RE FORTRESS COMMODITIES LIMITED

HCCW 311/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO. 311 OF 2012

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R E A S O N S   F O R   J U D G M E N T

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Introduction

1.  There were two petitions before the court.  They were filed by Cementia Trading AG ("the petitioner") to wind up Fortress Commodities Ltd ("Fortress") and Premier Distributors (Hong Kong) Ltd ("Premier"), companies incorporated in Hong Kong.  HCCW 311/2012 relates to the winding up of Fortress and HCCW 375/2012 relates to Premier.  The petitions were ordered by Harris J to be heard together.  At the conclusion of the hearing, a winding up order was made in respect of Fortress but judgment was reserved in HCCW 375.  I set out below the reasons for making the winding up order in HCCW 311/2012.

2.  Heny Lachman Mahtani ("Mahtani") is the sole director of both Fortress and Premier.  He and his son Vinod Lachman Mahtani each held 50% of the issued capital of each of the companies until 13 January 2012 when Vinod transferred his shares in both companies to Mahtani.  Thus, as from 13 January 2012, Mahtani became the sole shareholder of both companies and remained their sole director.

3.  The companies shared the same address and operated out of 717 Concordia Plaza, 7th Floor North Tower, 1 Science Museum Road, Tsim Sha Tsui East, Kowloon.

The petition

4.  The petition was based on a debt of US $2,695,000 due and payable by Fortress to the petitioner under invoices RI 3013594a and RI 313594b relating to a shipment of 25,000 metric tons of cement shipped to Afritramp, Ghana in October 2011.

5.  A statutory demand was duly served on Fortress on 2 August 2012 but was and remains unsatisfied.  The petition was presented on 24 August 2012 on the basis that Fortress is insolvent and unable to pay its debts.

6.  Fortress denied that it was indebted to the petitioner.  Its case was that it was not the contracting party and relied on a purchase order dated 28 August 2011 allegedly made between Premier and the petitioner ("the purchase contract").  Whether this ‘wrong party’ defence has any substance would turn on the facts of this case.

The facts

7.  The petitioner and Fortress entered into a CFR Sale/Purchase Agreement (" the agreement") on 28 August 2011 relating to the sale and purchase of 25,000 metric tons of cement with a laycan of 15/30 September.  Section 1 of the agreement set out the commercial terms for the sale and purchase of cement including its price, payment terms scheduling and shipments.  It was envisaged that the laycan would be narrowed.  It also provided the names and e-mails of contacts for Fortress, namely Dilip Vaswani ("Dilip") and Rafael Romero ("Rafael").  That was the first time the parties had entered into a transaction.  They were no previous business dealings between the parties.

8.  Preceding the agreement there had been negotiations since May and June 2011 between the petitioner's regional trading manager Andrew Preston (“Preston”) and the president of Fortress, Dilip.  Following the petitioner's final offer made on 3 August 2011, Rafael sent a written confirmation of acceptance on behalf of Fortress.  On 18 August 2011, Bally Singh, Vice President of Fortress accepted the terms of the agreement Preston had e-mailed to him that day.  

9.  While the petitioner signed two copies of the agreement on 28 August 2011, they were not couriered to Fortress until 30 August as appears from Preston’s e-mail to Bally of that date.  That e-mail also referred to the issuance of a pro forma invoice to facilitate Fortress in sending a draft LC and the narrowing the laycan to 25/30 September.

10.  The pro forma invoice was issued to Fortress on 2 September 2011.  On 20 September 2011, Fortress was advised that the laycan had been changed to 1 to 10 October.  On 27 September 2011 instead of issuing one letter of credit, Fortress proposed to split the order between two letters of credit: one from HSBC to cover 10,000 metric tons and another from BNP to cover the remaining 15,000 metric tons.  That appears from an e-mail to Preston dated 27 September 2011 from Bally asking that the drafts attached to his email be reviewed and approved so that "[Fortress] can proceed to have these LCs issued asap."

11.  In both drafts, Premier was named as the 'applicant'.  Preston’s evidence is that it is common practice in his industry to find the applicant of the letter of credit to be in the name of another company to the company on the sale and purchase agreement.  His understanding was that while Premier instead of Fortress had taken on the role as financier of the shipment it did not change the contractual relationship which was between Fortress and petitioner.  Therefore he did not raise any requisitions with Fortress.

12.  Instead, to facilitate matters, the petitioner issued two commercial invoices to Fortress addressed to "Fortress Commodities Ltd on behalf of Premiere Distributors (HK) Ltd".

13.  As the discharge port agent had yet to be named, Fortress was reminded to do so on 3 October 2011.  Dilip replied to the effect that "[Fortress] will revert in the next few days with the name of our preferred agent in Tema".  That e-mail bears the distinctive company banner used by Fortress which states its Hong Kong address and contact details as well as similar information for Fortress Commodities (Pty) Ltd which operates in Johannesburg and telephone numbers for other (presumably Fortress group) companies in Cameroon, Ghana, DRC and Liberia.

14.  The cement was shipped on 8 October 2011 and a copy of the two bills of lading was provided to Fortress.  Five days later Bally requested an amendment to the two bills of lading by e-mail, again using Fortress’ banner.  Also, the destination port was to be changed from Tema to Afritramp and the shipment was to be delivered without production of the original bill of lading.  Negotiations culminated in Fortress providing a letter of indemnity (written on Fortress stationery) on 21 October 2011 for each of the two bills of lading.

15.  Upon being notified by banks on the discrepancies on 9 November 2011, the petitioner informed Bally immediately.  Fortress responded on 10 November via an e-mail sent to Preston by Rafael with a copy to Dilip giving a lengthy explanation of an unexpected situation and proposing an immediate solution.  In summary, it was said that Fortress would normally establish LCs only after receiving LCs from Fortress Ghana.  However the LCs from Fortress Ghana were delayed because of a takeover affecting the bank used by Fortress Ghana.  It was explained that in order to maintain a good working relationship with the petitioner, “Fortress established the LCs in favour of the petitioner” without having first received the funds from Fortress Ghana.  It was anticipated that the LCs from Fortress Ghana would take a maximum of 2-4 weeks to be established.  It was proposed that meanwhile the petitioner should hire a collateral manager to audit the inventory and take control over the same, such costs as well as any loss of interest to be defrayed/paid by Fortress Ghana.

16.  There followed a long series of e-mail exchanges involving Preston and, on the Fortress side, Dilip, Rafael and Mahtani from December 2011 to June 2012 relating to the payment issue.  In his e-mail to Preston dated 7 January 2013, Mahtani personally added to Dilip’s apology “for putting [the petitioner] in this position”.  But at each anticipated payment date, some new excuse would be given, offering assurances and deferring the anticipated date for payment by another few weeks, while expressing every ‘confidence’ that payment would be made in the near future.  The date was changed no fewer than half a dozen times.  In short, the petitioner was being strung along and given the run around.

17.  The petitioner eventually lost patience and issued its winding up petition against Fortress on 24 August 2012.

18.  When Mahtani exhibited a copy of a purchase contract (allegedly made between the petitioner and Premier on 28 August 2011) to his affirmation in opposition to the petition, the petitioner considered the purchase contract a forgery.  Until that moment, Preston had never seen the purchase contract.  He was shocked to see his signature on it as neither he nor the petitioner had business dealings with Premier.  There was no such purchase contract in the petitioner's records and he had never signed such a contract.  Robert Locher, the other alleged signatory on behalf of the petitioner, also denied that the signature on the purchase contract was his. 

19.  The terms of the purchase contract replicated the terms of the agreement save that the agreement did not specify a shipment date whereas the purchase contract specified the shipping date as 20 October 2011.  In those circumstances, the petitioner applied for and obtained an order from Harris J on 12 November 2012 allowing inspection of the original purchase contract as well as the original copy of the agreement made between petitioner and Fortress.

20.  Although Fortress sought additional time for production which was granted, it was unable to comply with the order.  Mahtani’s explanation was that the documents must have been lost in the process of the office relocation of Fortress in May 2012 when it moved to a space less than half the size of its former office.

Whether triable issue shown

21.  Viewed against the backdrop of the facts outlined above, the 'wrong party' defence Fortress advanced rings hollow.  What is striking and remarkable throughout the dealings between the parties is that Fortress never once protested that it was not the contracting party for purchasing the 25,000 mts of cement for shipment to Ghana.  To the contrary, it accepted liability to make payment for shipment and acknowledged the debt.  It even provided indemnities in relation to changes to the bills of lading.  That is clear from the e-mail correspondence outlined in §§13 to 16 above which cannot be read in any other way.  If Fortress were not the contracting party, the e-mail correspondence would be wholly inexplicable.

22.  That aside, all Fortress has done is to exhibit a copy of the purchase contract.  As already noted, it is unable to produce the original for inspection which makes its authenticity suspect.  While Fortress sought to rely on the two letters of credit which made reference to the purchase contract, the drafts of those letters of credit which stated that Premier was the applicant for the credit and finally, the two commercial invoices which also made reference to the purchase contract, they do not advance the authenticity issue and Preston has provided a plausible explanation for those matters.

23.  While the purchase contract and the agreement are both dated 28 August 2011, the agreement (which Fortress maintains was the master agreement) while signed and dated by the petitioner on 28 August was not delivered to Fortress until 30 August and hence not executed by Fortress until that date at the earliest.  See §8 above.  In those circumstances, evidence concerning and leading to the execution of the purchase contract is critical.  Yet, there is none.  Further, the purchase contract provides for shipment to be made on 20 October 2011 when, as noted above, the cement was shipped on 8 October 2011.

24.  Contracts do not come out of thin air.  The total absence of any evidence from those involved in negotiating the purchase contract or a trail of correspondence on the subject is telling.  The authenticity of the purchase contract is itself highly problematic given Preston's evidence that he knew nothing about the purchase contract until it was exhibited to Mahtani’s affirmation, much less put his signature to it.  Preston's evidence deserves credence in the absence of any evidence from Fortress, let alone credible evidence, as to circumstances surrounding the making of the purchase contract.

25.  More importantly, once the banks refused to make payment, Fortress acknowledged and accepted liability for shipment.  Further, Mahtani knew exactly what was going on.  Given that he had total control over Fortress and Premier and his involvement on the payment issue, I have no hesitation in coming to the conclusion that Fortress has failed to show that there is a triable issue over the identity of the contracting party.  There is no on bona fide dispute on substantial grounds to warrant the dismissal of the petition.

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J U D G M E N T

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1. At the conclusion of the hearing of HCCW 311 and 375 of 2012, judgment in HCCW 375 was reserved which I now give.

Background facts

2. The background facts have been in the Reasons for Judgment in HCCW 311/2012.  For the purposes of this judgment, I adopt §§2 to 16 of the Reasons and incorporate them as part of this Judgment.

The petition

3. The petitioner also seeks a winding up order in respect of Premier on the basis that the LCs have not been paid and that, accordingly, Premier is indebted to the petitioner for the aggregate amount of the LCs ie US$2,695,000 with interest accruing at a daily rate of US$623.91.

4. The debt in this petition is identical to that in HCCW 311/2012.  While the debt is the same debt, being the purchase price for the shipment of concrete, the petitioner’s case against Premier is based only on the LCs, specifically, that Premier failed to discharge its obligation as applicant under the LCs to make payment, whereas its case against Fortress was based on the agreement.

Is Premier liable?

5. According to the petitioner, it had no direct contact with Premier.  In negotiating the LCs, it knew from the draft LCs provided that the applicant was Premier, a company with the same registered address as Fortress and sharing the same fax number.  Although the petitioner referred to a company search, it is unclear whether the company search was done at the time or only subsequently.  In any event, the petitioner was content to accept the LCs from a third party (ie Premier) as the financier.  As appears from §11 above, Preston’s uncontradicted evidence was that was a common arrangement in the cement industry.

6. It was not said and there is no evidence that such a third party is necessarily independently liable to the vendor on the LC so established.  Its liability (if any) must depend on the circumstances of the particular case relating to the provision of the LCs.

7. In the present case, the e-mail dated 10 November 2011 from Rafael to Preston sheds some light on the matter.  In pertinent part it reads:

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·  •Fortress Ghana always establishes letters of credit in favour of Fortress Commodities HK for any orders of cement placed for shipment to Tema, Ghana. •  ·On the strength of the Letters of Credit that Fortress HK receives from Fortress Ghana, Fortress HK establishes letters of credit through its 2 main bankers, HSBC & BNP Paribas, in favour of the cement suppliers. •  ·  When Fortress HK placed orders with Cementia, they waited for the LC’s from Fortress Ghana, normally through Intercontinental Bank, Ghana.  There was a delay in getting the LC’s from Ghana. •  ·  In order to maintain a good working relationship with Cementia, Fortress HK established letters of credit in favour of Cementia without waiting for the LC’s from Ghana as they knew that they were delayed but would eventually receive them.  The banks of Fortress HK accommodated the establishment of the LC’s in favour of Cementia in anticipation of receiving LC’s from Fortress Ghana through Intercontinental bank, as they normally do in the ordinary course of business. •  ·  …

8. It is apparent from that account that Fortress considered that it, rather than some third party, had established the LCs.  Premier was not even mentioned.  Given the control and ownership of Fortress and Premier, perhaps it was not all that surprising.  In those circumstances, it is more likely than not that Premier acted as the agent for Fortress rather than the reverse, with Fortress acting as agent for Premier.  In any event, that must be an arguable matter.

9. Ms Wu counsel for the petitioner submitted that there is nothing on the face of the LCs to suggest that Premier was only acting as agent.  In the circumstances of this case, I do not consider that the absence of any reference to agency is dispositive.

10. For all those reasons, I would dismiss this petition.  There is to be an order nisi of costs in favour of Premier.