received by the Inland Revenue on 27 March 2000 and, therefore, on 27 March 2000 that Condition (a) was not met, and the contract between the Government and Holdings never came into being and therefore there was no valid guarantee that could be given for a contract that did not come into being.

22. The second issue (as points 2 and 3 really come to the same thing) is that the 10 properties given under Condition (b) in the letter of 14 March 2000 were not resorted to by the Government.  The Government had obligation to resort to them, and either his liability under guarantee did not bite until the Government started to selling them or alternatively the Government was in breach of the obligation to sell these and therefore his guarantee liability is discharged.  Just two ways of putting it.  I would deal with each purported defence in turn.

23. I start with the first observation that both of these defences were not pleaded.  No witness statement had been given.  There were no examination of these issues and therefore they should not be fit for consideration at the trial.  But assuming I am wrong, assuming that they can be looked at and they can be considered, is there any substance in these two new defences?  I would take New Defence One first.

24. This is the cash point.  There was no cash of $100,000 paid on 27 March 2000, therefore it was argued there was no payment as required by Condition (a) in the letter of 14 March 2000.  Of course it is a case of construction of the written contract, and this is of far more value than the oral evidence of the parties, especially when the person giving them may not be the person who directly made the deal.  The words there are : “receipt of the sum totalling $100,000.00 on or before 27 March 2000”.  There was no doubt that the cheque was received.  The question for the purpose of argument is whether giving the words a sensible commercial construction, it could be said that the receipt of the cheque and the acceptance of the cheque on 27 March 2000 of the $100,000 by the Inland Revenue did not amount to a satisfaction of that Condition (a).  In my view, it clearly is a wrong argument.  The parties deemed fit and this is their most commercial arrangement to effect payment by cheque.  One party saw fit to make the payment, the other party saw fit to receive the payment, by cheque.  The parties acted on the basis that it was a valid payment and was a satisfaction of Condition (a).  The parties acted on the basis that this was a completed deal.  Thereafter instalment payments were made.  The Government acted on the basis that the Guarantee was good and, throughout, there was no suggestion that there was a late payment and therefore Condition (a) was not met.  

25. Mr Mok has helpfully referred me to Chitty on Contracts,  General Principles.  At 21-073, it said :

“…. If, however, [a creditor] accepts a negotiable instrument, such as a bill of exchange, promissory note or cheque, it is a question of fact depending on the intention of the parties, whether it is taken in absolute satisfaction of the debt, or only in conditional satisfaction.  In either event, the acceptance of the instrument gives the debtor a good defence to an action for the debt, at least until the instrument matures.”

Then at 21-074, it said :

“Normally, where a creditor accepts a negotiable instrument for his debt it is presumed to be taken by him as a qualified or conditional payment, and, accordingly, although the original debt is still due during the currency of the instrument, the creditor’s remedy is suspended until it is due.  If it is then paid, this amounts to payment of the debt; …. It has been held that a claimant who accepts a cheque for part of the debt claimed by him cannot sign judgment in default of appearance for the full amount claimed unless the cheque is dishonoured. …”

26. So, it would seem that in law there is a complete answer to the artificial argument presented by Mr Chun.  There was payment and there was receipt of the sum, but it was conditional payment and conditional receipt.  If the cheque should bounce, then of course there would be no receipt and no payment, otherwise everyone would consider it as good payment and good receipt on 27 March 2000.

27. The other way, perhaps, of looking at the point is to look at the Guarantee.  The Guarantee refers to two considerations : one is the refraining from taking action against Holdings and the other is the payment by instalments.  Both of which had been met, strictly speaking, that is all that is necessary for the validity of the Guarantee to be effective.  A Guarantee stands very often independently of any underlying contract.

28. The conclusion therefore I have reached is that there is no substance in the point made by Mr Chun.  Mr Chun refers me to a large number of authorities about time being of the essence, ranging from charter party cases to conveyancing cases.  But in my view they do not help him.  They turn on different factual situations in support of different legal propositions.  This is not a case where time of payment is of the essence.  This is a case where one has to give commercial sense to the construction of letters exchanged between the parties to see what the agreement was, and whether, in any way, that agreement did not come about or whether that agreement did come about and was acted on by the parties.

29. I now turn to the 2^nd New Defence that was raised.  The 2^nd New Defence is the non-realization of the so-called properties that had been pledged or charged to the Government.  The short answer to that complaint is that it was never pleaded.  That issue was never properly explored factually in documents or in discovery, and that certainly could not be done at the trial.

30. Things are said by Mr Chun about these properties not having negative value and that something could be realized from the sale of the properties.  What is clear, however, is that neither the company nor Mr Chun took any steps to say to the Government : “You should sell this property and you could have obtained this net sum.”  On this question, there was no correspondence, nothing in the pleadings or the witness statements, or even in any document put before the court.  The point made by Mr Chun is that : “Oh, the Government had several securities, (1) in the form of a Guarantee from me, (2) in the form of 10 properties pledged to the Government, the Government should protect my interest, that is, the guarantor’s interest, to sell the properties first before resorting to me.” 

31. But that is not the law, with all respect to Mr Chun.  The law is that the creditor has no obligation to resort to any security in any order or at anytime.  It is his right to enforce his several securities in the way he sees fit.  Of course, there could not be a variation of the original agreement between the creditor and the debtor so that for example, instead of giving time to the debtor to pay (which is of course properly permissible), the creditor should compound with the debtor and enter into agreement to give him a right to pay in different way.  Then that could affect the Guarantee, but that is not what is alleged. 

32. What is alleged is the non-taking of the action against the properties, and it is said that either therefore it discharges the Guarantee (which as I said is not the law) or that it is contrary to what he understood to be the position which is an allegation of misrepresentation.  But that misrepresentation was never made to him by anyone on behalf of the Government.  If it was made to him, it was made to him either by Deloitte or whoever else of his own staff, and that cannot form a valid defence to enforcement of the Guarantee.  I therefore come to the view that there is really no substance to that argument based on the non-resort (if I may call it that) by the Government against the properties. 

33. Mr Chun had the good fortune to persuade the Government again and again to give him, as well as Holdings, time to pay.  But unfortunately he could not arrange affairs so that the payment could be made as arranged.  His 1^st guarantee was returned to him in exchange for the 2^nd guarantee.  Notwithstanding the Government’s repeated indulgence and frustration in trying to collect the outstanding tax, Mr Chun has been able to delay the evil day very successfully until today.

34. The delay must stop now.  In my view, judgment must be entered for the Government in the sum claimed :

(1)	in the sum of $19,344,988.00 that is the outstanding judgment debt at Prayer (i) of the Statement of Claim;
(2)	in the amount of $5,785,361.31, being the interest on the balance of the judgment debt, at Prayer (ii) of the Statement of Claim; and
(3)	interest on the total sum of $19,344,988.00 from 9 March 2002 up to today at the appropriate judgment rate fixed by the Chief Justice under section 50 of the District Court Ordinance.

So there will be judgment for these three sums, and, of course, interest thereafter will run at the judgment rate on the total of the three sums.  I also order that costs be awarded in favour of the Government in the action.