YEE FAT DEVELOPMENT LTD v. WINLINE KNITTING FACTORY LTD

  DCCJ 447/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 447/2007

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J U D G M E N T

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Introduction

1.  The Plaintiff was a limited company incorporated on 4 April 2005, engaged in the knitting business. The Defendant was one of its customers.

2.  The Plaintiff’s claim as appears in the Statement of Claim is deceptively simple, for the price of goods sold and delivered. The background, however, is more complicated.

3.  Prior to the incorporation of the Plaintiff, one Mr. Lau Ying Kwok (“Lau”) traded as a sole proprietorship called Yee Fat Trading Company (“YFT”).

4.  YFT had dealings with the Defendant since about 2003, contracting out the processing and/or packaging steps in the manufacture of garments to YFT.

5.  It would appear that the Defendant did place a substantial number of orders with YFT, and a running account was established between them. The Defendant would at times make pre-payments to YFT for the orders given to alleviate YFT’s cash flow problems.

6.  In about 2004, the Plaintiff failed to meet the delivery deadline for 4 of the Defendant’s orders. As a result, the Defendant had to ship the goods by air, thereby incurring additional cost.

7.  The Plaintiff was incorporated in 2005 to carry on the same business as YFT. This was, on the Plaintiff’s own version of events, because YFT was in financial difficulties.

8.  Upon incorporation, the Plaintiff had 4 shareholders. Lau held the biggest single block of shares in the proportion of 50% of the total shareholding.

9.  Thereafter, the Defendant placed its orders with the Plaintiff instead of YFT, although there were still some orders which went to YFT.

10.  Around Chinese New Year of 2006, the Plaintiff delivered a statement of account. This statement of account was then the subject of negotiation, until it was settled (subject to the present action) on about 18May 2006.

11.  The Defendant set off the airfreight charges incurred as a result of YFT’s delay. This is the heart of the dispute. The Plaintiff says that the Defendant was not entitled to set off the airfreight charges, as it was a debt owed by YFT to the Defendant, and not by the Plaintiff. Further, Lau, who was alleged to have agreed to the set-off on behalf of the Plaintiff had no authority to do so.

12.  The Defendant, on the other hand, says that the accounts were settled between the Plaintiff and the Defendant by Lau who was acting for the Plaintiff.  This was done on or about 24 February 2006, and was evidenced by Lau’s handwriting on the accounts. Alternatively, the Defendant says that YFT’s business was transferred to the Plaintiff and that by the terms of the Transfer of Business (Protection of Creditors) Ordinance, Cap. 49 (“the Ordinance”), the Plaintiff is liable for the debts of YFT and is therefore entitled to set off the freight charges.

13.  There is pleaded a third defence that there was a novation of the parties rights and liabilities, with the Plaintiff taking over from YFT. This last defence was not pursued at trial, and I do not intend to deal with it. In any event, there is insufficient evidence to support such a plea.

14.  The Plaintiff’s answer is that Lau was only a business manager and had no authority to bind the Plaintiff to any settled account with the Defendant. The Plaintiff denies that there was any transfer of business. Both YFT and the Plaintiff continued to operate side by side and the Defendant did contract with both YFT and the Plaintiff after the Plaintiff’s incorporation.

15.  The issues are therefore fairly simple : did Lau have authority to bind the Plaintiff to an agreement between the parties for the freight charges to be settled and whether or not there was such agreement, and/or was the Plaintiff  a transferee of the business of YFT within the meaning of the Ordinance.

The Evidence

The Plaintiff

16.  Leung Sau Ching was the only witness for the Plaintiff. Lau had disappeared in about May 2006. Two witness statements had been filed, and he adopted the contents of both as his evidence in chief.

17.  He described how in early February 2005 Lau invited himself, Tse Chi Ming (“Tse”) and Pang Kai Yau (“Pang”) to form a joint venture in the same business as YFT by incorporating a new limited company as YFT was in financial difficulties.

18.  He also described how it was agreed that amongst the shareholders that he would be finance and account manager whilst Lau would be business manager, and that his (Leung’s) approval had to be sought for any discount on sales orders or any set off.

19.  He described, and it is generally not in dispute between the parties, that the Defendant had been a client of YFT and that how after the Plaintiff’s incorporation, it became a major client of the Plaintiff. He also described how the Plaintiff and the Defendant had a running account, as the Defendant placed a steady stream of orders, in some instances making payment even before delivery of orders.

20.  In January 2006, towards the end of the Chinese Year, the Plaintiff required cash to settle outstanding debts including salary and other expenses for the Plaintiff’s factory in China. Leung asked Lau to ask for outstanding payment from the Defendant, which Leung estimated would be about $800,000 to $1,000,000. Lau returned and said that the Defendant unilaterally set off the airfreight charges. Lau said he had never agreed with the Defendant for such set-off.

21.  Leung then prepared and sent on 25 January 2005 to Ms. Luk Kit Yue (“Luk”), the senior accounts clerk of the Defendant, a statement of account, showing that there was a sum of over $980,000 due from the Defendant to the Plaintiff.

22.  Leung said he followed that up with a telephone call to Hsieh Ming Chiu, managing director of the Defendant, and stressed that YFT and the Plaintiff were different companies and the sums should not be set off. According to Leung, he told Hsieh that he had never authorised Lau to agree to such set off.

23.  He then arranged with Hsieh to go to meet with him that day at the Defendant’s offices. On arriving at the Defendant’s offices, Hsieh left without speaking to him, but Luk agreed to verify the statement of account.

24.  Luk sent a version of the statement of account as varied by Luk to the Plaintiff on 26 January 2006. This copy had the Defendant’s company chop.

25.  After the Chinese New Year holidays, Leung prepared another amended version of the statement of account asking Lau to deliver it to the Defendant on 16 February 2006. This was returned with further amendments on 23 February 2006. The Defendant’s chop was affixed to this version of the statement of account at Leung’s request. According to this version, the outstanding amount from the Defendant was only some $146,051.31, which was settled by 18 May 2006.

26.  In cross-examination, Leung was asked what attracted him (and Pang and Tse) to invest in the Plaintiff. His reply was that Lau had a cash flow problem, and they could also bring their expertise and ability. When pressed, he said that they could expect more business in the long term, and finally that he was particularly concerned about the factory in Mainland China.

27.  He described the working relationship with Lau saying that Lau would have to report to him for his approval after soliciting orders. The orders would be processed only if Leung gave the go ahead.  He agreed that Lau as the business manager was the ‘face’ of the Plaintiff. He said that Lau had to report to himself despite the difference in the size of their respective shareholdings because that is what had been agreed. He himself took on the role of managing director, although his official post was as finance manager.

28.  He was challenged about a letter to the Defendant dated 15 June 2005. This letter is significant and I will set out the relevant parts as follows:

由於敝公司已改組為有限公司，煩請繳付貨款，支票抬頭請書＜怡發發展有限公司＞ 或＜Yee Fat Development Company Ltd.＞，並請以清單列明付貨明細。

敝公司亦會開〔正式收據〕以作實。

  Roughly translated, that would mean

As our humble company has restructured into a limited company, please issue cheques for payment to “Yee Fat Development Company Ltd.” Our humble company will issue a formal receipt as confirmation.

29.  Lau’s explanation for this letter was that it was the Plaintiff, ie the limited company that underwent restructuring in June of 2005, and this was a notice to that effect. However, he could give no convincing explanation as to what was being restructured.

30.  As to the Statement of Account, he could not say whether the handwriting on the statement of account which gave the final figure of $146,051.36 was Lau’s handwriting. It was not his handwriting.

31.  In any event, Lau was not authorized to give discount or make any settlements, but he had not done anything to inform the Defendant.

The Defendant

32.  The Defendant called 3 witnesses. The most important of which were Hsieh and Luk.

33.  Again, both adopted their witness statements as their evidence in chief.

34.  Hsieh is the managing director of the Defendant. The Defendant had started its business with Lau trading as YFT since 2003.  From time to time, YFT would request prepayments from the Defendant, which the Defendant would make and the accounts were settled at the end of the year.

35.  In 2004, YFT failed to meet the deadline for an order from the Plaintiff leading to the Plaintiff having to ship the order by air. By letter dated 9 December 2004, YFT agreed to compensate the Defendant for the airfreight. However, Lau requested to defer paying part of the compensation due to his cash flow problem and this was agreed to by Hsieh.

36.  In about late April/early May 2005, Lau told Hsieh that he (Lau) would set up a limited company to take over YFT. The limited company would have more partners, and Lau asked Hsieh to transfer all the Defendant’s past and future dealings to this new limited company. This company turned out to be the Plaintiff. Lau was specifically asked about the outstanding airfreight. He reassured Hsieh that all outstanding liabilities, including that of the airfreight, would be transferred to the Plaintiff.

37.  Thereafter, the Plaintiff took up the business that previously went to YFT, with Lau alone negotiating with Hsieh on behalf of the Plaintiff, and making decisions including pricing, payment, amendment of accounts and invoices and signing on various documents on behalf of the Plaintiff.

38.  There was only one occasion in January 2006 that he recalled when a Mr. Leung came to the office with other persons requesting a meeting regarding the Plaintiff’s affairs. As Hsieh had a prior appointment, he left the office without meeting with Leung.

39.  Under cross-examination, Hsieh agreed that there was only one occasion when Leung came to his office together with some other shareholders. Prior to coming to the office, Leung had telephoned ahead. Hsieh agreed that Leung had told him that the unilateral deduction of freight charges was not right and wanted to speak to him about it.

40.  He further said that Lau had not told him about the shareholdings of the Plaintiff, but that Lau had told him that he could make decisions for the Plaintiff.

41.  As to the details of the settlement account between the Plaintiff and the Defendant, Hsieh was unable to provide much assistance and deferred to the coming testimony of Luk.

42.  He agreed that even after the Plaintiff’s incorporation and commencement of business, the Defendant still placed some orders and made payments to YFT, although he explained that this was during the handover period.

43.  The Defendant also called Mr. Yeung Ngai Keung Dicky, the production manager of the Defendant’s factory in Dongguan. His evidence did not contribute much one way or the other.

44.  Ms. Luk Kit Yue, the Defendant’s senior accounts clerk, was also called. She too adopted her witness statement as evidence in chief.

45.  She confirmed the practice of YFT requesting for prepayment from time to time. She recalled being told by Hsieh about the deduction for airfreight charges in mid to late 2004, as well as the deferment of the deduction.

46.  She also says that she was told in about mid 2005 that the Plaintiff was to take over the business of YFT, and that thereafter, the Plaintiff began issuing invoices to the Defendant instead of YFT.

47.  She points out that one invoice no. YF-05-4-1 is not in her calculations and was a wrong invoice as the Defendant had not given such order to the Plaintiff.

48.  She confirms that since about mid 2005, she dealt with Lau on behalf of the Plaintiff in the same way that she had dealt with Lau vis a vis YFT before.

49.  She described how on or about 25 January 2006, the Defendant received a statement of account from the Plaintiff by fax. She checked the statement of account and then faxed it back with her amendments.

50.  On about 16 February 2006, Lau delivered the amended accounts to Luk for further verification saying that Leung of the Plaintiff had made some further amendments after checking with their own invoices.  On 24 February 2006, Lau came again for further verification, telling Luk that the airfreight charges should be deducted according to Lau’s agreement with Hsieh. Lau then put down words to indicate that freight charges should be deducted. (扣飛機).

51.   In cross-examination, Luk further confirmed that Lau had come to see Luk and had put down the particulars of the deduction.

52.  On the deduction of airfreight charges, she agreed that the deduction should not be the sum of $831,215.50 but should be $600,000 since only part of the airfreight charge compensation had been deferred. Therefore, the calculation on the statement of account was incorrect, and a sum of some $231,215.50 should not have been deducted on the final statement of account. She said that she did not check all the figures, especially for the airfreight charge.

Account Stated

53.  Lau had disappeared and was not available to be called by either party for the trial. There was nothing to contradict the Defence version that Lau had agreed the statement of account which contained a deduction of $831,215.50 for airfreight charges. The dispute centred on the authority of Lau to agree that deduction.

54.  Mr. Kwan for the Plaintiff relies on the evidence of Leung that Lau had no actual authority to settle accounts on behalf of the Plaintiff, and points to the fact that Lau was the ‘business manager’ whereas he himself was the ‘finance manager’ and therefore any settlement or discount would have to be approved by him. The Defendant had never procured a board resolution from the Plaintiff authorising Lau to make the deduction.

55.  Mr. Kwan further points out the rule in Re: Turquand’s Case (the indoor management rule) does not apply if the other party has been put on enquiry. Mr. Kwan says that the Defendant was put on enquiry because the Leung had told Hsieh over the telephone on about 25 January 2006 that Lau had no authority to agree on behalf of the Plaintiff to deduct airfreight charges.

56.   I do not agree. There is a contradiction in the evidence as to what, if anything, was said over the telephone between Leung and Hsieh, and when that occurred. However, looking at the inherent probabilities and objective circumstances, I find that Lau had ostensible, if not actual, authority to bind the Plaintiff on a settlement of accounts.

57.  Lau was a director of the Plaintiff, and was the one who had previously dealt with the Defendant throughout their relationship until the later stages.

58.  He was described as a ‘business manager’. There is no accepted definition of what that means. However, the word ‘business’ is very wide and would be wide enough to encompass matters such as giving of discounts, settling of accounts etc..

59.  More significant is the letter to the Defendant dated 15 June 2005. I find that this letter was sent to the Defendant to show that YFT’s business had been transferred to the Plaintiff. The wordings and the context, in particular the use of the word “為” connotes that the company (in the broad sense) had been changed into a limited company. The natural inference is that the it had been changed into a limited company from an ‘unlimited’ one, ie a sole proprietorship or partnership. There is no question of any partnership in this case. The letter can only mean that this is a notice that the previous sole proprietorship is now a limited company, and requesting all payments to be made to the limited company – instead of YFT.

60.  Although this is directly relevant to the question of the Transfer of Business issue, it is also significant in that this letter, which is a notice to an existing customer, does not in any way state any limitation on the authority of Lau. If there was really any limitation on Lau’s authority, it would be expected that this would appear on the notice.

61.  The Plaintiff also permitted YFT to use the same address, telephone nos. etc (or the other way round), Lau had also settled another prior invoice.

62.  All the above point to Lau having at least ostensible, if not actual authority to bind the Plaintiff to the statement of account and I so find.

Transfer of Business

63.  I also find that there has been a transfer of business within the meaning of the Ordinance.

64.  Even without the evidence of Hsieh that he had been told by Lau that the business of YFT would be transferred to the Plaintiff, the objective circumstances show that there has been a transfer. I accept each the points made by Mr. Campbell on this issue, and I will not list them all out. Of particular significance are the letter of 15 June 2006, the use of a similar name, the same address, the same telephone number, and even the same factory in mainland China, all pointing towards a transfer within the meaning of the Ordinance.

65.  Mr. Kwan says that there cannot be a transfer within the meaning of the Ordinance if both the transferor and the transferee are in business at the same time. I do not agree. The words of the Ordinance impose no such restriction. As rightly pointed out by Mr. Campbell, Liu Hon Ying t/a United Speedoc Company v. Hua Xin State Enterprise (HK) Ltd. & Anor. HCA 1060/2001 was a case involving gradual transfer of business.

66.  The Ordinance, whose long title describes it as an ordinance “To protect creditors on the transfer of businesses, to provide for the liability of transferees of business, the manner in which such liability may be avoided and for matters incidental thereto and connected therewith…”. A large element of protection of creditors would be lost if the Ordinance were interpreted to apply only to “instant” or “midnight” transfers. Many transfers do not occur in this way, and there is no justification of taking such a restrictive interpretation of the word “transfer”.

67.  However, that does not mean that I accept the whole of the Defence submissions on this issue, especially the Defence assertion that they are not liable at all to the Plaintiff. If I am wrong on the issue of there being a settled account between the parties, I consider that there is a sum of some $426,740.25 owed by the Defendant to the Plaintiff even though I find that there has been a transfer of business within the meaning of the Ordinance.

68.  Even if I accept the Defendant’s case that it is entitled to set off amounts owed by YFT, there are 2 items on which I am not satisfied that the Defendant was entitled to set off.

69.  The first of these is the amount represented by the invoice YF-05-4-1, in the amount of $217,927. Luk’s evidence is that this invoice was wrong in that the Defendant had not contracted out the products described in the invoice to the Plaintiff. In her evidence in the witness box all that she said about this matter was that it was wrong because the item numbers were wrong.

70.  However, there is evidence in the form of a receipt and a cheque to show that this had been paid by the Defendant to the Plaintiff. The Defendant seeks to show that it is not indebted to the Plaintiff by gathering all payments made by the Defendant to the Plaintiff (and YFT) as schedule C and subtracting therefrom all the Plaintiff’s invoices at Schedule B to give a positive balance of $22,402.25. In other words, the Defendant says that it has overpaid the Plaintiff $22,402.25.

71.  Looking at both schedules, the sum of $217,927 is included in Schedule C, but not in Schedule B. Although Luk attempted to deal with it by saying that it was wrong, no further explanation is given to counter the receipt which specifically refers to the invoice No. YF-05-4-1.

72.  In the circumstances, on the Plaintiff’s method of calculation, this $217,927 should be put back into the calculation.

73.  By the same token, the $231,215.50 which was part of the airfreight charges and which had already been paid by YFT was wrongly added to the sums which should have been deducted. That this sum was wrongly deducted was admitted by Luk, who agreed in cross-examination that the Defendant still owed the Plaintiff that amount.

74.  Therefore, if I am wrong on the question of whether there were settled accounts between the parties, I would find that the Defendant is liable to the Plaintiff for the sum of $426,740.25 ($217,927 + $231,215.50 – 22,402.25)

Conclusion

75.  As I find that the Plaintiff fails on the issue of settled accounts, the claim is accordingly dismissed. I make a cost order nisi in favour of the Defendant, be taxed if not agreed, with certificate for counsel.