An Feng International Trading Ltd. v. Honour Link International Development Ltd.

HCMP 571/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANCEOUS PROCEEDINGS NO.571 OF 1999

-------------

Judgment Handed Down : 11 February 1999

-----------------------

J U D G M E N T

-----------------------

1. This is an application by way of originating summons that the Defendant Honour Link International Development Limited ("Honour Link") be restrained from presenting any petition to the court for the winding up of the Plaintiff An Feng International Trading Limited ("An Feng") based on the sum of USD693,824.33 claimed in a statutory demand dated and served on 8 January 1999 on An Feng.

2. An Feng's case is that there is a dispute as to whether or not the sum claimed is due and owing to Honour Link and under the underlying transaction, such dispute is to be referred to arbitration. It is therefore premature for Honour Link to claim that An Feng is indebted to it in respect of that sum. Further, having regard to HCCL 271 and 272 of 1998, being proceedings commenced by Honour Link against An Feng on 11 November 1998 which inter alia, relate to the alleged debt, it is an abuse of process for Honour Link to use the winding-up procedure to short-circuit those actions.

The underlying transaction

3. The Plaintiff which was incorporated on 5 March 1998, commenced trading in April and shipped its first cargo in May 1998. On 2 June 1998, An Feng as seller and Honour Link as buyer entered into a contract for the sale and purchase of 30,877 metric tonnes of deformed steel bars at USD197/MT for a consideration of USD6,082,769 ("the Contract"). Clause 28 of the Contract contained the following arbitration provision :

"28) Arbitration : The parties hereto shall undertake all efforts to amicably settle any disagreement or dispute arising out of or relating to this Contract. Should such solution be impossible, arbitration to be carry out in Hong Kong under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, shall finally settle the dispute. Each party should appoint one arbitrator and the two chosen should appoint one arbitrator to settle the dispute. If one party fails to appoint an arbitrator, the one appointed by the other party to be the sole arbitrator. The arbitration award shall be final and binding upon both parties. The proceedings shall be conducted in English language and governed by Hong Kong Law."

Clause 29 was a buy back option granted by Honour Link to An Feng. This required a deposit of $3 million to be paid on or before 3 June 1998 as earnest money, the buy back price was at USD3/MT more than the sale price to Honour Link (i.e. at USD200/MT) upon a buy back on or before 25 days after "bills of lading date" and should An Feng fail to effect full payment less the deposit on time, Honour Link would have the right to resell immediately after the 25th day after the bills of lading date. Shipment had to be effected latest by June 15, 1998. Honour Link's evidence is that the Contract was entered into in that form because An Feng was unable to open a letter of credit for the purchase of the cargo. Honour Link therefore financed the purchase and An Feng was given the buy back option. This does not appear to be disputed.

4. On 14 August 1998, An Feng and Honour Link entered into an addendum (the 1st Addendum) to the Contract after having, on 7 July 1998, exercised the buy back option in respect of part of the cargo. Prior thereto, it would appear that the parties varied the price from USD197/MT to USD193/MT and the buy back price was amended from USD200/MT to USD195.50/MT. As regards the balance of the cargo ("the Remaining Cargo"), it was agreed by this addendum that Honour Link would not exercise its rights under Clause 29.4 of the Contract to sell the Remaining Cargo but to grant An Feng an extension until 11 September to buy back the Remaining Cargo subject to certain provisions. Honour Link would have unfettered right to sell the Remaining Cargo from 12 September onwards without further notification to An Feng. The 1st Addendum specifically provided that "all other terms and conditions of the Contract, unless expressly amended by the 1st Addendum, should remain in full force and effect".

5. On 28 August 1998, the parties entered into another addendum (the 2nd Addendum) whereby An Feng abandoned its option to buy back the Remaining Cargo by 11 September, with the result that Honour Link was free to dispose of the Remaining Cargo. It was also agreed that Honour Link would use its best endeavours to achieve the best possible price and would provide An Feng with full information and documentation as to such price.

The October Transaction

6. On or about 14 October 1998, the parties entered into an agreement for An Feng to purchase from Honour Link part of the Remaining Cargo upon terms, inter alia, that An Feng would make part payment by assigning a letter of credit for USD693,824.22 in favour of Honour Link and that An Feng would Guarantee and undertake to make that payment by 26 October 1998. There is in evidence, a letter of credit issued by the Bank of China, No. L/C 98077578 on 13 October 1998 in which the applicant was Nam Kwong Minmetals Company Limited ("Nam Kwong") and the beneficiary An Feng for an amount in excess of USD1 million. It is to be noted that the goods consisted of 7,000 metric tonnes of deformed steel bars at the price of USD152/MT. The price was accordingly over 20% less than the price per metric tonne An Feng had to pay for the goods.

7. By letter dated 14 October 1998, An Feng informed MeesPierson N.V. as follows :

"This is to inform you that we have assigned USD693,824.22 under the captioned letter of credit to Eternal Resources Ltd., who is acting on behalf of Honour Link International Development Ltd. Your irrevocable instruction is to remit the amount of USD693,824.22 upon successful negotiation under the captioned bills of lading to Eternal Resources Ltd.'s a/c no.E1110 with you together with message.

'Payment to Honour Link International Development Ltd. for settlement of 4,564.633 Metric Ton for Hot Rolled Deformed Steel Bars for Reinforcement.

Should for any reason, payment is not made under the captioned bills of lading, you are to hold the documents presented to the order of Eternal Resources Ltd. and only return the documents to Eternal Resources Ltd. upon their written instructions. You are not to return the documents to any other party including ourselves without the specific written instructions of Eternal Resources Ltd.'"

On 15 October 1998, Honour Link and An Feng entered into an agreement relating to the part of the Remaining Cargo to be purchased under the October Transaction covered by Bills of Lading Nos. 4 and 5 ("the Guarantee") which is in the following terms :

"[Honour Link], in consideration of releasing the 1/3 original bills of lading to [An Feng] for the purpose of customs formalities, [An Feng] hereby undertake full responsibility of this matter and hereby declare the willingness to act as Sole Guarantor for the full payment of the abovementioned cargoes by October 26, 1998."

On the same day, the bills of lading were released to An Feng. On 19 October 1998, Honour Link was asked for its confirmation that the cargo could be released as the original Bills of Lading Nos. 4 and 5 had been received.

8. The letter of credit which was the subject matter of the assignment of 14 October was issued on 13 October 1998. It was amended on 27 October as well as 5 November 1998. The amount assigned under the letter of credit was never remitted to Honour Link. It would appear that the bills were never successfully negotiated. It is Honour Link's case that by wrongfully agreeing to amend the letter of credit, An Feng made itself unable to draw down on the letter of credit, thereby preventing Honour Link from receiving payment pursuant to the assignment.

Whether the debt is substantially disputed

9. The debt which is the subject matter of the statutory demand is the amount due under the Guarantee. In accordance with its terms, Honour Link released 1/3 bills of lading on the day the Guarantee was signed. There is a certificate issued by Nam Kwong to An Feng dated 15 October certifying that they had received those bills of lading. Nam Kwong is the end purchaser of the goods in question. Payment was not made on 26 October as provided for in the Guarantee. Despite various demands made by Honour Link, An Feng failed to pay and on 11 November 1998, Honour Link commenced proceedings, namely HCCL Nos.271 and 272 of 1998.

10. HCCL 271 is an action based on the Guarantee. HCCL 272 is an action in respect of amounts said to be due and owing by An Feng under the Contract and Addenda. Included in this amount (subject to any credit for any amount recovered under HCCL 271) is the value of the goods which were the subject matter of the October Transaction. Order 14 summonses were issued by Honour Link. An Feng then issued summonses to stay both actions on the basis that the dispute should be referred to arbitration. As a result, Honour Link has consented to have its O.14 summonses adjourned pending the outcome of An Feng's stay applications. By consent, the parties agreed directions for the filing of evidence but no dates have yet been re-fixed for hearing of the stay applications.

11. It was not until 11 January 1999, three days after the issuance of the statutory demand, that An Feng's solicitors wrote in the following terms :

"Your clients' claim under the so called 'guarantee' is disputed bona fide, and on substantial grounds. Those grounds will be set out at the appropriate time, either in the arbitration proceedings to which this dispute should properly be referred, or, in the unlikely event that our pending stay application fails, in your Order 14 application in High Court Action HCCL 271 of 1998."

This was followed by a letter dated 16 January 1999 in the following terms :

"Our clients deny that they are liable to your clients for the sum of US$693,824.22 claimed in your clients' purported Statutory Demand, interest thereon or costs. Furthermore, in due course they will be asserting a counterclaim for damages and/or an indemnity. The defence and counterclaim arise in the following circumstances.

1. There were terms of the contract of sale that your clients had the right to sell the goods, that the goods were free from any charge or encumbrance, and that the buyer would enjoy quiet possession of the goods.

2. We are instructed, however, that the goods were and are still in fact subject to the arrest or detention of the customs authorities and/or a central investigation team from Beijing, at the port of Zhanjiang.

3. Accordingly, it has not been possible to take delivery of the goods."

This is the only intimation that has ever been given and it was given on behalf of An Feng by its solicitors of An Feng's alleged defence to the Guarantee.

12. What is surprising about these assertions is the fact that that was the first time they were ever made, some 2 1/2 months after payment ought to have been made and long after the delivery of the bills of lading. It is to be noted that there is no direct evidence from An Feng itself which is highly unusual. Nor is there contemporaneous correspondence as one would normally expect raising any issue regarding any inability to take delivery of the goods or the alleged seizure or detention of the cargo, much less that it was in fact due to the fault of Honour Link. No inkling was ever given that An Feng or its end buyer had not taken or could not take delivery of the goods.

13. An Feng's 'excuse' for not condescending to particulars of its defence to the claim on the Guarantee is that under arbitration rules and the rules of court, it is not obliged to disclose its defence until the appropriate time. But this does not explain the absence of contemporaneous documentation during the period prior to 11 November that would corroborate the assertions now made or throw light on what had happened and when, by whom and for what reason(s) the goods were detained as alleged and why no one from An Feng filed any evidence. Nor does it explain why An Feng finds itself 'unable' to give a proper and adequate explanation of why it is not liable to pay the amount guaranteed in support of its present application for a quia timet injunction.

14. The law is clear. As stated in Palmer's Company Law, 24th Edn. at 88-06 :

" To fall within the general principle the dispute must be bona fide in both a subjective and an objective sense. Thus it must be honestly believed to exist and must be based on substantial or reasonable grounds. 'Substantial' means having substance and not frivolous and which the court should therefore ignore. There must be so much doubt and question about the liability to pay the debt that the court sees that there is a question to be decided. The onus is on the company 'to bring forward a prima facie case which satisfies the court that there is something which ought to be tried either before the court itself or in an action, or by some other proceeding."

In my judgment, An Feng has failed to demonstrate that the dispute is bona fide and what the triable issues are. Other than a bare assertion via its solicitors, there is simply no evidence that the alleged detention or seizure of the cargo was attributable to the fault of Honour Link if this be one of the triable issues. The onus is upon An Feng and it is an onus that it has failed to discharge. In the circumstances, the submission that the debt due under the Guarantee is substantially disputed is rejected.

Solvency of An Feng

15. It was submitted that there is no basis for believing that An Feng is insolvent and therefore no basis for presenting a petition based on its insolvency. Evidence was filed to show the state of An Feng's bank balances and its banking facilities as well as turnover. This is all very well, but as its liabilities have not been disclosed, the court cannot come to any sensible conclusion as to its solvency. Moreover, if a debt that is not substantially disputed is unpaid, the court may infer that the company is insolvent : see Re United Strength Ltd [1992] HKC 386; Cornhill Insurance plc v. Improvement Services Ltd [1986] 1 WLR 114. Accordingly there is nothing in the solvency point taken by An Feng.

Arbitration

16. It is common ground that Honour Link has neither received the proceeds under the letter of credit assigned to it by An Feng nor as has it been paid the sum An Feng agreed to guarantee. Prima facie, there is a debt due and owing to Honour Link. As I have rejected the submission that the debt is substantially disputed, it would not be an abuse of process for Honour Link to present a petition in respect of the debt. The fact that Honour Link had commenced legal proceedings does not estop it from presenting a petition. The question which now arises is whether the arbitration provision contained in the Contract applied to the October Transaction, and more specifically to the Guarantee and its effect (if any) upon any proposed winding up petition.

17. Counsel for An Feng submitted that the alleged debt ("the dispute") "arises out of" or "relates to" the Contract so that the arbitration provisions contained in Clause 28 of the Contract applies. Alternatively, it is an implied term of the October Transaction so that the dispute should be referred to arbitration. But the debt in respect of which the statutory demand relates is the amount owing under the Guarantee.

18. When the underlying transaction is analysed, it is apparent that the Contract as varied by the Addenda left Honour Link free to dispose of the Remaining Cargo as from 12 September. Thereafter, disposals by Honour Link would prima facie be new and separate transactions which have nothing to do with the Contract. Miss Rattigan, counsel for An Feng accepted the October Transaction was a 'fresh' transaction but submitted that where the purchaser happened to be An Feng rather than some third party, the position is different and operated to bring back into play the arbitration provision. I find the logic of that analysis difficult to follow. The linkage is tenuous. Had it been intended that the arbitration provision should apply, one would have expected another addendum to deal with this transaction and a provision similar to that to be found in the 1st Addendum, specifically incorporating by reference the other contractual provisions including the arbitration provision. This, however, was not the case.

19. It appears to be common ground that the proper test for determining whether there has been incorporation by reference is one of construction, ascertaining the intentions of the parties at the time they entered into the Contract by reference to the words used : see per Kaplan J in Astel-Peiniger Joint Venture v. Argos Engineering and Heavy Industries Co. Ltd. [1994] 3 HKC 328 at 339. Whilst it is not for this court to determine this issue, it would appear that nothing can be gleaned from either the assignment of 14 October or the Guarantee itself to support a construction that the parties intended the arbitration provisions to apply. As no evidence has been adduced as to what was said by those involved in negotiating the October Transaction, in so far as it is a question of construction, on the evidence before the court, my preliminary view is that An Feng will have an uphill task. Moreover, it is at least debatable whether the Guarantee (as distinct from the underlying sale) does not stand on a different footing so that even if the underlying sale were to be subject to arbitration, the Guarantee would not.

20. In Hollmet AG & Anr. v. Meridian Success Metal Supplies Ltd. [1997] HKLRD 828, Rogers J (as he then was) held (at 831J-832D) as follows :

" If there is an agreement which provides that disputes should go to arbitration, until the court is satisfied that there is a dispute, it seems to me that it can still be said that money is due and owing under the contract. It is only once the dispute has arisen that the arbitration comes into being. So whether one looks upon the test, under s.177 as considering whether the company is a debtor or whether one applies the other approach and considers whether there is a bona fide dispute on substantial grounds, it seems to me that until it is properly established that there is a dispute, the debt would exist.

It is not sufficient in the Companies Court for a person merely to hold up his hand and say there is a dispute. He must establish that there is a bona fide dispute on substantial grounds. Of course, once arbitration proceedings have been commenced, the matter is different because then it may be said that there is not a debt owing....

...If a company wishes to obtain a stay of winding-up proceedings on the basis that the underlying debt upon which the statutory notice is founded is disputed, it must establish in the normal way that there is a bona fide dispute on substantial grounds. If it has not satisfied the court as to the bona fides and substantial nature of its claim it can only expect a short adjournment to enable it to commence the arbitration and then, if sufficient evidence to establish a genuine dispute is still absent it can expect to have to give an undertaking to proceed with the arbitration with all due dispatch. It cannot simply put up its hands and say: 'You, the court, have no jurisdiction because of my contract'. That is not what the contract says, and the Companies Court is entitled to be satisfied that there is a proper dispute."

In Hollmet, the existence of the arbitration provision was clear and incontrovertible; in the present case, the very existence or applicability of the arbitration provision is very much in doubt. Coupled as it is with the fact that the debt has not been shown to be substantially disputed, in the light of Hollmet, I can see no basis for the court to restrain Honour Link from presenting a winding up petition to which it would otherwise be entitled, simply on the assertion of An Feng that the Guarantee is subject to the arbitration provision of the Contract. Until that has been established, An Feng would not begin to come within any part of the holding in Hollmet.

21. Whilst it is not for this court to deal substantively with the question of whether the arbitration provisions apply, nonetheless, the strength of An Feng's case is a consideration in the exercise of the court's discretion. It is so fraught with difficulty that, in all the circumstances, I would not consider granting the injunction sought unless the entire amount of the debt is paid into court pending the determination of An Feng's stay application.

22. There is to be an order nisi for costs in favour of the Defendant.