LIO WENG TONG v. FUNDPARK LTD

HCSD 14/2020 and
HCSD 15/2020
(Heard together)

[2020] HKCFI 2540

HCSD 14/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO. 14 OF 2020

________________________

________________________

AND

HCSD 15/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO. 15 OF 2020

________________________

________________________
(Heard together)

________________________

J U D G M E N T

________________________

1.  There are two applications to set aside two respective statutory demands. They arose out of the same factual backgrounds.

Backgrounds

2.  Koofy Development Limited (“Koofy”) is a Hong Kong company carrying on the business of development, design and application and sense and motion technology.

3.  The two Applicants are the shareholders and directors of Koofy.

4.  Koofy entered into an Exclusive Distributor Agreement (“Distribution Agreement”) with an Australian company Athena Solutions Pty Ltd (“Athena”) whereunder Koofy would supply goods to Athena.  The Distribution Agreement caters for worldwide distribution of Koofy’s goods by Athena.

5.  The Respondent engages in the business of trade financing.

6.  Koofy and the Respondent entered into a trade financing agreement (“Agreement”) and pursuant thereof:

(1)  Koofy would assign accounts receivables from Athena to the Respondent;

(2)  The Respondent would pay Koofy a percentage of the face value of these receivables upfront; and

(3)  The 2 Applicants would personally guarantee all liabilities of Koofy under the Agreement.

7.  A Deed of Assignment was duly executed and due notice of assignment was given to Athena.

8.  The terms of the Agreement, in so far as they are relevant to these applications, are as follows:-

(1)  Koofy would assign accounts receivables from Athena to the Respondent; Accounts receivables assigned by Koofy to the Respondent fall into two categories:

(i)  recourse receivables (defined as “Seller Risk Accounts Receivable”) and

(ii)  non-recourse receivables (defined as “Purchaser Risk Accounts Receivable”). [Clause 2]

(2)  For recourse receivables, in the event of default by Athena, the Respondent (as assignee of Koofy) will have the right of recourse against Koofy.

(3)  For non-recourse receivables, if Athena defaults, the Respondent must bear the loss (or seek indemnity from its insurers) [Clause 2]

(4)  The mechanism for determining whether a particular accounts receivable is recourse or non-recourse is as follows:-

(i)  by default, a receivable which is created without prior vetting by the Respondent is a recourse receivable [Clause 2];

(ii)  however, this is subject to an exception: the first HK$2m worth of accounts receivables assigned to the Respondent will be deemed non-recourse even without the Respondent’s prior vetting [Clause 3]; and

(iii)  an initially non-recourse receivable can somehow be converted into a recourse receivable pursuant to a proviso stated in Clause 8 (“Clause 8 Proviso”) which reads:-

“…provided, however, that [the Respondent] shall not credit the Purchase Price of any unpaid Purchaser Risk Account Receivable if …(II) [the Respondent] determines that any Purchaser Account Receivable remains unpaid for any reason other than the customer’s financial inability to pay. In either case, such Account Receivable shall be converted to a Seller Risk Account Receivable.”

(5)  The trade financing aspect of the Agreement operates as follows: When a receivable is assigned by Koofy to the Respondent, the latter may make an upfront payment to Koofy up to 80% of the face value of the receivable.  There are then further mechanisms for the payment of the balance.

(6)  At the same time, in order to make profits, the Respondent would charge a variety of fees, commissions, charges and interests on any receivable assigned.

(7)  The Respondent also took out an insurance coverage from Euler Hermes Hong Kong Services Limited (“EH”) to cover its risk under the Agreement.

9.  On 11 January 2019, Koofy applied to the Respondent for upfront payment in respect of a purchase order dated 9 November 2018 (“the 1^st PO”) for the sale of 1,080 units of a product to Athena.

10.  The Respondent duly made upfront payment of HK$1,760,003.80 to Koofy, being 80% of the face value of the invoice issued under the 1^st PO after deduction of relevant commissions and charges.

11.  The Respondent never received any payment from Athena.  It is common ground that Athena is in default.

12.  In the course of handling the Respondent’s insurance claim, EH engaged a debt collector which liaised with Athena.  The following facts, inter alia, were discovered:-

(1)  the 1^st PO[1] was apparently replaced by another purchase order dated 5 January 2019 (“2^nd PO”).  The 1,080 units were split into 2 deliveries of 540 units each, one batch to a delivery address in USA and the other batch to a delivery address in Australia;

(2)  in a document dated 1 October 2019 issued by Athena’s legal representative entitled “Legal Notice”[2] (“the LN”), Athena set out the dispute it has with Koofy under the 2^nd PO:-

(i)  only 1,040 units were delivered: 300 units sent to USA, 540 units sent to Australia, and 200 units Australia;

(ii)  the 300 units sent to USA lacked the required compliance labels and were unsellable.  Athena asked Koofy on multiple occasions to add the compliance labels but that was not done.  Athena sought to return these goods to Koofy;

(iii)  as for 540 units sent to Australia, Athena relied on Clause 3.2 of the 2^nd PO which stipulated that “If the Exclusive Distributor is unable to sell the units which will be delivered to the AU Delivery Address for a profitable, sustainable margin, within a time period of 90 days commencing on the date when the units are delivered to the AU Delivery Address, [Koofy] shall: (i) collect the unsold units at its own expense; and (ii) not be entitled to receive from the Exclusive Distributor any purchase price for the unsold units”. Athena could not sell the 540 units and sought to return them to Koofy;

(iv)  as for the remaining 200 units sent to Australia, Athena sought to set off their prices from a cross-claim for damages under certain delivery orders and invoices in 2017.  That cross-claim arose out of certain non-delivery and delayed delivery of units which resulted in loss suffered by Athena.

(3)  By the LN, Athena alleged that Koofy had been in breach of contract.  In particular, Athena stated that “If you do not own this debt, Athena FZE demands that you immediately send a copy of this dispute letter to the original creditor so they are also aware that Athena FZE dispute the debt.”

13.  As a result of the LN, EH concluded that the case falls under the “dispute category” under the insurance policy and thus refused to process the Respondent’s insurance claim.

14.  In the circumstances, the Respondent determined, under the Clause 8 Proviso, that the non-payment by Athena was for reason other than the financial inability of Athena.  Accordingly, the said receivable from Athena was converted to a Seller Risk Account Receivable.  Pursuant to this conversion, it is the Respondent’s stance that Koofy became obliged under the Agreement to pay the various sums set out in the Statutory Demands to the Respondent.  Furthermore, since Koofy had defaulted, the two Applicants, being the guarantors, are indebted to the Respondent for those various sums set out in the Statutory Demands totaling HK$2,260,993.74[3].

15.  The Applicants applied to set aside the respective Statutory Demands on the ground that the alleged debt in each Statutory Demand is disputed on substantial grounds.

 The Applicants’ arguments

16.  The foundation of the Applicants’ arguments is that the Respondent’s right to make “determination” under the Clause 8 Proviso must be subject to “reasonableness”.  In other words, the right to make determination should not be exercised unreasonably.  Then on this premise, the Applicants argued that the determination by the Respondent pursuant to the Clause 8 Proviso was unreasonable because the alleged dispute raised by Athena is of no merit at all.  The Applicants attack the merit of Athena’s dispute for the following reasons[4]:-

(1)  Athena never alleged that the delivery of the products to USA constituted a breach of contract between Koofy and Athena;

(2)  It should be clear to the Respondent that Athena’s allegation that it had already paid for the 200 units had no merit;

(3)  It was never a contractual term between Koofy and Athena that compliance labels shall be affixed to the 300 units delivered to USA. Hence, Athena was not entitled to return the said 300 units; and

(4)  Athena had no right to return the 540 units delivered to Australia because under Clause 3.2.1 of the Distribution Agreement, goods are deemed to be accepted provided that no written notice supported by satisfactory evidence is received within 90 days from the receipt of the products.  The Applicants assert[5] that the goods were received by Athena on 22 March 2019 and Athena only requested to return the goods on 24 June 2019, beyond the 90 days limit.

The Respondent’s arguments

17.  First of all, counsel for the Respondent accepted that Clause 8 should be interpreted in a way that the Respondent should not act unreasonably in the making of its determination.  The Respondent argued that it cannot be said to have acted unreasonably in the making of its determination for the following reasons:-

(1)  The evidence shows that there is a dispute on what were the finalized terms of agreement between Koofy and Athena. There was clearly a change of agreement from the 1^st PO to the 2^nd PO. One can also see discrepancies between the 2nd PO and the 5 bills of lading relating to those goods.  The Respondent is just the assignee and has no knowledge of the agreement and variation of agreement between Koofy and Athena.  The Respondent cannot be said to have acted unreasonably in not being able to resolve who is in the right and in the wrong.

(2)  As to the 540 units delivered to Australia, there is a dispute as to whether they are subject to a right of return by Athena. There is apparently a conflict between Clause 3.2.1 of the Distribution Agreement and Clause 3.2 of the 2^nd PO. According to the former, the 90 days limit shall commence “from the receipt of the Product”.  In the latter, the 90 days limit shall commence from the date “when the units are delivered to the AU Delivery Address”.  Furthermore, the 2^nd PO contained Clause 5.1 which reads: “In case of a conflict between this Purchase Order and the terms of the [Distribution Agreement], this Purchase Order shall prevail and control”.  The 2^nd PO was later in time and Clause 5.1 shall prevail.  In any event, being the assignee, the Respondent had no information as to the date of delivery to the said business address in Australia.  Even now, in the 2^nd affirmation of Ma, the Applicants merely put forward a bare unsubstantiated allegation that the 540 units were delivered to the business address in Australia on 22 March 2019.  In fact, this date of 22 March 2019 was merely an “estimated cargo arrival date” as shown in the Delivery Order produced by the Applicants[6].

(3)  There is a dispute on whether it is a contractual term between Koofy and Athena that there should be compliance labels attached to the products.  Both the Distribution Agreement and the POs were silent on this issue.  Yet, the Distribution Agreement pertains to distribution of goods all over the world. Each jurisdiction is likely to have its own compliance standard. There is no schedule of specifications in the Distribution Agreement.  There must have been some incidental agreement or documents agreed between Koofy and Athena over detail specification requirements or safety compliance requirements for different jurisdictions.  As an assignee, the Respondent has not been provided with such information.  It should be the obligation of the Applicants to put forward such information in their affirmations, which they have not.  In any event, from a test report disclosed by the Applicant[7], it was stated that “[Koofy]  and the Manufacturer have agreed to produce, test and label ELT Listed Products in accordance with the requirements of this Report”.  It is thus likely than not that the necessary affixing of labels formed part of the agreed specifications of the products.  Athena has at least an arguable case that Koofy was in breach by failing to attach compliance labels to the products.

(4)  Finally, there is a dispute on whether Athena could use the alleged cross-claim to effect a set off for the price of the remaining 200 units delivered to Australia.  The Respondent relies on Derham on the Law of Set-Off (4^th Ed.) §§17.03-17.04.  In the present case, the cross-claim alleged by Athena arose in 2017, i.e. before Athena had notice of the assignment. It is thus at least arguable that Athena can invoke the right of set-off against the Respondent.

Discussion

18.  In my view, the focus of the Applicants’ arguments is misplaced.  In the course of the hearing, I asked this question of Mr Tsui, counsel for the Applicants: “From all the materials contained in the 2 hearing bundles, can you show me any evidence or document indicating or capable of inferring that Athena did not pay for the goods because of their financial inability?”.  In his usual candour for which I commend, Mr Tsui acknowledged in the negative. 

19.  In my judgment, the proper question to ask in this case is: whether it can be argued that the Respondent acted unreasonably in not concluding that the non-payment by Athena was due to its financial inability. To me, the answer is a resounding “No”.  There is absolutely no evidence, available to the Respondent, of any financial inability on the part of Athena.  The Applicants cannot point to any evidence that is capable of drawing such inference.  Naturally, in the absence of such evidence, any reasonable person in the position of the Respondent could only conclude that Athena defaulted for reasons other than financial inability.

20.  Mr Tsui argued that the dispute was raised by Athena as an excuse to refuse payment.  The basis of his submission is as mentioned in paragraph 16 above.  Mr Tsui submitted that the disputes raised by Athena were not genuine. With respect, I disagree.  On the contrary, I accept the submissions made by Mr Lau, counsel for the Respondent as set out in paragraph 17 above.  In my view, it cannot be said that the disputes raised by Athena are plainly unarguable and hence disingenuous.  Even this Court is unable to draw such a conclusion on the materials presented in the hearing bundles.  In the circumstances, it is in my view wholly unarguable that the Respondent had acted unreasonably in its determination pursuant to the Clause 8 Proviso.

21.  In the Applicants’ Skeleton Arguments, arguments were also raised in respect of the propriety of the charging of Commission of HK$70,006.81; Additional Commission of HK$43,754.26; Interest of HK$48,218.98; and Late charge of HK$313,125.70.  Both counsel however fairly conceded that resolution of these disputed amounts, which are relatively insubstantial compared to the overall indebtedness, would not affect the validity of the Statutory Demands.

Conclusion

22.  Accordingly, the Applicants have failed to demonstrate that the debts stipulated in the Statutory Demands are disputed on substantial grounds and I will dismiss both applications.

23.  I further make an order nisi that costs shall follow the event. The Applicants shall pay to the Respondent costs of and incidental to the applications, to be taxed if not agreed, on party-and-party basis with certificate for counsel.  This order shall become absolute unless application for variation is made within 14 days from the date of the order.

24.  Finally, I thank counsel for their valuable assistance.