AVT ELECTRONICS LTD v. WINLY FASHION WHOLESALE CO LTD AND ANOTHER

HCA30&3984/2001 (Cons)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. HCA 30 & 3984 OF 2001 (CONSOLIDATED)

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J U D G M E N T

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Introduction.

1. These are consolidated actions which are concerned with related transactions. The Plaintiff is common to both, and the corporate Defendants, if I can so describe them, are owned and directed by the individual Defendants in each action, who are husband and wife.

2. In the main action in monetary terms - HCA30/01 - the Plaintiff claims a little over $2.6 million in respect of the alleged sale of three consignments of lambskins to be used in making up various items of apparel evidenced by three unpaid invoices. Alternatively, the action is brought on the basis of three cheques drawn by the 1st Defendant in purported settlement of the invoices, which were dishonoured.

3. The 2nd Defendant, Mr Wong Pak-yun, is sued under a guarantee in writing dated 9 August 2000, whereunder he is said to have guaranteed the 1st Defendant's indebtedness to the Plaintiff.

4. In the lesser action, originally started in the District Court but subsequently transferred to this court and consolidated, the claim is for $369,000 and is brought on an identical basis, this time relating to just one transaction evidenced in a single invoice for the amount claimed for which payment was purportedly made by cheque which was subsequently countermanded.

5. The 2nd Defendant's liability in this action is also on the basis of her written guarantee dated 16 October 2000 in respect of the 1st Defendant's indebtedness to the Plaintiff.

The Issues.

6. The fact of the Defendants' indebtedness is not disputed and neither are the amounts claimed. No point is taken as to the correctness of the sums alleged to be owing or anything of that sort.

7. Apart from an issue very properly drawn to my attention by Mr Mumford, who appears for the Plaintiff, as to whether three of the cheques can now be sued on because notice of dishonour was given late, by far and away the main point of issue raised by the defences is the allegation that the transactions which are said to give rise to liability are in fact a sham so constructed by Mrs Lo, the Plaintiff's director, together with her husband, to mask their true nature, which is that they were unlicensed moneylending transactions at rates of interest said to exceed the 60 per cent statutory limit. If that is right, then the debts are unenforceable and the Defendants are absolved of liability.

The Approach.

8. In order to understand how the defences came to be pleaded, it is necessary for me to relate in a little detail how these transactions came about, in order that I might discover their true nature. I will then have to consider the law relating to the question of when a particular transaction is to be viewed as a genuine one; in other words, one which in truth and substance is what it purports to be; or whether it is one which has no basis in fact, save that it is there to mask what in reality is a moneylending transaction, in which case it falls to be judged as such and must meet the requirements of the Moneylenders Ordinance before it can be enforced by the courts. Lastly, I will need to apply the facts as found by me to the relevant legal principles in order to determine the outcome of these actions.

Background.

9. By way of introduction, it is helpful to say something about the individuals who are principally involved in the dispute as it has now become. Mrs Lo is the person who negotiated the transaction with Mr Wong. She and her husband are the persons who are the shareholders and directors of the Plaintiff. The Plaintiff company is largely concerned in the electrical and electronics industry. Prior to 1998, Mrs Lo had operated a garment trading company called Nice Goal Limited. It was in this connection that she came to know Mr Wong, who has been in the garment business for some 20 years. In the past he had run his company very successfully. At its peak, between 1989 and 1993, it employed 300 people on the mainland and had an annual turnover of $25 million. During those good times, Mr Wong has told me that one of his salesmen, who was employed by Winly Fashion, the 1st Defendant in the second action, had annual sales to Nice Goal Limited of $2 million.

10. From about 1998, Mrs Lo ceased this type of business to devote herself to what was her husband's work in the electronics field. According to Mr Wong, they had been on good terms, and that level of sales must, to a large extent, bear that out. In relation to the allegation that the transactions that I am concerned with are in truth moneylending dressed up as sales of lambskins, he has told me that in the past, when he was short of cash in his business, he had borrowed money from Mrs Lo, her husband, and indeed Mrs Lo's father-in-law. They would give him money, which he would repay by post-dated cheque, which would include interest. He has produced two cheques and vouchers relating to his company's internal accounting which are said to be repayments of such loans. He says that there were many more of these, but he cannot now locate them because his business has folded and the documents are spread about in various places, so that he cannot find them.

11. This evidence has been given by him to support his case that lending money is something that Mrs Lo and her husband's family do regularly, and that the instant transactions are yet another, albeit more sophisticated, example of this. This is all strongly denied by Mrs Lo, who says that she has never lent any money to Mr Wong or to his companies, and Mr Mumford has, with much justification, complained that these documents should have been disclosed long ago, given the nature of the Defendant's case.

12. I have let this evidence in, and on the third day of the trial, after a further overnight search, Mr Wong has put in more papers. Perhaps not surprisingly, given the nature of the evidence that has been put in, there is no independent proof of these other instances of alleged moneylending, and Mr Mumford has not sought to counter these suggestions by availing himself of the opportunity that I have given him of recalling Mrs Lo to rebut these specific allegations beyond her general denials during the course of her evidence.

13. Other than this reference, I will leave over my conclusion on these allegations for when I indicate how I find on the evidence overall.

The Transactions.

14. From that brief history of the parties' previous dealings, I now come to the transactions that I am required to decide on. There is a dispute between Mrs Lo and Mr Wong as to the tenor of his approach to her in June/July 2000, which resulted in what is now before me. What is clear is that whilst he previously had traded successfully in lambskins, this being a potentially profitable seasonal business, he now found himself short of money. He used the expression "cash-flow difficulties" which, as Mr Mumford has rightly observed, is a polite way of saying that at this particular time he had no money.

15. Her evidence is that he came to see her, bringing with him some lambskins to show her, and said that she could purchase lambskins, which she could then sell on to him. He indicated that his credit limit was not large enough to accommodate the level of purchases that he wished to make. As she put it, "He wished to do it in a big way and he wanted me to help him." She says he told her that she would get $1 per square foot for each transaction, lambskin being bought and sold on the basis of a price per square foot. He would then sell on at greater profit for himself.

16. According to Mr Wong, he had tried to engage Mrs Lo more on the basis of a partnership or co-operation whereby both would have to share the risk if the onward sales of the lambskins failed to make the hoped-for profit or failed to proceed as smoothly as had been expected. His evidence is that she was not prepared to go into such a venture, but she would be prepared to lend him the money so that he could purchase on his own account. He has described her proposal in his first witness statement where, according to him, she had indicated that the moneylending to him would now take a different form. It would no longer be a straightforward loan repayable by post-dated cheque. Use would be made of letter of credit facilities that were available to the Plaintiff company, given its financial standing, which was not available to Mr Wong's companies. Purchases would normally be made by the Plaintiff company, who would then sell on to Mr Wong's company. For his part, he could pay by post-dated cheque. Payment would include a commission payable to the Plaintiff based on $1 per square foot of lambskin.

17. In truth, that "commission" represented the interest on the amount "lent" to the Defendant for the purchase of the consignment of lambskins from the supplier. The intervention of the letter of credit represented "the mask" by which the moneylending transaction was carried out, and the interest element represented by the so-called commission has been worked out on the Defendant's behalf to be in excess of the permitted statutory percentage of 60 per cent. This, therefore, is said to be unlicensed moneylending against a background of a history of loans made by Mrs Lo, her husband and his father to Mr Wong's companies, usually at excessive rates of interest.

18. For these reasons, therefore, Mr Wong says, on the basis of the pleaded defences, the actions are not maintainable and should be dismissed.

19. Apart from strongly denying the factual history put forward by Mr Wong, Mrs Lo has described these transactions as genuine sales by the Plaintiff to the Defendant companies with an element of agreed commission calculated on the basis of $1 per square foot. Because deferred payment terms were offered to the Defendants by means of payment by post-dated cheques, guarantees were required from Mr Wong in the case of Hover, the 1st Defendant in the main action, and Mrs Chan, his wife, in respect of Winly, the 1st Defendant in the second action.

20. Mr Mumford has, understandably, stressed the contractual realities created by the letters of credit as between the Plaintiff and the suppliers of the lambskins who sold these to the Plaintiff. Attention has been drawn to the sequential elements of each of these transactions.

21. None of this evidence is in dispute and has been recounted in Mrs Lo's witness statement (pages 4 - 11 of the bundle of witness statements). An example will suffice. I take the second transaction with Hover in the main action, culminating in the Plaintiff's invoice 990250, the narrative of which appears in paragraph 15 of Mrs Lo's witness statement (page 5 of the bundle of witness statements). It is sufficient to observe that the first transaction of $702,000 was achieved successfully in this way in the sense that the Defendant paid the Plaintiff's invoice. This second transaction and the subsequent ones were not paid for. The various elements as related by Mrs Lo in paragraph 5 are as follows:

"(1) Wong Pak-yun requested the Plaintiff to open a letter of credit for 26,000 square feet of lambs' leather for garments in the total amount of $494,000.

(2) The Plaintiff applied and issued on 3 August 2000 through its bank, Dao Heng Bank, a letter of credit No. 464010014351 for an amount of $494,000 for the said purchase of 26,000 square feet of lambs' leather for garments, colour black, at $19 per square foot.

(3) The supplier of this sale, Fordrich Limited, issued an invoice No. FI0198 dated 3 August 2000 to the Plaintiff.

(4) Hover gave the Plaintiff its purchase order, P013, dated 3 August 2000, for the said order, and a Shanghai Commercial Bank Limited cheque No. 322164 dated 28 August 2000 in the sum of $520,000 drawn by Hover in favour of the Plaintiff. The Plaintiff in return issued an invoice No. 990250 dated 5 August 2000 to Hover. The Plaintiff charged $494,000 for 26,000 pieces of lambs' leather for garments and $26,000 for the agreed commission charges at $1 per piece.

(5) The Plaintiff delivered the said lamb leather for garments by releasing the cargo receipt and other title documents of the said lamb leather for garments to Hover.

(6) The cheque dated 28 August 2000 was dishonoured upon its presentation and the amount thereof in the sum of $520,000 which forms part of the present claim."

It can be seen from this that there were two separate and distinct sales, one from the supplier to the Plaintiff, settled by the letter of credit, and the subsequent sale from the Plaintiff to the Defendant, evidenced by the Defendant's purchase order to the Plaintiff, the Plaintiff's invoice to the Defendant and the purported payment by the Defendant by post-dated cheque. Whilst this may be so, Mr Wong says that this was just window-dressing put in place by Mrs Lo to cover the real situation of a loan attracting interest whereby the Defendant was lent the money by the Plaintiff to purchase the lambskins.

22. As I have already mentioned, the subsequent transactions also resulted in non-payment. A further identical transaction was effected with the 1st Defendant in the second action. This was done on condition that the 2nd Defendant in that action provided a guarantee herself, which she did on 16 October 2000.

23. In contesting the genuineness of these matters, Mr Wong has urged a number of further matters in the course of his evidence. He has drawn attention to the provision of guarantees which he says militates against a sale of these lambskins. Why, he asks rhetorically, would you require a guarantee to support a transaction between seller and purchaser? A guarantee is much more likely to be required in a relationship between creditor and debtor where a debt is created by an outright loan. He has also referred to the purely nominal position of the Plaintiff in the purchase of the lambskins from the suppliers. Everything came from him. He selected the lambskins from the suppliers because he knew what type of skins he wished to purchase and in what quantities. He then told Mrs Lo the amount for which the letter of credit was to be opened and the other relevant details. That was the only part she played. All the information was provided by him. Once the order became available, she provided him with a cargo receipt, without which he would not be able to obtain physical possession of the goods. The Plaintiff never had delivered to it any of these consignments. It merely received a purchase order from the Defendant for which it issued an invoice and was then given a post-dated cheque in purported payment.

24. Mr Wong suggests this is artificial; I should look through it and see the reality, which is a loan, unenforceable, as an unlicensed moneylending transaction at exorbitant rates of interest. Mr Mumford draws attention to the fact that these were real transactions which the law would have given effect to had a dispute arisen: two separate contracts for the sale of goods in which property passed from seller to buyer with the attendant risk which passes with property as contemplated by sections 18, 19 and 20 of the Sale of Goods Ordinance. These are transactions which actually took place in fact with distinct contracting parties. It is not to be said that they are a sham. They gave rise to separate rights and potential remedies under them.

25. Particular reference is made to the fact that as between the supplier, the issuing bank under the letter of credit and the Plaintiff as buyer, the Defendant was a complete stranger; and as to the subsequent contract between Plaintiff and Defendant, only they were privy to that transaction under which the Plaintiff now sues.

The Law.

26. I need to refer to certain expressions as understood in section 2 of the Moneylenders Ordinance Cap. 163. A loan is defined as including an:

"Advance, discount, money paid for or on account of or on behalf of or for or on behalf of or at the request of any person or the forbearance to require payment of money owing on any account whatsoever and in every agreement whatever its terms or form may be which is in substance or effect a loan of money and also an agreement to secure the repayment of such a loan and 'lend' and 'lender' shall be construed accordingly."

Interest is defined as:

"Interest does not include any sum lawfully agreed to be paid in accordance with this Ordinance on account of stamp duty or other similar duty, but save as aforesaid, includes any amount, by whatever name called, in excess of the principal which amount has been or is to be paid or payable in consideration of or otherwise in respect of a loan."

A moneylender is:

"Every person whose business, whether or not he carried on any other business, is that of making loans, or who advertises or announces himself to hold himself out in any way as carrying on that business, but does not include:

(a) a person specified in Part I of the Schedule; or [which has relevance to this matter]

(b) as with respect to loans specified in Part II of Schedule I, any person who makes such a loan."

Paragraph 11 may have relevance to one of the transactions, so I need to read it; the other exemptions having no relevance. Paragraph 11:

"A loan made to a company where the loan:

(a) forms part of a transaction involving the export from or import into Hong Kong of goods or serves; and

(b) is for the purpose of facilitating that export or import, as the case may be, of those goods or services."

27. Mr Mumford has, in the course of a very fair and helpful opening, drawn attention to a number of authorities which he says assist in what my approach should be in deciding on the evidence whether what has occurred here was a series of sham transactions masking the reality which are in fact loans within the definition of the Ordinance. If they are not, then I need not go further and consider the other provisions, which is whether the Plaintiff is a moneylender within the Ordinance. It is convenient, therefore, to take that issue first.

28. Whilst I have found all the authorities of assistance on the different aspects that they address, I can do no better than repeating and then following the approach of Romer LJ in Re George Inglefield [1993] 1 Chancery 27, where the Court of Appeal was required to decide whether certain transactions were out and out sales or in fact a mortgage or charge from which certain consequences would follow, where he said:

"The only question that we have to determine is whether, looking at the matter as one of substance and not of form, the discount company has financed the dealers in this case by means of a transaction of mortgage and charge or by means of a transaction of sale..."

I must therefore look at the substance of the matter and not just form by which the transaction was effected.

The Result.

29. In arriving at a conclusion, I consider that I must look at the matter broadly and that I should have regard to the background against which the transactions were entered into. This should take into account the question of whether there had been a pattern of previous outright lending to Mr Wong or his companies by Mrs Lo, her husband and father-in-law.

30. My assessment of the witnesses was that I found Mrs Lo to be a shrewd, rather calculating operator, not the sort of person who would do anybody any favours without some profitable return to her or those whose interests she represented. Mr Wong I found to be more straightforward, despite the criticisms made of him by Mr Mumford. These are matters of impression formed on the basis of what they said and how they said it in the witness-box. The fact that I found Mrs Lo the less attractive witness who did not fill me with an overwhelming sense of assurance about what she said does not necessarily disentitle her to being believed where what she says can be verified by solid evidence, particularly where what Mr Wong has said is not supported by such evidence.

31. As to the previous alleged moneylending, there simply is no compelling material to satisfy me, on a preponderance of probabilities, that such transactions took place. Mr Wong has failed to demonstrate that on the evidence, which is far from saying that I necessarily accept Mrs Lo's denials. This issue remains open on the evidence. I find myself unable, on this paucity of evidence, to find the issue proved in the Defendant's favour, with the result that I must put it to one side.

32. Turning to the transactions by themselves, and they must now be viewed in isolation against the background that Mr Wong was short of money and was looking for ways to get his leather trading to move forward, I am satisfied that after proper scrutiny, they should be taken at face value as genuine purchases and resales by the Plaintiff company. This was the scheme agreed between the parties following discussion between them, and this is what was agreed. Because Mr Wong lacked the wherewithal to purchase direct from the supplier, he had to rely on the Plaintiff to do that and sell on to him at a profit ($1 per square foot) for which he would pay by post-dated cheque.

33. Accordingly, I find these transactions cannot be characterised as a sham. In the substance and form which they took, they are one and the same. They were genuine transactions. I am afraid the reality is that Mr Wong was prepared to acknowledge these debts as validly due until he instructed solicitors, who then suggested the prospect of this line of defence. In saying this, I do not intend to criticise those solicitors. This is merely a case of that advice having proved to be wrong on the evidence as it has emerged.

34. Accordingly, there can be no defence on the invoices, and there must therefore be judgment to the Plaintiff in both actions in the amounts claimed in the statements of claim against all the Defendants.

35. I will hear from Mr Mumford on the question of interest in a moment. For the sake of completeness, I should mention that in the action on the cheques where notice of dishonour was given late, I would have discharged the Defendants and I would have, if necessary, given them leave to amend their defences to obtain that outcome. On the countermanded cheque no notice of dishonour would have been required and I would have entered judgment on that cheque. But as I have found liability made out on the invoices, that is not necessary in any formal sense.

36. Given my finding that these were not loans within the Ordinance, it really becomes unnecessary to give any hypothetical ruling as to what the outcome of the case would have been had I found that the Ordinance took effect, including whether one overseas transaction would have been exempted under the relevant schedule or whether I would have thought it proper to reopen the transactions under section 24 of the Ordinance.

(Discussion re interest)

37. There must be interest on these debts. So far as the 1st Defendants are concerned in each case, I will award interest from the date of dishonour of the cheques until judgment at 4 per cent, and thereafter at the judgment rate. So far as the individual Defendants are concerned, there is an agreed contractual rate on the guarantee, and that is what was agreed, and so I will award interest on the terms which appear in the guarantee, which is 2 per cent per month.

38. The Plaintiffs are also entitled to their costs on a party and party basis to be taxed if not agreed.