AGFA HONG KONG LTD. v. KING DRAGON INDUSTRIAL LTD. & OTHERS

HCA 13016/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13016 OF 1999

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J U D G M E N T

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1. The Plaintiff, Agfa Hong Kong Limited is a well known manufacturer and supplier of photographic printing equipment and materials. Its claim in these proceedings arises from the supply of very substantial quantities of photographic goods to the 1st Defendant company between July 1997 and July 1998.

2. It alleges that the price of the goods was denominated either in US dollars or Hong Kong dollars and claims the balance of the price of the goods from the 1st Defendant in the sum of US$7,235,958.18 and HK$5,839,069.00.

3. The Plaintiff put its claim either on the basis that the goods were supplied pursuant to a Credit Agreement between the Plaintiff and the 1st Defendant dated 23 October 1995 or alternatively on the basis of goods and services supplied to the 1st Defendant at the 1st Defendant's request.

4. The Plaintiff's claims against the 2nd,3rd and 4th Defendants are based on instruments of guarantee and indemnity signed by them in respect of the liability of the 1st Defendant to the Plaintiff.

5. It is alleged that sometime between October 1995 and October 1996, the 3rd and 4th Defendants executed instruments of guarantee and indemnity to the Plaintiff with a limit of $10 million.

6. It is further alleged that the 2nd, 3rd and 4th Defendants all executed further instruments of guarantee and indemnity to the Plaintiff in respect of the 1st Defendant's obligations with an upper limit of $60 million in the early part of 1998.

7. All these instruments of guarantee and indemnity provided a guarantee and indemnity to the Plaintiff not only in respect of future sums owing by the 1st Defendant to the Plaintiff but also in respect of amounts outstanding at the date of the execution of the instruments.

8. The Plaintiff's claim against the 2nd, 3rd and 4th Defendants is under the instruments of guarantee and indemnity.

9. Judgment was entered against the 1st Defendant on 1 March 2000 in default of payment into court of a sum of HK$20 million ordered by Master Christie on 14 December 1999.

10. The 3rd Defendant was adjudged bankrupt on 1 August 2001. If the Plaintiff was to proceed with its claim against the 3rd Defendant it would require the leave of the court pursuant to section 12(1) Bankruptcy Ordinance Cap. 6. The Plaintiff did not seek such leave but asked for the claim against the 3rd Defendant to be adjourned sine die with liberty to restore. I made the order requested.

11. The 2nd Defendant did not attend the trial. A notice of trial had been sent to the address for service given by him in the Notice to Act in Person filed by him on or about 15 May 2001 but was returned to the court marked "moved to address unknown". It appeared from an affirmation dated 7 January 2002 filed by Mr Wellington Chao, solicitor for the Plaintiff, that the 2nd Defendant was now resident in Taiwan and had been for some time, but that nonetheless he was aware of the trial date. In the circumstances, I gave leave to the Plaintiff to proceed against the 2nd Defendant in his absence. After the conclusion of the case for the Plaintiff, the 4th Defendant, who was the only defendant to attend the trial, informed the court that she had received the telephone call from the 2nd Defendant during the course of the preceding day in which he had said that he wanted to attend the trial but was currently prevented from doing so by an order of a court in Taiwan. I refused an application for an adjournment of the trial. There was no documentary evidence to support the 4th Defendant's assertion. Even on the account the 4th Defendant had given the court, the 2nd Defendant had been in his current position for a considerable period of time and yet no attempt had been made on his behalf to bring this matter to the attention of the court.

12. The Defence of the 2nd and 4th Defendants was essentially two fold:

(1) that although the relationship between the Plaintiff and the 1st Defendant had originally been that of seller and buyer, that relationship had changed in about January 1997 when it was agreed that the 1st Defendant would simply act as a middleman in selling the Plaintiff's products in China. As a result, the 2nd and 4th Defendants were under no liability under the instruments of guarantee to pay the Plaintiff for goods supplied to 1st Defendant later in respect of which the Plaintiff now claims.

(2) Alternatively that the guarantees in the sum of $60 million were only executed in August 1998 and that since the Plaintiff had granted no trade credit to the 1st Defendant thereafter there was no consideration for those guarantees.

In addition, insofar as the 4th Defendant is concerned, she denied at trial that she had signed the earlier instrument of guarantee and indemnity in the sum of $10 million. This was not however a matter that had been pleaded in her amended defence.

13. No issue was taken as to the evidence of the calculations of the amounts allegedly owing by the 1st Defendant to the Plaintiff, if the Plaintiff succeeded in establishing that the relationship between them was one of buyer and seller.

The evidence

14. The Plaintiff called two oral witnesses, Miss Rebecca Au, who at the material time was the General Manager of Electronic Data Processing/Accounting and Credit Control of the Plaintiff and one of whose duties was to monitor accounts receivable of all of Agfa's customers, and Mr Andrew Wong Kwan Wah who was and is General Manager of the Plaintiff's Graphic Systems Department and whose responsibilities included the development and management of Agfa's business relating to graphic products.

15. In addition the Plaintiff adduced the statements of George Kwok Chuen and the annexures thereto under section 47 of the Evidence Ordinance Cap. 8. He had formerly been Credit Controller and later Credit Control Manager of Agfa. It appeared from a second affirmation of Mr Wellington Chao of 8 January 2002 put before the court that Mr Kwok was avoiding service of a writ of subpoena requiring him to attend the trial.

16. The evidence of Miss Rebecca Au and Mr Andrew Wong amounted to this: That the 1st Defendant had opened an account with the Plaintiff in October 1995. Initially it had bought goods from the Plaintiff on the basis of cash on delivery. Subsequently it had been granted credit terms which had become progressively more generous.

17. Although the Plaintiff's business with the 1st Defendant had rapidly increased, the relationship between the two had always been that of buyer and seller. Andrew Wong admitted that there had been a proposal on behalf of the 1st Defendant that in view of the scale of the Chinese market, its role be changed to that of middleman. Andrew Wong said that the proposal had been refused. He admitted that it had been referred to a meeting attended by the 4th Defendant at a restaurant in Wanchai in January 1997, but he said he had not agreed to the proposal and had said that it was not the company's practice to carry on business in this way.

18. The Plaintiff's witnesses produced or referred to documents evidencing the buyer and seller relationship in respect of the period in question including purchase orders issued by the 1st Defendant, order confirmations issued by the Plaintiff, invoices issued by the Plaintiff and monthly statements issued by the Plaintiff to the 1st Defendant setting out the amounts it owed.

19. In addition other documents were produced indicating that the relationship of buyer and seller between the 1st Defendant and the Plaintiff had continued. These included an accountant's report dated 2 March 1998 prepared by Vincent L S Wong and Company, Certified Public Accountants indicating that the Plaintiff was a trade creditor of the 1st Defendant for $44,635,368.14 for the period ended 31 October 1997, a confirmation for audit purposes sent by the 1st Defendant's own accountants to the Plaintiff seeking confirmation that as at 31 March 1998, the 1st Defendant owed the Plaintiff $64,437,239.97, a settlement agreement executed by the 3rd Defendant on behalf of the 1st Defendant confirming that the 1st Defendant owed Agfa in excess of HK$65 million as at 23 November 1998 and other documents emanating from the 1st Defendant indicating that the relationship continued to be that of buyer and seller.

20. The witnesses also gave evidence of meetings on 20 July 1998, 3 September 1998 and 23 November 1998 attended by the 2nd and 3rd Defendants on behalf of the 1st Defendant at which the 2nd and 3rd Defendants admitted the 1st Defendant's liability for the debts to Agfa, and a similar meeting on 4 May 1999, at which the 4th Defendant had been present with the 3rd Defendant. It is apparent from the minutes of the latter meeting that a letter faxed by the Plaintiff's solicitors the same day to the 1st Defendant demanding the sum of $63,121,295.00, being money owed by the 1st Defendant to the Plaintiff, had been the subject to discussion and that neither the 4th nor the 3rd Defendants had denied the indebtedness of the 1st Defendant.

21. Insofar as the instruments of guarantee are concerned, the evidence of George Kwok (whose statement was admitted in evidence) was that the instruments with a limit of $10 million were executed sometime in 1996, and that the instruments with the limit of $60 million were executed sometime before Chinese New Year in 1998. Rebecca Au gave evidence that guarantees with a limit of $10 million must have been signed before 24 October 1996 when the Plaintiff changed its name from Agfa Gevaert (Hong Kong) Limited to Agfa Hong Kong Limited and that the guarantees with a limit of $60 million must have been signed before an audit team from Agfa's Headquarters visited Hong Kong in or about May 1998.

22. The 4th Defendant gave evidence but called no witnesses. She was the Assistant General Manager of the Mainland Region of the 1st Defendant and a director of the 1st Defendant at the relevant time. She was aware that the relationship between the Plaintiff and the 1st Defendant had originally been that of buyer and seller, but maintained that the relationship had changed.

23. She admitted that she had not taken part in any negotiations which resulted in the change of relationship (which she said would have involved the 2nd and 3rd Defendants) but she had been told by the 2nd Defendant that there was such a change.

24. She had, however, been present at the dinner attended by the 2nd Defendant and Mr Andrew Wong Kwan Wah in the restaurant in Wanchai in early 1997 (around January) when the 2nd Defendant had pointed out the risks to the 1st Defendant in expanding its business in China and when he had asked whether the Plaintiff would change the role of the 1st Defendant to one of middleman. She said Andrew Wong had said that there was no precedent for the Plaintiff adopting such a course but they would study it further. Nothing more was said about the matter. This evidence does not differ significantly from that of Andrew Wong.

25. The 4th Defendant's evidence was that because of subsequent events known to her, she believed that there had been a change in relationship commencing shortly after the meeting at the restaurant in January 1997. She pointed out the very rapid increase in credit granted by the Plaintiff to the 1st Defendant month by month and the relatively small amounts paid to the Plaintiff by the 1st Defendant. She said that there was no reason why a company such as the Plaintiff would increase the 1st Defendant's credit to such levels unless there was a very special relationship. She said these increases in credit were inconsistent with a relationship of buyer and seller, even though she conceded that the transactions were entered into the 1st Defendant's books as "goods bought" and the documentation of the transactions was to similar effect.

26. She suggested, as I understand it, that a reason why the transactions might have been entered into the 1st Defendant's book as "goods bought" was that it was necessary for the purpose of avoiding foreign exchange restrictions in China and to ensure that money could subsequently be remitted to Hong Kong, that there be a notional sale of the goods from the 1st Defendant to its subsidiary. To record the transactions between the Plaintiff and the 1st Defendant as "goods bought" would be consistent with this. She suggested that the reasons why the books were made up this way was because the books would "go to the Government". It appears she was also suggesting as a reason why the transactions might have been recorded as "goods bought" was that the 1st Defendant's accounting staff had simply carried on recording the transactions as they had done before.

27. The 4th Defendant further suggested that the fact that the Plaintiff had appointed a firm of accountants to audit the 1st Defendant's books indicated that the relationship between the Plaintiff and the 1st Defendant was not that of seller and buyer. She said that if it had been then the 1st Defendant would not have allowed the inspection of its books.

28. She also pointed to other matters which she suggested pointed to a different relationship between the Plaintiff and the 1st Defendant to that which had prevailed earlier.

(1) She had been instructed that at trade fairs in China contacts with customers had to be done in the name of the Plaintiff.

(2) Employees of the Plaintiff would always take part in product seminars and promotional activities.

(3) Copies of contracts between the 1st Defendant and its subsidiaries had to be given to the Plaintiff, and that from time to time sales reports had to be sent to the Plaintiff.

(4) That whenever regional sales meetings were held by the Beijing, Shanghai or Guangzhou offices, a representative of the Plaintiff was invited to attend.

29. Insofar as the instruments of guarantee and indemnity are concerned, she denied that it was her signature appearing on the first such document with a limit of $10 million.

30. Insofar as the second instrument is concerned with the $60 million limit, she alleged that she had signed it before she went to the United States of America on 4 July 1998, but had only authorized the handing over of the document to the Plaintiff on her return to Hong Kong at the end of August 1998 after having been told that otherwise the Plaintiff would not continue to supply goods to the Plaintiff and after being shown a certificate (Exhibit D1(2)) appointing a subsidiary of the 1st Defendant as "Printing Arts Products China Agent" for a further year.

31. At one stage during the trial, it appeared that the 4th Defendant might have been suggesting that the certificate (Exhibit D1(2)) and other similar certificates (Exhibit D1) were evidence of a change of relationship between the Plaintiff and the 1st Defendant. In cross-examination however she accepted that these certificates were simply to show that the recipient was authorized to deal in the Plaintiff's products.

Assessment of the evidence

32. The evidence pointing to the sums owing to Agfa being debts owed by the 1st Defendant as buyer of those goods can only be described as overwhelming.

33. All the contemporaneous documentation showed that the goods in question were purchased by the 1st Defendant from the Plaintiff and that the relationship between them was simply that of buyer and seller. All the contemporaneous documentation also showed that those acting on behalf of the 1st Defendant accepted that this was the situation. There were no documents indicating the contrary.

34. It is significant that the 4th Defendant herself concedes that she herself cannot give direct evidence of any agreement with the Plaintiff as to a change in the relationship with the 1st Defendant as she was mainly resident in China at the material time and negotiations would have been conducted by the 2nd and 3rd Defendants.

35. The circumstances, to which the 4th Defendant points as indicating a change of relationship, in particular the very considerable increase in credit granted to the 1st Defendant, the involvement of the Plaintiff in the promotion of its products in China and its desire to be informed of the 1st Defendant's activities in relation to its product, are all explicable on the basis that the Plaintiff had a common interest with the 1st Defendant in penetrating the huge market represented by the Mainland. Both Andrew Wong and Rebecca Au accepted that the 1st Defendant was not looked upon as a normal customer but one with a particular ability to achieve this end. In any event, the Plaintiff had started on the path of regularly allowing the 1st Defendant increases in credit well before January 1997.

36. Although, the 1st Defendant was granting unusual credit facilities to the 1st Defendant, it did take steps to protect itself by requiring the signing of the personal guarantees by the directors of the 1st Defendant. It was also reasonable in view of the large credit it was giving to its customer (1st Defendant), to insist on the 1st Defendant's books being audited.

37. There were aspects of the evidence of the 4th Defendant concerning which I consider that she was being less than frank. I do not believe she was being frank when she attempted to explain the way that the 1st Defendant entered the transactions in its books by saying that she had consulted accountancy firms about the manner in which the entries should be made and they had been unable to assist. Nor did I believe her evidence that Vincent L S Wong & Company who compiled the report on the 1st Defendant's financial affairs for the period 1 April 1997 to 31 October 1997 had known that the relationship between the Plaintiff and the 1st Defendant was not that of buyer and seller. I disbelieved her account of the meeting on 4 May 1999 with Agfa's representatives; in particular that she was unaware of what was being discussed because she did not speak English. There would have been no point in her being present if she was not aware of what was being discussed.

38. I find the tripartite distribution agreement of 29 May 1997 involving the Plaintiff, the China National Printing Materials Corporation and a subsidiary of the 1st Defendant , which the 4th Defendant suggested pointed to the Plaintiff being the direct supplier of the goods to the Mainland market, in fact supports the Plaintiff's contention for by Clause 2(1) it provides that the Plaintiff and the China National Printing Materials Corporation acknowledge that the 1st Defendant's subsidiary was the sole supplier of the Plaintiff's goods to the China National Printing Materials Corporation.

39. In considering the evidence, I have borne in mind the evidence of Andrew Wong as to the price the Plaintiff charged the 1st Defendant for its film, the customs tax that would normally be payable thereon in China and the maximum price recommended by the Plaintiff that the 1st Defendant should charge its customers. These figures would tend suggest that if there was indeed a sale by the Plaintiff to the 1st Defendant then the 1st Defendant would have been unable to make a profit unless it negotiated a special tax rate or adopted less official means to import its goods into the Mainland. The evidence from Mr Andrew Wong was essentially that being the purchaser, the question of taxation was a matter for the 1st Defendant and he was unaware of the 1st Defendant's arrangements. It is not for this court to comment on what appears to be the Plaintiff's stance in this matter in the absence of any plea of illegality, but solely to consider whether this evidence might tend to suggest that the relationship between the Plaintiff and the Defendant was not that of buyer and seller. I am satisfied that notwithstanding this evidence, that the evidence that the relationship between the Plaintiff and the 1st Defendant was that of seller and buyer remains overwhelming.

40. In my view, the 4th Defendant was clutching at straws in her attempt to demonstrate any change in relationship between the Plaintiff and the 1st Defendant.

41. I find that the sums claimed by the Plaintiff were sums owed by the 1st Defendant as purchaser of the Plaintiff's goods.

42. Insofar as the instruments of guarantee are concerned, I find that the instrument with a limit of $10 million was signed by the 4th Defendant before 24 October 1996 when the Plaintiff changed its name.

43. I consider that on the balance of probabilities, the 4th Defendant is incorrect in saying that she did not sign this document. She admitted that the signature looked like hers but she said that she knew it was not hers because when she signed a document she would look at it. She also said that Agfa would have had no reason to ask for a guarantee at that stage. However, even on her own evidence Agfa was granting credit to the 1st Defendant in 1996. It must follow from her evidence that she was suggesting that the document was forged. If that was her evidence I consider it likely that the solicitors who were then instructed by her would have said as much in her amended defence. Moreover the solicitors would have served notice denying the authenticity of the document. They did neither. I consider it highly unlikely that anyone in Agfa would have forged her signature on this document. In any event, in light of my finding regarding the later deeds of guarantee with the limit of $60 million, I consider the validity of this first instrument is academic.

44. In my view the only reasonable construction of the guarantees with the limit of $60 million is that they were intended to supersede the earlier guarantees, not be complementary to them.

45. I am satisfied that the later guarantees with the limit of $60 million were executed by the 2nd, 3rd and 4th Defendants and delivered to the Plaintiff well before August 1998 as the 4th Defendant now alleges. I believe that this is another example of the 4th Defendant being less than frank with the court.

46. I have no reason to doubt George Kwok's statement (para. 15) that the 3 guarantees were signed before Chinese New Year 1998. I accept that it was the existence of these guarantees which led to Agfa requiring the 3 insurance policies on the lives of the 1st Defendant's directors, the proposals for which were made on 20 May 1998. I also accept Rebecca Au's evidence that she had been concerned that these guarantees were executed before the arrival of the audit team from Agfa's Headquarters in about May 1998. I am also persuaded by her reasoning that in view of the amounts owed by the 1st Defendant, if the guarantee had been required in August 1998 it would have had a limit of $70 million not $60 million.

47. Even if I had been satisfied that the guarantees were only executed in August 1998, I would still have found that there was consideration for them. Although the Plaintiff may not have supplied further goods to the 1st Defendant, it continued to grant the 1st Defendant credit by forbearing from taking legal proceedings until a year later on 12 August 1999. That in the circumstances of this case was sufficient to amount to consideration.

48. As Lord MacNaghten said in Fullerton v Provincial Bank of Ireland [1903] AC 309 at 313:

"..... It is not necessary that there should be an arrangement for forbearance for any definite or particular time. It is quite enough if you can infer from the surrounding circumstances that there was an implied request for forbearance for a time and that forbearance for a reasonable time was in fact extended to the person who asked for it."

49. This in my view was a case where such an inference could have been drawn. I am satisfied that the Plaintiff would not have forborne from taking legal proceedings until a year later if the personal guarantees were not in place.

50. In the light of the above, I find that the 2nd and the 4th Defendants are liable under the deeds of guarantees signed by them.

51. I therefore give judgment against the 2nd and 4th Defendants in the sum of $60 million. I order that the Defendants pay interest at judgment rate from the date of issue of the writ until payment.