VERIZON UK LTD v. CARDTEL EUROPE LTD

CACV 13/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 13 OF 2012

(ON APPEAL FROM HCCW NO. 430 OF 2010)

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REASONS FOR JUDGMENT

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Hon Kwan JA:

1. This is an appeal against a winding-up order made by Harris J on the grounds of insolvency on 17 November 2011. The judge held that the company, Cardtel Europe Limited (“the Company”), has not demonstrated it has a bona fide dispute of the petitioning debt of £11,841,916.80 (approximately HK$142,148,305.08) on substantial grounds. There is no dispute about the applicable legal principles. The question raised by Mr Maurellet for the Company in this appeal is whether the judge’s analysis of the evidence and his application of the legal principles to the evidence were correct. We dismissed the appeal at the end of the hearing and these are the reasons for judgment.

The background

2. The relevant background matters may be stated as follows.

3. The petitioner, Verizon UK Limited, was incorporated in England and Wales and operates a telecommunications business.  The Company was incorporated in Hong Kong and had been engaged in the business of producing pre-paid calling cards to end users.  The Company belongs to a group known as the Nowtel group of companies.

4. Since 2001, the petitioner had provided telecommunication services to Nowtel Europe Limited (“Nowtel Europe”) in accordance with a Wholesale Master Services Agreement entered into between them on 25 June 2001 (“the Master Agreement”).  Nowtel Europe is a company in the Nowtel group and was incorporated in the Republic of Ireland.

5. In late 2009, the petitioner became concerned about the level of indebtedness of Nowtel Europe under the Master Agreement and looked to obtain some level of security to protect its position.  Negotiations took place between them from late 2009 to May 2010.  Three documents were executed on 28 May 2010 as a result.

6. The first was a document made as a deed entitled “Payment Plan and Variation of Commercial Terms” (“the Variation Agreement”) between the petitioner and Nowtel Europe.  The relevant clauses in the recitals, which are important, read as follows:

“B. The Customer [Nowtel Europe] has accrued overdue payments in respect of the Services and the Parties hereby agree to define the terms upon which the liability will be reduced. The outstanding debt as at the date of this Payment Plan is US$17,083,331 (“Outstanding Amount”), and is further detailed in the statement of accounts at Annex A.

C. The Parties have agreed a credit limit (“Credit Limit”), set off and other security arrangements to prevent the accrual of increased liability to Verizon Business [the petitioner].

D. As at the date of this Payment Plan the Credit Limit is US$13,000,000 and the amount in excess of the Credit Limit is US$4,083,331 (“Excess Amount”). The Credit Limit shall be reviewed by [the petitioner] upon the Excess Amount being repaid in accordance with this Payment Plan. At such time [the petitioner] shall undertake a review of the Services provided to [Nowtel Europe] and reassess the transactions in respect of monthly traffic levels, payment terms, security or any other factors which are relevant at the time and shall at its sole discretion request an amended Credit Limit and further security as it deems necessary.

E. This Payment Plan provides a variation to the terms of the Agreement [Master Agreement] and sets out the credit terms upon which the Parties agree to manage the Excess Amount. Such terms shall continue until otherwise agreed and varied at the Credit Review or thereafter.”

7. By the Variation Agreement,

   (1)  Nowtel Europe and the relevant group companies agreed to provide securities by way of (a) a group company payment guarantee as set out in the guarantee attached at annex B; and (b) a fixed and floating charge over Nowtel Europe’s equipment and assets as set out in the charge attached at annex C.

   (2)  For the full settlement of the Excess Amount by 29 December 2010, Nowtel Europe agreed to make regular payments by monthly instalments in the amounts specified by same day bank transfer to clear in the petitioner’s bank account by certain dates (“Monthy Instalments”).

   (3)  In consideration of settlement of the Outstanding Amount, Nowtel Europe agreed to utilise the services in accordance with minimum and maximum usage levels and to pay the charges for the services under the Master Agreement on a weekly basis (“Weekly Payments”).

8. The next document was a deed entitled “Guarantee and Indemnity” (“the Guarantee”) made by four companies in the Nowtel group in favour of the petitioner in respect of the liabilities of Nowtel Europe.  The guarantors were Nowtel (UK) Limited (“Nowtel UK”), Nowtel Global Limited (“Nowtel Global”), Nowtel USA Inc and the Company.  The liabilities of the guarantors to the petitioner are joint and several.  The Guarantee is a continuing irrevocable guarantee in respect of the “Guaranteed Obligations” which is defined to mean:

“all or any amounts due to Verizon [the petitioner] in respect of the payment obligations in respect to the Weekly Payments and the Monthly Instalments as more particularly defined in the Payment Plan Agreement dated 28 May 2010 a copy of which is Annex 1 to this Agreement, which are at least 7 Working Days past the date when the payment was due by the Borrower [Nowtel Europe] to [the petitioner] and any amounts which shall from time to time (and whether on or at any time after demand) be due under any relevant service agreements including but not limited to the Wholesale Mast [sic] Service Agreement [the Master Agreement]”.

9. The third document was a deed entitled “Charge over Plant and Machinery” (“the Charge”) executed by Nowtel Europe in favour of the petitioner as the chargee.  By the Charge, Nowtel Europe covenanted to pay the “Secured Liabilities” when the same are due and as continuing security for the payment of the Secured Liabilities, it charged by way of first fixed charge in favour of the petitioner all the secured assets as defined and by way of first floating charge in favour of the petitioner such of the secured assets if any as are not effectively subject to a fixed charge. “Secured Liabilities” is defined to mean:

“all or any amounts due to the Chargee [the petitioner] in respect of the payment obligations in respect to the Weekly Payments and the Monthly Instalments as more particularly defined in the Payment Plan Agreement dated 28 May 2010 a copy of which is Schedule 2 to this Charge, which are at least 5 Working Days past the date when the payment was due by the Guarantors under the Guarantee and Indemnity Agreement, dated 28 May 2010 the attached as Schedule 3 to this Charge and any amounts which shall from time to time (and whether on or at any time after demand) be due under any relevant service agreements including but not limited to the Service Agreement [the Master Agreement]”.

10. It was provided in the Charge that on proof being given to the petitioner that all the Excess Amount (as defined in the Variation Agreement) has been paid and discharged in full, the petitioner will, at the cost and request of Nowtel Europe, endeavour to release and discharge created as soon as reasonably practicable.

11. The Variation Agreement and the Charge were executed by Osbert Layne Bell on behalf of Nowtel Europe.  Mr Bell executed the Guarantee for two of the guarantors, one of them being the Company.  He is a director of Nowtel Europe and one of the three directors of the Company and the only deponent of the affidavits filed on behalf of the Company to oppose the petition.

12. On 9 September 2010, the petitioner served a suspension of service letter on Nowtel Europe.  This was followed by a first demand on the guarantors for £1,718,258.90 on 21 September 2010 and a second demand on the guarantors for £11,841,916.80 on 6 October 2010.  On 7 October 2010, the petitioner served notice on Nowtel Europe to enforce its rights under the Charge and this notice was acknowledged by Mr Bell on behalf of Nowtel Europe by letter the same day.

13. On 8 October 2010, Nowtel UK on behalf of Nowtel Europe sent an email to the petitioner raising a dispute for invoices rendered by the petitioner from February 2009 to August 2010.  The disputed sum in total was £2,087,992.95.

14. On 14 October 2010, Nowtel UK on behalf of Nowtel Europe wrote to the petitioner alleging that the sum of £11,841,916.80 demanded on 6 October 2010 was not a “Guaranteed Obligation” under the Guarantee.

15. The petitioner presented this petition to wind up the Company on 22 October 2010.  The petition was amended on 11 January 2011 to plead reliance on a debt of £11,841,916.80.  The petitioner did not rely on a statutory demand to establish that the Company is unable to pay its debts, choosing to establish insolvency by other evidence.

16. On 27 October 2010, Nowtel Europe and Nowtel Global went into voluntary liquidation in Ireland on the grounds of insolvency.  In the directors estimated statement of affairs for each company, which was signed by Mr Bell, a sum of £14,881,804.47 was recorded to be owed to the petitioner.  In respect of Nowtel Global, it was stated that Nowtel Global “is jointly and severally liable with other group companies” for this liability.

17. Nowtel UK went into administration in England on 12 November 2010.  It filed a statement of affairs on 4 January 2011 signed by two directors (not Mr Bell) recording that the liability of Nowtel UK to the petitioner was £11,841,916.80.

The Company’s case

18. The Company filed three affidavits of Mr Bell in opposition.  It disputed liability for the petitioning debt on just one ground.  It is alleged that it is entitled to have the Guarantee rescinded on the ground that it entered into the Guarantee in reliance on the petitioner’s representations that:

   (1)  Nowtel Europe’s outstanding indebtedness to the petitioner at the time was US$17,083,331.00, see recital B to the Variation Agreement; and

   (2)  the alleged outstanding amount was US$4,083,331.00 in excess of the agreed credit limit of US$13,000,000, see recital D to the Variation Agreement.

19. It is the Company’s case that the representations were untrue in that in around August 2010, Nowtel Europe and the Company discovered that there was overcharging by the petitioner during January 2009 to August 2010 in the total sum of £2,087,992.95 for inbound and outbound airtime traffic.

20. Mr Bell asserted that the Company only executed the Guarantee because of the petitioner’s representation that Nowtel Europe had substantially exceeded the credit limit by about US$4 million.  If the Company had been aware of the extent of the petitioner’s overcharging for telecommunication services and that the petitioner had overstated the sum allegedly due to itself by over £2 million, he would not have agreed that the Company was to execute the Guarantee.  And if there had been only a relatively minor excess of the credit limit, Mr Bell would have expected Nowtel Europe to make its own arrangements to pay the excess sum or provide the petitioner with other forms of security.  He would not consider it necessary or in the interests of the Company to provide the Guarantee.

21. The judge accepted that the Company has demonstrated that there is a serious dispute whether or not Nowtel Europe had been overcharged by the sums of £2, 087,992.95 and £61,085.73[1], making a total of £2,149,079[2] but did not accept that the Company has demonstrated it has bona fide defence on substantial grounds that a material misrepresentation was made to the Company[3] on which it relied in deciding to sign the Guarantee.  If the disputed amount of £2,149,079[4] were to be deducted from the Excess Amount of US$4,083,331 in the Variation Agreement, the figure in excess of the credit limit would be reduced to US$962,438[5].

The Company’s arguments on appeal

22. Mr Maurellet took issue with the judge’s findings that “there is no evidence that any representations were made to the Company about the amount of the excess over the credit limit at all” and that “there is no evidence that the Company’s board ever saw the Variation Agreement in which the alleged misrepresentations are contained”.  He pointed to the fact that the Variation Agreement and the Guarantee are inextricably intertwined as they referred to each other in the body of the document, and they were in reality part of one commercial agreement.  He submitted that the judge’s findings quoted above were incorrect.  The representations were contained in recitals B and D of the Variation Agreement, and the Guarantee was part and parcel of the Variation Agreement.  The representations were made to Mr Bell, who signed the Variation Agreement and the Guarantee in his different capacities.  The statements of the recitals were clearly matters of importance and intended to be relied upon by the Company.  There is no reason in law why the representation must be made to the board of directors of the Company instead of to Mr Bell who executed the Guarantee on behalf of the Company.

23. As to the judge’s findings that there was no evidence “concerning [the Company’s] deliberations prior to authorising the execution of the Guarantee”, and “there is simply no evidence to suggest that the Company was giving any independent consideration to whether or not it would sign the Guarantee”, Mr Maurellet submitted it would be very rare where the party relying on a representation would record in writing that he was relying on that representation especially when the representation was in writing.  Here, Mr Bell had deposed that his decision as a director to agree for the Company to execute the Guarantee was based on the representation that Nowtel Europe’s credit limit was exceeded by a substantial sum of over US$4 million as stated in the Variation Agreement.

24. Insofar as the judge was influenced by the petitioner’s email of 25 May 2010 to Nowtel Europe as an ultimatum which left the latter and its associated companies with no choice but to agree to provide the security including the Guarantee, Mr Maurellet argued that if the companies in the Nowtel group had known of the substantial overcharging, they would have negotiated with the petitioner on different terms and one cannot rule out the possibility of the petitioner agreeing to vary its security requirements in that situation.

25. For the above reasons, it was contended that that Mr Bell’s evidence could not properly be described as unbelievable or disingenuous, given that the judge had accepted there was a serious issue as to whether Nowtel Europe had been overcharged by over £2 million.

If the Company’s evidence is believable

26. Miss Ismail submitted for the petitioner that the defence of the Company is a “put-up job”. Her submission was on the following lines.

27. Firstly, it is pertinent to note that although Nowtel UK had raised disputes on the amount of the petitioner’s invoices on 20 August 2010 (the total sum in dispute was £60,383.35) and on 8 October 2010 (the total sum in dispute was £2,087,992.95) and alleged on 14 October that the debt demanded by the petitioner was not a “Guaranteed Obligation”, there was no suggestion of any misrepresentation made by Nowtel Europe or any of the guarantors until Mr Bell made his 1^st affidavit in opposition on 30 December 2010.

28. Secondly, there was acknowledgment of the debt to the petitioner by Nowtel Europe and other guarantors in the Nowtel group in various ways, notwithstanding the disputes of the amount of indebtedness.  In September 2010, Nowtel Europe provided the petitioner with two cheques dated 15 and 22 September 2010 for the respective sums of £400,000 and £650,000 in part payment of its debts.  Both were dishonoured when presented for payment.  On 27 September 2010, Mr Bell and another director made an offer on behalf of Nowtel Europe to the petitioner to settle the outstanding indebtedness over a period of 72 months, on the basis that the current outstanding sum as estimated by Nowtel Europe was US$19 million.  On 7 October 2010, Mr Bell on behalf of Nowtel Europe acknowledged the notice of the petitioner to enforce the Charge, after two unsatisfied demands were made by the petitioner on the guarantors on 21 September and 6 October 2010.  Lastly, Mr Bell signed a statement of affairs for Nowtel Europe and for Nowtel Global as at 27 October 2010 including a debt to the petitioner of £14,881,804.47.

29. Thirdly, recitals B and D in the Variation Agreement were statements of agreed fact between Nowtel Europe as principal and the petitioner as creditor, rather than representations one way or the other between the parties, or just a record of the amount of indebtedness.  Clause B stated clearly that the parties to the deed “hereby agree to define the terms upon which the liability will be reduced.”  Where a recital of fact is intended to be a statement of all parties, all parties to the deed are estopped from denying the truth of the recital.  But where the recital is the statement of one party only, only that party is so estopped (Stroughill v Buck (1850) 14 QB 781 at 787; Greer v Kettle [1938] AC 156 at 170 to 171; Lewison, The Interpretation of Contracts, 4^th ed, para 10.16).  As parties to the Variation Agreement, Nowtel Europe and the petitioner are estopped from denying the truth of the facts agreed in recitals B and D.

30. Fourthly, the creditor is only bound by a representation it has made to the surety, but in the rare case whether the creditor appoints a third party as agent to procure the guarantee, it will be bound by the representation of its agent (O’Donovan & Phillips, The Modern Contract of Guarantee, 2^nd ed, para 4-46).  If the misrepresentation is conveyed to the surety by the principal, the surety must establish that the principal acted as the agent of the creditor for the purpose of making the representation or for the purpose of procuring the guarantee, the mere fact that the principal was asked by the creditor to procure a guarantee would normally be insufficient to establish agency (Barclays Bank v O’Brien [1994] 1 AC 180 at 194A; Andrews & Millett, Law of Guarantee, 6^th ed, para 5-011).  Here, the petitioner as creditor required Nowtel Europe to obtain cross-company guarantees.  This is the normal commercial case, not an unusual agency situation of the petitioner having made Nowtel Europe its agent for the purpose of procuring the Guarantee.  There was no representation of the petitioner to the Company.

31. Fifthly, the Company did not produce minutes or notes of any board meeting in respect of its provision of the Guarantee, nor did Mr Bell provide any evidence of what occurred at any such board meeting.  There was no evidence of what was put before such board meeting.  This is despite the email of Richard Reingold of Nowtel Europe to the petitioner on 24 May 2010 stating that “at [the petitioner’s] request, the directors of the various Nowtel entities have now held their respective board meetings” and that “all in all the boards have after careful deliberation come to the conclusion that signing of the security agreements is not in the best interest of the companies”.  It is also despite clause 9.5 of the Guarantee which represented that the guarantor has taken all necessary action to authorise its entry into the Guarantee including the holding of a meeting of the board of directors.

32. This is particularly telling as after the said email of 24 May 2010, in which Nowtel Europe attempted to avoid giving the cross-company guarantee on the basis that the boards of the various Nowtel entities had met and taken the view that the relatively low excess amount of US$4 million over the credit limit and the US$1 to 2 million excess over the highest exposure before October 2009 did not justify the guarantee, the petitioner replied on 25 May 2010 explaining the purpose of the credit limit (that it was not a credit facility) and stating that unless Nowtel Europe were prepared to pay the outstanding debt immediately, the petitioner required the negotiated documentation package including the Guarantee and Charge be signed by 26 May 2010, failing which the petitioner would issue a five business day suspension letter for all services.  The petitioner’s reply showed clearly it was not prepared to accommodate any other arrangement.

33. The Company produced no minutes or notes or other records of what occurred at any board meeting which resulted in its provision of the Guarantee.  All that the Company adduced in evidence was Mr Bell’s belated assertion of what he would have decided as one of the directors if he had known of the disputed overcharge by the petitioner.

34. I agree with Miss Ismail’s submissions.  Mr Bell’s assertion of misrepresentation was made without evidential support and is not believable when assessed in context.  The judge is correct in holding that the Company has not shown it has a bona fide dispute of the petitioning debt on substantial grounds.

35. For the above reasons, we dismissed the appeal with costs to the petitioner.

Hon Fok JA:

36. I agree with the Reasons for Judgment of Kwan JA.

Hon Barma J:

37. I agree.