LAU CHI KAN MICHAEL v. PANG CHING CHEUNG

HCA 2781/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2781 OF 2004

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J U D G M E N T

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Introduction

1.  The Plaintiff is suing the Defendant for the sum of $2,158,410.14 by virtue of a guarantee in writing signed by the Defendant in favour of the Plaintiff on 28 January 2004.  Although I have had much evidence in the course of the trial, most of that evidence has fallen away and I have been left with a short but crucially important issue to resolve.  If the Defendant has that point decided in his favour then the debt to which the guarantee relates will have been extinguished and the Plaintiff will have failed in the action.  If I rule in the Plaintiff’s favour on the issue then there must be judgment in his favour in the amount claimed, there being no dispute on the calculation of the debt.

Parties

2.  It would be helpful to say something about these parties given the fact that they have known each other for some years now.  They had first met well over 10 years ago.  Both were and are involved in the garment industry.  Of the two the Plaintiff is in a more substantial way of business.  The Plaintiff’s main operating garment companies are Long Art Investment Company Limited (“Long Art”) and Garment Link Manufacturing Limited (“Garment Link”) which was of more recent origin having been incorporated on 31 October 2003.  The Defendant’s relevant company is Kingfish Garment Factory Limited (“Kingfish”) which was incorporated on 9 January 2004.

The Undisputed Facts

3.  As part of the background narrative to this matter, I am able to set out what follows as facts that are not dispute.  Having established Kingfish the Defendant, who with his wife Madam Cheung Lai Fong were it only shareholders and directors, approached the Plaintiff for a loan in order to provide the necessary start-up capital to get Kingfish going.  He was also hoping to get some orders from the Plaintiff’s companies such as Long Art.  Having taken advice, the Plaintiff entered into loan agreement with Kingfish for the amount of $200,000.  This appears at page 19 of the documents bundle and is dated 28 January 2004.  It is a tri-partite agreement with the Plaintiff as lender, Kingfish as borrower and the Defendant as guarantor of Kingfish’s debt.  The Defendant also entered into a formal guarantee in writing on the same date, it being an “all monies” guarantee in respect of Kingfish’s debt to the Plaintiff.  He also executed a letter of confirmation in Chinese which stated that he understood his right to seek independent legal advice before entering into these obligations.

4.  I ought to briefly extract from the loan agreement the most salient points by way of background, although as the case has now developed nothing really turns on these.  Firstly, the initial loan of $200,000 could be varied by agreement from time to time up to $2 million.  These increases could be initiated by Kingfish serving a Form of Notice appearing in Schedule 1 to the loan agreement.  If Kingfish requested an advance to be paid to a third party such a payment would be deemed to have been advanced to Kingfish.  Lastly, the Plaintiff reserved the right, in his absolute discretion, to modify the loan facility.  Nothing in the agreement prevented the parties from increasing the loan facility to beyond $2 million.

The History of the Loans

5.  Having taken the initial $200,000 Kingfish, through the Defendant, then asked for further advances.  These can be set out in table form which, for convenience, I gratefully take from Mr Pow SC’s written closing speech:

"	Date	Amount (HKD)	SOC [Pleadings Bundle pp.5-7]	Cheques [Documents Bundle p.]
	2nd January 2004	$200,000.00	Para. 7	[1]
	30th January 2004	$100,000.00	Para. 8(1)	[40]
	2nd February 2004	$200,000.00	Para. 8(1)	[41]
	23rd February 2004	$300,000.00	Para. 8(2)	[43]
	11th March 2004	$700,000.00	Para. 8(3)	[45]
	1st April 2004	$300,000.00	Para. 8(4)	[47]
	Sub-total	$1,800,000.00			"

There then followed further advances from the 1^st April 2004 to 8 July 2004 which is the cut-off date for the Defendant’s alleged liability, about which I will have more to say presently.  A statement of account appears at page 130 which is an annex to the Plaintiff’s witness statement of 27 July 2006.  The advances were as follows:

Cash advanced to the Borrower direct	23-April-04	500,000.00
Wages paid to the employees of the Borrower for and on behalf of the Borrower at the request of the Borrower	May 04-July 04	334,517.10
Prices of Materials paid to the suppliers of the Borrower for and on behalf of the Borrower at the request of the Borrower	Apr 04-July 04	1,335,929.36
Sub-Contracting Fees paid to the sub-contractors of the Borrower for and on behalf of the Borrower at the request of the Borrower	May 04-Jul 04	1,161,817.39
Rental Fees paid to the landlord of the Borrower for and on behalf of the Borrower at the request of the Borrower	May 04-Jul 04	40,000.00
Operating Expenses paid for and on behalf of the Borrower at the request of the Borrower	May 04-Jul 04	302,535.37
	Plus up to 1 April 2004	1,800,000
	Total	5,474,799.22

These amounts have been fully documented and I accept that the total of $5,474,799.22 was lent by the Plaintiff to Kingfish either directly or to its order, all of these at the request of the Defendant on Kingfish’s behalf.

The 8July 2004 Watershed

6.  The Plaintiff’s evidence is that as Kingfish’s indebtedness grew so did his concerns that he would not be able to secure repayment.  Added to this was the further dimension that his company Long Art had sub-contracted orders that it had from its customers to Kingfish.

7.  If Kingfish went under there would be the inevitable consequence that Long Art’s orders with it would not be produced which, in turn, would have meant that Long Art would be sued by its own customers.  It was this factor in particular that persuaded the Plaintiff to continue advancing money to Kingfish in order to keep it afloat so that it might complete its sub-contracts with Long Art and hopefully trade itself into a position of being able to repay some if not all of its indebtedness.  But it became obvious by the early summer of 2004 that the only realistic prospect for Kingfish and for the Defendant himself was for Kingfish to be sold as a going concern.  To this more limited extent those further loans might have had the effect of allowing Kingfish to remain a going concern until a buyer could be found.

8.  At the start of the trial Mr Pow, who had come into the case late, decided that the claim by the Plaintiff would have to be adjusted very substantially, on a proper appraisal of the evidence, hence the amendment of the statement of claim on the first day of the trial from $5,166,604.70 to $2,158,410.14 for which judgment is now sought.  This needs to be explained.

9.  The Plaintiff’s case is that on 8 July 2004 he received a letter from the Defendant’s solicitors [see Documents Bundle – 130] which is self-explanatory .  Given its importance, I ought to set it out in full.  Before I do so I should observe, as appears in the body of the letter that the parties had by then agreed to sell Kingfisher to a third party as a going concern.  What is not accepted is that Kingfisher had been handed over to the Plaintiff by the Defendant as from 5 May, about which I will need to say more in a moment.  The letter is in these terms:

“Re:     Demand for repayment of Outstanding Principal and Interest under the loan agreement entered into between Kingfish Garment Factory Limited being the Borrower.  Mr Pang Ching Cheung being the Guarantor and Mr Lau Chi Kan Michael being the Lender

We act for Mr Pang Ching Cheung and Madam Cheung Lai Fong former Directors of Kingfish Garment Factory Limited we are handed your letter dated 25^th June 2004 and we have instruction to reply thereto.

We are instructed that our client Mr Pang Ching Cheung on behalf of Kingfish Garment Factory Limited did not denied that the company had entered into a loan agreement with your client dated 28^th January 2004 up to a principal amount of not exceeding HK$2 million.  Further our clients admitted that Kingfish Garment Factory Limited (“Kingfish”) had borrowed HK$1.8 million from your client and those money had been used to purchase fixture and equipment and the payment of salaries and were recorded in the Kingfish’s account.  On the 5^th of May 2004 your client had agreed with our client that if out client transferred the ownership of Kingfish to your client your client would not peruse any outstanding amount on account of Kingfish (if any) from our client.  On the 12^th day of May 2004 and according to the said oral agreement our clients approached your office and gave to your Ms Shirely Y H Yuen. Company Secretary all the relevant company documents relating to Kingfish including Form R1, D1 and D2 all duly signed by our clients and which signified the transfer of all interest in Kingfish to your client and your Ms Yuen promised our clients that all the documents relating to the instrument of transfer to shares and other supporting documents would be lodged with the Company Registry within the next five to seven days.  In the circumstances our client Mr Pang denied that he is still in control of Kingfish and he had entered into a “subsequent” oral agreement with your client Mr Lau and he and/or Madam Cheung owe your client the sum of HK$6,545,178.61 or at all.”

10.  The Plaintiff’s solicitors replied at length on 21 July 2004 as follows:

“Re:  Demand for Repayment of Outstanding Principal and Interest under the loan agreement entered into between Kingfish Garment Factory Limited being the Borrower, Mr Pang Ching Cheung being the Guarantor and Mr Lau Chi Kan Michael being the Lender

We refer to your letter of 8 July 2004, the contents of which are noted.

We are instructed to deny the allegations of your client in respect of (1) an purported agreement between our respective clients to settle the entire outstanding sum owed to our client (the “Indebtedness”) by assigning the shares of Kingfish Garment Factory Limited (Kingfish”) to our client, and (2) your client’s purported cessation of control over Kingfish.

Our client strongly denies that our client had ever waived his own rights to claim against your client for the Indebtedness by the purported transfer of ownership of Kingfish by your client to ours.  We are instructed that when our client first demanded your client to repay the Indebtedness, it was agreed between the parties to seek prospective buyer(s) for acquiring all interests in Kingfish currently owned by your client, and the proceeds of sale will be used for repaying part of the Indebtedness.  The company secretarial documents were prepared in escrow in contingent upon a prospective buyer being found by either or our client or your client.  We are instructed to inform your client that the company secretarial documents have not yet been perfected as neither party has located a prospective buyer.  Our client had requested you to locate a prospective buyer which your client failed to do so.  As such, your clients’ allegation of not currently controlling Kingfish is untrue. At all material time and up to present, your clients were and are still in control and managing Kingfish.

We are also instructed to deny your client’s allegation that your clients did not owe our client the sum of HK$6,545,178.61.  During the period between January 2004 and June 2004, our client advanced the aggregate sum of HK$6,545,178.61 to Kingfish.  Up to present, your clients, neither Kingfish nor Mr Pang have made any repayment to our client.

We are instructed to inform you that our client has recently located a prospective buyer namely ‘Mr Leung Tai Kwong’ and ‘Mr Leung Siu Kei’ on acquiring the entire interests in kingfish at the price of HK$1 million.  As previously agreed between your clients and our client, the proceeds of sale will be used for repaying part of the Indebtedness.  We are instructed to write to your client and seek his comments on the sale and make enquiry as to whether he is able to locate a buyer who is willing to pay for a price higher than HK$1 million.  If we do not receive any objection from your client, the company secretarial documents previous signed by him in escrow will be used for effecting the sale.  Please write to us by the close of the business of 24 July 2004.

Lastly, we have instruction to institute legal proceedings against your client.  Please kindly let us know whether you have instructions to accept service.  Meanwhile, we expressly reserve all our client’s right and remedies in the matter.”

11.  That is how the battle lines were drawn and it was largely based on the Plaintiff’s solicitors letter of 21 July 2004 that the claim had been originally formulated.  The substantial change, in terms of quantum, that has come with the amended statement of claim is based on the Plaintiff’s acceptance that after the receipt of the letter of 8 July, notwithstanding further advances to Kingfish to keep it afloat, such advances were not done at the behest of the Defendant, with the consequence that Kingfish nor the Defendant as its guarantor could be held liable under the loan agreement of 28 January 2004.  He accepts that the line must be drawn under 4 July 2004 which is the date of the last advance, as appears in the account set out in paragraph 5 above.  Anything after this date is now abandoned by the amended pleading.

How the Reduced Claim is Quantified

12.  The starting point is the amount of $5,474,799.22 said to be outstanding as at 4 July 2004.  I have already observed that all of these amounts have been properly documented and accounted for by the Plaintiff.  In this respect it is also worth observing that the Defendant, as he is entitled to, has elected to call no evidence.  And so I have nothing from the Defendant to contradict these amounts which, as I have already observed, are all in evidence and amply proved.

13.  From this the Plaintiff deducts the sum of $1,000,000 being the consideration paid by the buyers of Kingfish to the Plaintiff on behalf of Kingfish.  All that I need to observe is that Kingfish was sold on 16 September 2004 to a Mr Leung Tai Kwong and Mr Leung Siu Kei.  Given the matters raised in the Defendant’s solicitors’ letter of 8 July 2004 that control of Kingfisher was handed over to the Plaintiff in May 2004 it should be observed that transfer documents were prepared in escrow in May when a Mr Klaus Lam had shown interest in the purchase of Kingfisher but this fell through once he had investigated Kingfisher’s balance sheet.  The Defendant had tried to find a purchaser, as had the Plaintiff through his staff.  The best offer that the Defendant could find was a prospective purchaser for no more than $700,000 until the Leung’s offered $1,000,000 which was accepted.  I am satisfied that from May until 8 July, when the Defendant says that he would no longer be responsible for any of Kingfisher’s continuing receipt of loans from the Plaintiff that the Defendant remained in control of the reins at Kingfisher.

14.  The sale to the Leung’s thereby reduced the Kingfisher’s debt to $4,474,799.22.

15.  The next element of the calculation is the deduction of $2,316,389.08 which is what Long Art owed Kingfisher for the goods manufactured on its behalf by Kingfisher.  It is this which reduces the final debt to $2,158,410.14, which is now claimed.  The documentation to all of this comes from Exhibit P2.  This is the vital piece of evidence and now forms the centre piece of the dispute which I must now resolve.

16.  Exhibit P2 comprises a front sheet which lists out the invoices for the value of work done by Kingfish for Long Art, totalling $4,524,966.83.  The supporting paper work is attached to the exhibit.  There are then five items totalling $2,208,577.75 relating to goods manufactured by Kingfish to Long Art’s order which were returned by US Customs because of defective supporting documentation which failed to show that the goods in question were produced in China.  It is said that this documentation (such as certificates of origin) needed to be provided by Kingfish as the manufacturer.  It did not and the US Customs returned these, hence the deduction.  Before I consider this further I propose to set out here the front sheet to Exhibit P2 for the purpose of identifying the particular transactions which demonstrates how the total is arrived at by the Plaintiff:

Kingfish Garment Factory Ltd

Account Receivable

	Inv. Date	Ref. No.	Invoice No.	CR	Total Amount
a/  Sales	06/01/04	AR0406001	KG040601	1,111.68
Amount	06/01/04	AR0406004	KG040601A	370.56
	06/01/04	AR0406002	KG040602	1,074.62
	06/01/04	AR0406005	KG040602A	370.56
	06/12/04	AR0406007	KG040604	205,253.18
	06/12/04	AR0406008	KG040604A	70,776.96
	06/12/04	AR0406009	KG040605	144,518.40
	06/12/04	AR0406010	KG040605A	50,025.60
	06/12/04	AR0406011	KG040606	111,168.00
	06/12/04	AR0406012	KG040606A	37,056.00
	06/16/04	AR0406015	KG040608	261,578.30
	06/16/04	AR0406016	KG040608A	90,546.34
	06/16/04	AR0406017	KG040609	166,752.00
	06/16/04	AR0406018	KG040609A	55,584.00
	06/16/04	AR0406019	KG040610	185,280,00
	06/16/04	AR0406020	KG040610A	66,700.80
	06/24/04	AR0406021	KG040611	36,129.60
	06/24/04	AR0406022	KG040611A	13,006.66
	06/26/04	AR0406023	KG040612	156,895.10
	06/26/04	AR0406024	KG040612A	54,101.76
	06/28/04	AR0406025	KG040613	73,222.66
	06/28/04	AR0406026	KG040613A	25,346.30
	06/28/04	AR0406027	KG040614	160,081.92
	06/28/04	AR0406028	KG040614A	53,360.64
	06/19/04	AR0406031	KG040616	192,228.00
	06/19/04	AR0406032	KG040616A	69,202.08
	06/19/04	AR0406033	KG040617	233,156.35
	06/19/04	AR0406034	KG040617A	80,707.97
	06/19/04	AR0406035	KG040618	175,645.44
	06/19/04	AR0406036	KG040618A	58,548.48
	06/19/04	AR0406037	KG040619	261,133.63
	06/19/04	AR0406038	KG040619A	90,046.08
	06/01/04	AR0406006	KG040603A	102,736.22
	06/14/04	AR0406013	KG040607	243,180.00
	06/14/04	AR0406014	KG040607A	76,428.00
	06/30/04	AR0406029	KG040615	174,279.00
	06/30/04	AR0406030	KG040615A	54,733.40
	07/02/04	AR0407001	KG040701	134,559.60
	07/02/04	AR0407002	KG040701A	42,290.16
	07/03/04	AR0407003	KG040702	157,904.88
	07/03/04	AR0407004	KG040702A	49,627.25
	06/01/04	AR0406003	KG040603	308,208.65	4,524,966.83
b/  Sales	09/15/04	GV0409003	ACCURAL-DL	513,410.88
Return	09/15/04	GV0409003	ACCURAL-DL	351,179.71
	09/15/04	GV0409003	ACCURAL-DL	319,608.00
	09/15/04	GV0409003	ACCURAL-DL	613,434.29
	09/15/04	GV0409003	ACCURAL-DL	410,944.87	2,208,577.75
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Bal. Sales Amount due fm Long Art (a – b):					2,316,389.08

The Only Issue in the Case

17.  The Plaintiff’s counsel and solicitors had come to court expecting to have to strictly prove the case on the loans and how these loans were caught by the loan agreement and the guarantee.  The defence were expecting to meet the case as pleaded against them.  On the first day Mr Pow applied to amend the statement of claim to restrict his claim to indebtedness up to 8 July 2004.  This caused the loss of the first day of the trial.  On its resumption it had appeared that the case was largely to follow the originally expected course with Miss Gwilt, on behalf of the Defendant, questioning various aspects of the quantification of the indebtedness.  The Defendant then elected not to give evidence.  As is apparent from Mr Pow’s note to his final speech which had to be adjourned to a date beyond the original estimate for the trial, he has concentrated on the various aspects of quantification but now that she has come to address the matter on the Defendant’s behalf Miss Gwilt has contented herself to a very limited submission on the validity of the deduction of the five items in Exhibit P2 which total $2,208,577.75.  She says that there is no justification for this deduction and if she is right about that then on a proper mathematical basis the Defendant must succeed because he would be entitled to set off the entire value of the invoices in respect of goods manufactured for Long Art by Kingfish which, as Exhibit P2’s front sheet shows come to $4,524,966.83 which would then completely extinguish Kingfish’s debt to Long Art and thereby to the Plaintiff.  All of this is correct.  The matter therefore appears to reduce itself into this narrow dispute as to whether it was Kingfish’s responsibility to produce the supporting documents for inspection by the US Customs.  She submits that as Kingfish’s responsibility was to supply the goods on a FOB basis no responsibility could have been cast on Kingfish to produce such documentation.  The point appears to have escaped Mr Pow’s attention because he had not addressed it in his note to his final speech and I am now being asked by Miss Gwilt to decide this case on a matter that has not been pleaded by her let alone on a basis that no evidence in support of such a point has been called.  She has sought to make her own criticisms of the Plaintiff for not dealing with these returned goods in the witness statements of his witnesses but, for my part, I am satisfied on the evidence that the Plaintiff, who has called Miss Szeto to explain the contents of the account as set out in Exhibit P2 has done more than enough to prove the accounting record and as a consequence Kingfish’s indebtedness.  The Defendant who heard this evidence has elected to remain silent.  He could have, if he wished, come to the witness box and explained the matter which Miss Gwilt has sought to advance in her speech but without any proper evidential foundation.  I am in no doubt that, where Miss Szeto has been able to provide a satisfactory explanation as to how Exhibit P2 and its supporting invoices have come into existence and why the five deductions have been made, the Defendant must be adjudged to be indebted to the Plaintiff in the outstanding balance of $2,158,410.14 by virtue of his obligations under the loan agreement and his guarantee in writing.  There will therefore be judgment to the Plaintiff in this amount together with interest.  As to the rate and period of interest I will ask the parties to address me briefly in writing within 14 days of the date of the judgment.  Because the statement of claim has been amended late in the day it may well be that this will ultimately affect the period of interest, at all events, the Defendant not learning of the precise amount claimed against him until the first day of the trial.

18.  As a result of the judgment on the claim, the counterclaim must, inevitably, stand dismissed.  The Defendant will pay the Plaintiff’s costs of the claim and the counterclaim on a party and party basis.  This will be an order nisi.