HAIKIRK CO LTD v. ELTON S.Y. CHOW & ASSOCIATES (a firm)

Registered company - subsidiary being a legal entity separate and distinct from other members of the group of companies (Salomon v. Salomon Co. Ltd. (1897) A.C. 22 and "Charterbridge Corp. v. Lloyds Bank" (1969) 2 All E.R. 1185 at 1194.

Charges - Assignment of rent and creation of debenture on the whole of a company's undertaking - Rights of Receiver/Manager appointed under debenture.

Held: The chairman of a group of companies, of which plaintiff was a subsidiary, had no apparent or ostensible authority to act on behalf of Plaintiff since he was not Plaintiff's director or officer or agent ("Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd." (1964) 2 Q.B. 480) - Having assigned rent of the suit premises, Plaintiff landlord remained as beneficial owner of rent. Upon appointment of Receiver/Manager under debenture the floating charge crystallised into fixed charge - Receiver/Manager is entitled to distrain for arrears of rent in Plaintiff landlord's name - Defendant's application for warrant of distress for rent to be discharged and for damages in respect of goods seized is dismissed.

IN THE DISTRICT COURT OF HONG KONG

HOLDEN AT VICTORIA

CIVIL JURISDICTION

DISTRAINT NO. 6 OF 1984

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DECISION

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1. This is the hearing of an application by Defendant (a firm) for (a) the discharge of a Warrant of Distress issued by Plaintiff and (b) compensation by way of damages in respect of seizure of Defendant's goods under that warrant.

2. It is pertinent to list at the outset a chronology of the chain of events, which are not disputed, that led to that distraint and to follow them up with the matter at issue.

Chain of events

                (1) By an agreement dated 22.12.1981 loan facility of US $83,000.00 was made available to Plaintiff (the Borrower) towards the acquisition of a piece of land and the building standing on it known as the Carrian Centre (the Property) by a consortium of banks and financial institutions (the Lenders) with Wardley Limited (the Agent) acting en behalf of the Lenders. Pursuant to that loan agreement two documents were executed on 28.1.1982:-

                (2)     On 26.7.1982 Defendant entered into a tenancy agreement with Carrian Property Management Limited (referred to as "Carrian Property Ltd.”) as agent of the landlord, i.e., Plaintiff, for the lease of an office known as Unit B on the 13th Floor of the Property at $83,288.00 in monthly rental and for a term of 2 years from 1.6.1982.

                (3)     Written notices of the said Assignment of Rental were sent to Defendant on 26.1.1983 and 27.1.1 983 by Plaintiff and the Agent respectively.

                (4)     By an instrument dated 17.10.1983 the Agent exercised its power under the said Debenture and appointed Messrs. A.H. Deacon and N.P. Etches jointly and severally as Receivers and Managers of the Property and the entire undertaking of Plaintiff.

                (5)     The Receivers took out a Distress Warrant against Defendant for arrears of rent for the month of November 1983, as a result of which Defendant's goods were seized by the bailiff en 13.1.1984. That distraint gave rise to the present application.

Issue

3. Defendant advanced two grounds in support of their case.

Defendant's first ground

4. This is contained in the affidavit of E.S.Y. Chow, Defendant's proprietor who more or less repeated it in the witness box. It is reproduced below:-

 

Paragraph 3

"

At all material times, both the said Carrian Property Management Ltd. and the Plaintiff were members of the Carrian Group of companies. Before the Defendant entered into the said Tenancy Agreement, the Defendant was retained by Mr. George Tan, the then Chairman of the Carrian Group and acting on behalf of the Carrian Group, as one of the Architects and Consulting Engineers of the Carrian Group. Mr. George Tan gave the representation that the Defendant could set off the rent and the associated charges of the said premises against the professional fees charged by the Defendant for professional services rendered to the Carrian Group. It was only based upon such representation given by Mr. George Tan that I entered into the said Tenancy Agreement. Such representation has in fact been implemented by Carrian Property Management Limited acting as agent of the Plaintiff after I entered into the said Tenancy Agreement. "

5. Defendant's above contention can be divided into different parts and dealt with seriatim:-

6. Defendant produced no proof in support of this allegation. However, on this aspect I found assistance, as far as Plaintiff is concerned, from "Halkirk Co. Ltd. v. Carrian Holdings Ltd.". Civil Appeal No. 155 of 1983 in which Leonard, V.P., said at p. 6:-

"The only other evidence which the learned trial judge can have considered is to be found in an affidavit of Mr. Etches sworn on the 2nd November, 1983. From this it appears that Halkirk is a subsidiary of a company known as Carrian Investments Ltd. (CIL) whose controlling shareholder is in fact Carrian Holdings Ltd. Halkirk was apparently set up so that in it might be vested the Centre, a substantial asset of what I will call the "Carrian Group" (that is the two main companies, Holding and CIL, together with their various subsidiary companies, all of which companies were the "brain children" of Mr. George Tan, his associates or relations).

7. The distinctive rights and liabilities of a company within a group are summarized in these words of Pennycuick, J. in "Charterbridge Corporation v. Lloyds Bank" (1969( 2 All E.R. 1185 at p. 1194:

"Each company in the group is a separate legal entity and the directors of a particular company are not entitled to sacrifice the interest of that company. This becomes apparent where on considers the case where the particular company has separate creditors".

 

8. There is also evidence from A.H. Deacon, Receiver/Manager of Plaintiff's undertaking, that searches of the Companies Registry revealed that George Tan had never been a director or officer of Plaintiff and was a director of Carrian Property Ltd. for only a year from 18.2.81 to 10.2.82. Thus, although it is possible, as one may be led to think, that George Tan controlled a holding company, of which Plaintiff and Carrian Property Ltd. were subsidiaries, yet it cannot be said that he could, without concrete proof, act for those subsidiaries just before and at the time the tenancy agreement of the suit premises was signed by Carrian Property Ltd. and Defendant on 26.7.82. The lack of authority for George Tan to so act is derived from the principle laid in the classic case of "Salomon v. Salomon & C. Ltd." (1897) A.C. 22 that a limited company is a separate entity and according to Lord Halsbury at p. 30 "..... once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself....." To this dictum can be added that the company is at law a different person altogether from its shareholders and sister companies of the same group

9. It is said in Palmer's Company Law Vol. 1 p. 335 that "A company, being an artificial person, can only act through agents. The agents will normally be the directors or executive employees of the company, and their powers are conferred either directly by the company's articles of association or by an authority under the articles". Since George Tan was not a director or officer of Plaintiff or Carrian Property Ltd. at the material times and was not held out by persons having the management of those companies as being their agent, he could not be regarded as having apparent or ostensible authority to act on their behalf. A case in point is "Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd." (1964) 2 Q.B. 480.

10. According to Defendant, that representation was made at an unknown date in the early part of 1982, whilst the tenancy agreement in question was entered into at the end of July 1982. Thus, first of all, there was a long lapse of time between the two events to retain the effectiveness of the first. Second, even assuming the first event to exist, there is, as was already pointed out, no proof that George Tan had authority to act for Plaintiff or Carrian Property Ltd. when that tenancy agreement was made. Third, as that alleged representation was not corroborated by George Tan or any witness, it would, to all intents and purposes, be hearsay and could not therefore be admitted in evidence. Fourth, clause 10.12 of the said Tenancy Agreement says "This Agreement sets out the full agreement reached between the parties (Plaintiff and Defendant) and no other representations have been made or warranties given relating to the said building (the Contre) or the premises (the suit premises)." Based on this term it can be taken that even if George Tan had made the alleged representation, that promise would be repugnant to the provision of S. 4 of the Misrepresentation Ordinance, Cap. 284 which roads:-

"If any agreement (whether made before or after the commencement of this Ordinance) contains a provision which would exclude or restrict: -

 

 

that provision shall be of no effect except to the extent (if any) that, in any proceedings arising out of the contract, the court or arbitrator may allow reliance on it as being fair and reasonable in the circumstances of the case. ”

11. Defendant further relied on the following documents:-

12. First of all, according to A.H. Deacon, Receiver/Manager, Plaintiff at the material times had no property other than the Carrian Centre and had nothing to do with the sites to which Defendant claimed to have rendered his professional services. Secondly the fact that Carrian Property Ltd. allowed a set-off (item (a) above) on one occasion on 4/1/83 does not mean that that set-off could be applied to rental due for November, 1983.

13. Authority on the aspect of set-off of debt of a company before and after the appointment of Receivers on the strength of a debenture can be found in "N.W. Robbie and Co. Ltd. v. Witney Warehouse Co. Ltd." (1963) C.A. 1324, headnotes of which road:-

"In January 1960, the plaintiffs (a company incorporated in Ireland) issued a debenture to their bank securing all moneys due to the bank by a floating charge on the company's assets. On July 6 1961, the bank appointed a receiver and manager under the debenture. Before the appointment of the receiver the plaintiffs had sold goods on credit to the defendants to the value of £95. After the receiver was appointed, he permitted the plaintiffs to carry on business, and they sold further goods on credit to the defendants to the amount of £1,251. These goods had been part of the stock of the plaintiffs when the receiver was appointed. Between November 1960 and January 1961, the plaintiffs had bought goods from a subsidiary company of the defendants to the value of £852. On October 6 1961, the subsidiary company assigned the benefit of the debt to the defendants and notice of the assignment was given to the plaintiffs. In an action for £1,346, the amount due for goods sold and delivered, the defendants admitted £493 was owing but claimed to set-off the balance of £852.

        Hold, (Donovan L.J. dissenting) that, on the construction of the debenture, each debt owed by the defendants as it arose after the appointment of a receiver became a chose in action of the plaintiffs subject to an equitable charge in favour of the bank as debenture-holder (post, pp. 1330, 1331, 1336, 1337); that those choses in action had thus become assigned in equity to the bank at times when the defendants had no cross claim and no right of set-off against the plaintiffs so that, at the first moment of assertion of set-off there was no identity between the persons beneficially interested in the claim and the person against whom the cross claim existed and, therefore, not the mutuality pre-requisite to sot off (post, PP.1331, 1338, 1339); and that no right of set-off of the subsequently acquired cross-debt could defeat the interest of the debenture-holder. Accordingly, judgment should have been given for the full sum claimed. "

14. In the light of foregoing, I disregard E.S.C. Chow's testimony on George Tan's representation to him as being inadmissible hearsay and reject Defendant's claim of the right to set off fees due to them by Carrian Group against arrears of rental owed by then to Plaintiff for November 1983. Ground (1) of Defendant cannot therefore stand.

Defendant's second ground

15. Defendant relied upon the following terms of the said Assignment of Rental from Plaintiff to the Agent which say:-

16. Clause 1

"As security for the payment of all moneys becoming due to the Lenders under the terms of the Agreement, the Borrower, as beneficial owner, hereby assigns and agrees to assign to the Agent (as agent for the Londors) all the Borrower's rights, title, interest and benefit to and in any moneys whatsoever payable (whether now or in the future) to the Borrower by present or future Lessees and all other rights and benefits whatsoever accruing (whether now or in the future) to the Borrower, in the Borrower's capacity as a lesser, from present or future Lessees, subject to the proviso for cosser hereinafter contained. "

17. Clause 3(a)

"The Borrower hereby undertakes with the Agent (on behalf of the Lenders) that the Borrower will:-

18. Clause 4(a)

"All payments of rent due to be paid pursuant to Clause 3(a)(iv) hereof shall be applied by the Agent in or towards payment of the Secured Indebtedness. "

19. Based on the above provisions Defendant argued that, by having absolutely assigned rental of the suit premises to the Agent and having given the required notice as specified in that document, Plaintiff was no longer entitled to collect rent of the suit premises and to appoint its Debenture Holder to distrain goods for arrears of rental. In other words they claimed that although the Debenture Holder in question also happened to be the Agent, it acted in another capacity, i.e. as agent of the Plaintiff and not in its own position as assignee of rental of the suit premises. Defendant made reference to Law Amendment and Reform (Consolidation) Ordinance, Cap. 23, Section 9 which says:

"Any absolute assignment, by writing under the hand of the assignor (not purporting to be by way of charge only), of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim such debt or chose in action, shall be and be deemed to have been effectual in law (subject to all equities which would have been entitled to priority over the right of the assignee if this section and sections 2, 3, 4, 10 and 11 had not been enacted) to pass and transfer the legal right to such debt or chose in action from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the same, without the concurrence of the assignor: ......”

20. It is undisputed law that upon appointment of Receivers by Plaintiff under the Debenture the floating charge ever Plaintiff's whole undertaking crystallized and that floating charge became converted into a fixed charge. In this connection I an of the view that the said crystallization and conversion override and absorb the Assignment of Rental. I also find that the Debenture has made provision for such eventuality under Clause 6.02 which reads.

"At any time after the security hereby constituted has become enforceable the Agent may, without any consent on the part of the Borrower or of any person:-

 

21. Clause 6.08

"Save so far as the same are net inconsistent herewith, the provisions of sub-sections (1) and (2) of Section 101, Sections, 104, 106 and 107 and sub-sections (3), (4), (5), (7) and 8 (i), (ii) and (iii) of Section 109 of the law of Property Act .....

 

22. Section 109 of the Law of Property Act reads:-

23. Clause 7.02(x)

"Every such Receiver or Receivers appointed in respect of the Property, and/or the other undertaking, property, assets and rights aforesaid shall be the agent of the Borrower..........”

24. To sum up, it is plain and clear that the Lenders had caused 3 forms of security to be executed by Plaintiff in their favour, viz. (a) a mortgage on the Property, (b) a floating charge on Plaintiff's entire undertaking and (c) an assignment of rental of the Property, on 28.1.1982, while Defendant only signed a tenancy agreement with Plaintiff at a later date of 26.7.1982. It is also undeniable that the Lenders decided to enforce their security on 17.10.1983 by appointing Receivers to take over the whole of Plaintiff's undertaking. This appointment, in my view, has priority over the said Assignment and the relevant Debenture does give power to the Receivers to levy distress for arrears of rent. It should also be noted that it so happened that the Agent acting on behalf of the Lenders is also the assignee of the rental of the suit premises. The Agent was thus all along the legal owner and Plaintiff, the beneficial owner of the rental in question. Section 109(3) of Law of Property Act 1925 says:

"The receiver shall have power to demand and recover all the income of which he is appointed receiver, by action, distress, or otherwise, in the name either of the mortgagor or of the mortgagee, to the full extent of the estate or interest which the mortgagor could dispose of ....."

25. From the above finding I have come to the view that the Receivers had rightly represented Plaintiff in distraining Defendant's goods and that the second ground of Defendant's argument must also fail.

26. To conclude, I hold that the issue of the Warrant of Distress by Plaintiff's agent was justified and proper and reject Defendant's application to have it discharged. As a consequence of this finding Defendant's claim for damages is also dismissed.