TOPPAN PRINTING CO v. CHINESE UNITED PRESS LTD AND ANOTHER

HCA 2898/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2898 OF 2002

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J U D G M E N T

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Introduction

1.  Between May and December 2001 the plaintiff printed a number of issues of a weekly magazine called the CUP magazine having contracted to do so with its publisher, the 1^st defendant.  When in December the contract was terminated $6,593,218.36 in printing charges was due and outstanding.  By this action the plaintiff sued the 1^st defendant for this amount and, unopposed, was awarded judgment.  But the 1^st defendant was by then insolvent and is now wound up; from this source there has been no recovery.  This claim is against the 2^nd defendant for repayment of the same debt.  The 2^nd defendant was at the material time parent of the 1^st defendant.  The plaintiff claims that the 2^nd defendant agreed in October 2001 to meet all of the 1^st defendant’s unpaid accounts with the plaintiff in consideration for a revised, discounted rate.  The defence is that there was not and never has been an agreement in which the 2^nd defendant was or is now committed to pay the 1^st defendant’s debts due to the plaintiff; thus liability is denied.

Background

2.  The 2^nd defendant began life when it was incorporated in Bermuda in May 2000.  By this time there was already in existence a group of companies having common ownership and objectives; the coming into being of the 2^nd defendant was for the purpose of rationalizing the group under the 2^nd defendant as its holding company thus to qualify for listing on the GEM stock exchange in Hong Kong.  Following its incorporation the 2^nd defendant achieved that listing in July 2000.  The core business was promoted as being on-line advertising and shopping and providing            e-business solutions to customers.  The Board of Directors comprised 8 directors being executive and non-executive.  Those most prominent and who feature in this case are Messrs Saimond Ip and Albert Cheng.  At the material time Mr Ip held office as Chairman of Directors and CEO of the 2^nd defendant and the subsidiaries.  Mr Cheng has been described as founder executive director and chief i-content architect, which translates to mean that he was mainly responsible for the design and set-up of the company’s website.

3.  In early 2001 the 2^nd defendant by its Board resolved to publish a magazine called CUP magazine.  For the purpose it incorporated the 1^st defendant with a share capital of $2.  The 1^st defendant did not have and never has had any assets beyond that nominal share capital.  It was the wholly-owned subsidiary of Cyber Communications Corporation Limited.  Cyber Communications was itself a wholly-owned subsidiary of the 2^nd defendant.  The plaintiff is a long established Hong Kong company specialising in the printing of weekly periodicals and books.  It is part of a group of companies with headquarters in Japan.  The group is large enough to be included in the Fortune 500.  At the material time the plaintiff’s managing director was a Mr James Lee.  He has been described as a veteran in the industry with 40 years experience.  He has since retired but remains with the plaintiff as an advisor.  A senior member of the plaintiff’s management was and remains a Mr Wong Tak Shing.

4.  The extent to which Messrs Ip and Cheng were authorized by the 2^nd defendant’s Board to found the CUP magazine and meet the associated expense of that is not agreed as I shall come to.  Suffice to say they were as CEO and founder respectively those responsible for getting things under way.  Mr Ip was in charge of business and administration.  Mr Cheng with extensive experience in publishing was chosen to be responsible for editing and content.

5.  In March 2001 Messrs Ip and Cheng for the 2^nd defendant on the one hand and Messrs Lee and T S Wong for the plaintiff on the other sat down to dine at the Grand Hyatt for the purpose of negotiating prospective terms of a contract for the printing of the CUP magazine.  Messrs Cheng and Lee were longstanding acquaintances in the field but had not contracted before.  I shall come to details of the meeting later; suffice for this background to say that the upshot was that in April 2001, at or shortly after the incorporation of the 1^st defendant, the plaintiff as printer contracted with the 1^st defendant to print and bind the 1^st defendant’s CUP magazine.  No issue is taken with the specifications or other details.  Pertinent terms were that the magazine would issue weekly and that the contract would run for 12 months unless terminated by either party on 3 months’ notice.  Credit terms were agreed; that is 120 days from invoice, but the 1^st defendant was required to put up a deposit of $5 million.

6.  By undated letter but said to have been written and sent at or about this time the 2^nd defendant’s secretary wrote to the plaintiff to state that the 1^st defendant was a wholly-owned subsidiary of the 2^nd defendant.  But the 2^nd defendant was not a party to the contract or otherwise referred to.

7.  A cheque for $5 million dated 15 May 2001 drawn on Cyber Communications was duly paid to and received by the plaintiff.

8.  Printing then got under way.  The first issue was put out in May and it was thereafter printed weekly.  The plaintiff invoiced the 1^st defendant upon production of each issue.  The invoices were paid at or about the expiry of the agreed credit period.  So far so good.  Then it was that in September 2001 a decline in circulation numbers and a lower than expected income from advertising caused Messrs Cheng and Ip to negotiate revised, discounted prices with the plaintiff.  The parties by an exchange of letters agreed to revised terms on 28 September.  In general terms this amounted to a discount of 4.8%.

9.  Then the following letter was sent on Mr Cheng’s letterhead with the 2^nd defendant to the plaintiff:-

10.  The signature thereon is Mr Cheng’s.  The extent to which or whether at all this evidences a commitment by the 2^nd defendant to the plaintiff is the central and crucial issue in these proceedings.

11.  By 19 December the plaintiff for the period 12 July to 19 December 2001 had invoiced a total of $11,593,218.36.  By virtue of the credit terms some but not all of this was then due.  But in the event as I shall come to none of it was paid.

12.  By about mid-December Messrs Cheng and Ip decided that the magazine should issue monthly not weekly.  The contract with the plaintiff, whose operation was geared to printing weekly periodicals, was discontinued.  (The appropriate notice was not given, but no point was made of this.)  The 1^st defendant wrote to the plaintiff on 20 December 2001 offering to pay the amount due, which after credit of the deposit of $5 million came to $6,593,218.36, by instalments over a number of months.  There was no response; in the event, nothing was paid.

13.  By this time the 2^nd defendant was in trouble.  It had assets but a shortage of cash and was unable to meet the groups’ debts.  Two options presented themselves to the Board; raise money or restructure.

14.  By January 2002 the Board of the 2^nd defendant was talking to those representing the backers of a group of companies called the Mobile Media Group who were looking to take a controlling interest in a GEM listed company for the purpose of achieving a listing for the group.  The holding company of the group was called Fortune Impact Limited.  Its shareholders were called Gold Focus Limited and Tiger Princess Company Limited.  The discussions proved productive.  In what may be described as a reverse takeover, on 18 April 2002 the 2^nd defendant acquired all the shares in Gold Focus and Tiger Princess in consideration for the vendor shareholders taking a new allocation of shares in the 2^nd defendant, of such significant size as to give them a controlling interest in the 2^nd defendant.  As a part of the deal the existing eight directors including Messrs Ip and Cheng resigned, and were replaced by those who controlled Gold Focus and Tiger Princess.  Thereafter neither of Messrs Ip or Cheng played any further part in running the 2^nd defendant.  It was at this time that the 2^nd defendant changed its name from 36.com Holdings Limited to M Channel Corporation Limited.

15.  The plaintiff looked to the 2^nd defendant (as restructured) for recovery of the balance of the debt incurred by the 1^st defendant.  The 2^nd defendant by its reconstructed Board got rid of its subsidiary the 1^st defendant and denied liability of the debt which it said was the responsibility of the 1^st defendant.

16.  That denial persisted.  These proceedings have resulted.

The Pleadings

17.  For reasons that will become apparent it is necessary to deal with these as they developed.

18.  The writ and statement of claim were filed in July 2002.  At this stage the claim was against the 1^st defendant alone suing for moneys due and owing under the various invoices that issued pursuant to the printing contract between the parties of April 2001 (the contract is described as having been made on 30 March 2001; I shall deal with this discrepancy in due course).  The amount sued for was the balance due after credit of the deposit of $5 million being $6,593,218.36.  Judgment by default with costs was awarded against the 1^st defendant in October 2002.  As I have said this is an empty judgment.  Meanwhile in September 2002 the 2^nd defendant was joined and the statement of claim amended to incorporate a claim against it.  Referring to the printing contract between the primary parties, it was pleaded that the plaintiff had contracted with the 1^st defendant in reliance on a guarantee verbally given by Mr Cheng on behalf of the 2^nd defendant to guarantee all moneys due by the 1^st defendant to the plaintiff.  So, the suit included a claim against the 2^nd defendant for the same sum.

19.  But there was to be a further amendment, made in January 2004, some 15 months later.  This is the statement of claim that is before me.  By this the plaintiff deletes its reference to a guarantee made prior to the printing contract of April 2001 and refers for the first time to the revised terms propounded in or about September 2001.  It now pleads that the October letter (the one written by Mr Cheng to Mr Lee of 3 October) ‘constituted a further agreement by the 2^nd defendant that it would be responsible for the debts of the 1^st defendant should the latter fail to pay the plaintiff’.  (Pausing here, reference to a further agreement would appear to be a misnomer; as now pleaded there was no prior agreement between the plaintiff and 2^nd defendant).  Then it claims that in consideration of the October letter the plaintiff gave a further discount to the 1^st defendant.  The amended statement of claim goes on to recount that during the first 3 months of 2002 Mr Cheng repeatedly acknowledged liability on behalf of the 2^nd defendant.  The claim now sued for is by virtue of breach of the October letter and, further, by reason of the ‘further confirmations’ the 2^nd defendant is estopped from denying liability.

20.  The defence as pleaded is that there was never any binding or enforceable agreement, commitment or undertaking made by the 2^nd defendant to meet the unpaid debts of the 1^st defendant with the plaintiff; that the amendment to the terms of the printing contract made in September 2001 was as between the plaintiff and 1^st defendant and did not concern the 2^nd defendant.  The 2^nd defendant did not commit itself to settle the debt and did not authorize Mr Cheng to do so on its behalf.

The Issues

21.  Although there are pleaded three heads by which the 2^nd defendant is bound, it seems to me and I so find that the plaintiff’s case stands or falls on whether the October 3 letter represents a binding and contractual commitment by the 2^nd defendant to meet its subsidiary’s debt due to the plaintiff.  As a necessary ingredient of that is whether its author Mr Cheng was authorized to write it.

22.  For these answers it is necessary to go into the evidence.  That for the plaintiff was adduced by Messrs Lee and T S Wong, respectively managing director and senior manager of the plaintiff at the two stages of contractual commitment and revision of terms and thereafter up to the issue of the writ.  In an unusual twist, their account is supported by those of the 2^nd defendant who were hands-on during this engagement; these being Messrs Ip and Cheng, respectively CEO and executive director.  In opposition I heard from a Mr Wong Kun To.  At the time of the restructuring he was a leading player in Mobile Media Group and became and is now Chairman and CEO of the 2^nd defendant.  He had no direct involvement in the company during the history; but he puts forward the case of the 2^nd defendant under restructured management that there are no records or other contemporaneous documents that support the plaintiff’s case, the burden being upon it to establish its claim.

The Evidence

23.  I shall deal with the evidence of Messrs Ip and Cheng first.  Both said the decision by the 2^nd defendant to found a new magazine to be called CUP was a considered one.  The Board saw the need to diversify the operation run by the Group consequent upon the declining popularity of the dotcom phenomenon.  The publication of a weekly periodical was seen as a complementary product.  Cross-examined on the issue of authority, both said that a properly constituted Directors’ meeting was called and, after discussion, it was resolved that the two of them should head a new subsidiary and, with an approved budget, commit to such costs as were necessary to get the magazine up and running.  Both said that the Board gave them full authority to represent the parent in employing such staff and meeting such other expenditure as they deemed necessary.  This included engaging a printer, one of the more crucial features of a successful publication.  Asked about the separateness of the proposed subsidiary from the 2^nd defendant, both said that it was the Group’s policy to incorporate another company when a new venture was being undertaken.  Mr Ip said it was in this particular case for appeasing advertisers, linking the name of the magazine to the publisher.  Mr Cheng agreed with that but also said it was commonly undertaken in publishing circles; in case of a defamation suit the parent would be one step removed from financial exposure and bad publicity.  It was put to both that an important aspect was that the parent would escape liability for unsettled bills should the venture fail.  Both denied that, saying that the costs would be borne out of consolidated funds.  Both said that the decision to proceed was documented in a properly constituted minute and Board resolution.  But no such document was recovered in discovery and I was not told why.  In particular, there was nothing to tell me that the Board was committed to protect the 1^st defendant’s creditors should the magazine founder.  Nor was this pleaded.

24.  Mr Cheng said on the matter of choice of printer he spoke to Mr Lee because of his and the plaintiff’s reputation.  At the dinner meeting at the Grand Hyatt Mr Lee expressed concern about dealing with a shell company having no assets; he asked for security such as a bank’s guarantee.  It was Mr Cheng who countered with a $5 million deposit; he said it was for two reasons.  The first was that before a bank would commit to a guarantee it would require a deposit in any event, and fees on top of that.  The second was that it gave opportunity to lever a discounted rate and a greater than normal credit period out of the plaintiff; in the end that worked.  Mr Lee seemed satisfied that the $5 million was sufficient security having regard to the expected exposure.

25.  The return to the table to renegotiate terms in September 2001 was because whilst the circulation numbers were reasonable the revenue from advertising was lower than expected; the Board had put pressure on to try for a bigger discount.  Mr Cheng said he explained the circumstances to Mr Lee.  Mr Lee was prepared to reconsider the terms.  But he had reservations.  There had not been default in meeting the invoices, but latterly one or two payments had been late beyond the 120 days credit period which was already a generous one.  And there was, because of the length of credit, exposure beyond the $5 million bond.  And here was Cheng saying business was not good.  He needed to be assured that in the event of the 1^st defendant being unable to pay its bills the 2^nd defendant would do so.  If he was able to get that assurance in writing then he would commit the plaintiff to a discount of 4.8% of the current rate.

26.  Mr Cheng agreed and wrote the letter of October 3.  Asked whether he had the Board’s approval to write that letter, and in particular whether their was a resolution authorizing him to commit the 2^nd defendant, he responded ‘No.  I already had the authority of the Board.  According to the Board’s resolution (of January 2001) and authority vested in me I had authority to write the letter.  I did not need a specific authorizing resolution.’  Of course what he is saying here is that the Board resolved to permit him to go to any creditor of the 1^st defendant and commit the 2^nd defendant to pay whatever amount was due by the 1^st defendant and unpaid.  But that resolution was for some reason not produced.  Nor were its terms pleaded.

27.  As it turned out the reduced costs were not enough to resolve the problem.  The September terrorist attacks in New York and loss of business confidence caused a further reduction in advertising revenue, and the net worth of the Group overall had slumped by 95%.  By December there was about $10 million in the bank, down from $100 million.  Staff were laid off and much of what was left was expended to meet statutory redundancy payments.  There was nothing available to pay the plaintiff.  By this time the debt was $6,593,218.36 after deduction of the deposit.  It was at this time that Messrs Cheng and Ip decided to change the concept to a monthly magazine and they terminated the contract with the plaintiff. A new printer was arranged whose operation was geared to the monthly format.  Of the plaintiff’s bill, Mr Ip was asked whether he regarded the 2^nd defendant as being liable to pay.  His response was ‘Yes, we believed we were liable.  But we wanted to negotiate terms of payment.’

28.  It was at this time that the Board was actively pursuing means of getting past the cash shortfall difficulty by raising money or restructuring.  The letter of 20 December 2001 looking to pay by instalments was to buy time.  But until there had been a refinancing or reconstruction, even those terms were beyond the resources available.

29.  When Mr K T Wong and his Mobile Media Group emerged the problem seemed to be ready to be sorted out.  Messrs Lee and T S Wong were kept informed and asked to be patient.  During the meetings and negotiations that followed with the tabling of the Group’s accounts the CUP magazine’s liabilities were fully aired and the unpaid debt of more than $6.7 million was specifically referred to as moneys due.

30.  The response from Mr K T Wong was that this debt could be reduced by a major haircut, by which was meant that the creditor should be offered a percentage of what was due in settlement of the bill.  If it was not prepared to co-operate then it could be left to wind-up the subsidiary and be paid nothing.  This of course was on the basis that the 2^nd defendant was not liable.  Mr Cheng said he assured the investors that the 2^nd defendant was liable to meet the debt.  He said he explained that the company as the debtor’s parent had committed itself to meet the debt.  As he said the response was ‘There’s no harm in trying’, by which he understood them to mean that they would try for a reduction.  He said they left it at that.  The restructuring proceeded and on 18 April Messrs Ip and Cheng resigned their positions and left the 2^nd defendant.

31.  I heard next from Messrs Lee and T S Wong of the plaintiff.  Negotiations concerning the proposal for the plaintiff to print the CUP magazine were undertaken over a passage of time; the occasion of the Grand Hyatt dinner was when the deal was finally struck.  Mr Lee said it was only then that he was told that the publisher and contracting party was to be a $2 shell company yet to be incorporated.  It was particularly because of this that he called for a bank guarantee and, in the end, settled for the $5 million deposit.  It was at his request that a letter was written, the undated one, to confirm the parenthood of the 1^st defendant.

32.  When the reduction in terms was proposed in September Mr Lee said his immediate concern was that the plaintiff was exposed beyond the deposit held; if the magazine was as Mr Cheng said not performing as well as was hoped for there was the risk of loss.  Whilst prepared to assist a customer to get past hard times he took the opportunity of requiring an assurance in writing that the 2^nd defendant would be fully responsible; hence the letter of 3 October.

33.  Following the termination of the contract in December he left it to Mr T S Wong the sales manager to pursue the debt.  Mr Wong said he received the letter proposing payment by instalments but nothing was received.  Over the passage of the next three months he made contact with Mr Cheng who assured him that the 2^nd defendant would pay once the restructuring that was pending was complete.  But still nothing was forthcoming.  Then he wrote to the 2^nd defendant care of Mr Cheng on 17 May 2002 a letter before action.  Of course by then Mr Cheng had departed the scene.

34.  This brought the following response which I repeat verbatim:-

35.  M Channel Corporation Limited was the 2^nd defendant’s new name and Mr K T Wong a new executive director.

36.  I come now to the evidence adduced for the 2^nd defendant by Mr K T Wong.  He was from the outset an appointed executive director who took office at the point of settlement of the restructure on 18 April 2002.  Subsequently he has been appointed Chairman.  He played an active role in the negotiations leading up to the reconstruction and thereafter.  He said the principal attraction of the 2^nd defendant was that it was listed, on the GEM, which was an objective of the Mobile Media Group that was, in the reconstruction, to be absorbed by the 2^nd defendant.  He was well aware of the publishing arm of the 2^nd defendant run under the 1^st defendant, of the cost in the consolidated fund of the printing and the outstanding debt of more than $6 million due to the plaintiff.  But he understood this to be a debt of the subsidiary and that the parent was not liable; he said he was not told otherwise.  Specifically he was not shown the letter of 3 October and was not aware of its contents.  He agreed the debt was referred to in discussions.  He agreed he said that a haircut should be pursued.  He knew, because Cheng said so, that the pursuing of a discounted settlement was not popular.  But there was nothing said about a legal commitment.  And in the end Mr Cheng said he would follow this up.  He said the group he represented had no wish to continue the publishing of the CUP magazine or any other magazine and so soon thereafter as the reconstruction was completed they got rid of it.

37.  He responded to Mr T S Wong’s letter before action because he had no knowledge of any obligation by the 2^nd defendant to meet the debt, and had no wish to expend company funds in a gratuitous payout.

38.  He got to know of the 3 October letter only some months later when reference to it emerged in the amended pleadings.  Then he caused a search to be made of the 2^nd defendant’s records but could not find a copy of the letter or of any Board resolution authorizing its being written or otherwise containing an authority to commit the company to the debt due by the 1^st defendant to the plaintiff.  He questioned the authenticity of the letter.

39.  He was asked then about whether he had conducted a search of and seen any minutes incorporating any Board resolution concerning the origins of the CUP magazine in January 2001.  His response was ‘I don’t remember.  I may have.’  It was put to him that there was a resolution by the 2^nd defendant’s Board authorizing Messrs Ip and Cheng to commit the 2^nd defendant to the publication and he responded: ‘I don’t know.’

Discussion

40.  An unusual feature of this litigation is that the plaintiff’s cause is supported by those who were in the 2^nd defendant at the time the alleged commitment was made.  That must go some way towards establishing that was intended and what happened.  But the paucity of contemporary documents and other features do not by any means render the result a foregone conclusion; particularly, the burden remains with the plaintiff to prove its case.

41.  The following matters emerged from the evidence:-

(1)	The original contract was between the plaintiff and 1st defendant.  (Before proceeding further there is the matter of its date to resolve.  As I have mentioned it is referred to in the pleadings as being dated 30 March 2001.  That is the date shown on the document.  The evidence whilst not conclusive is that it was in fact signed in early April.  The significance of this is that if 30 March were in fact the date it was signed then it was signed by the 1st defendant before it came into existence and with no subsequent ratification.  The point has been taken.  But I am satisfied and find as a fact that it was signed in April when the 1st defendant was already incorporated).  The 2nd defendant was not a party.  Consequent upon the pleadings being amended there was no longer any suggestion that it was proffered as a guarantor.  Mr Cheng formed the view that it would honour any commitment that the 1st defendant would be unable to meet, but there was nothing produced to verify this.  The Board resolution I was told about was not available.  Mr Lee seemed to have been satisfied with the terms propounded without the need for a guarantee from the parent; after all he had a $5 million buffer.  The undated letter that the 1st defendant was a wholly-owned subsidiary of the 2nd defendant was neither here nor there;
(2)	When it came to revised terms, these were concluded by an exchange in correspondence before the end of September.  Acceptance by the plaintiff was not made conditional upon the 2nd defendant guaranteeing the 1st defendant’s commitment;
(3)	The wording of the October letter begins by confirming the revised terms.  It post-dated the revised terms.  It does not purport to be an integral part of them.  It is at best ambivalent on just what it is that the 2nd defendant’s obligations are stated to be;
(4)	Mr Cheng on his own admission had not sought Board approval to commit the 2nd defendant to a without-limit guarantee.  He may have had a mindset that he had that approval but there was nothing produced to show that this was justified;
(5)	There is a singular lack of publicity surrounding the October letter.  The plaintiff in pressing for payment made no reference to it.  It was not shown to Mr K T Wong or his associates during the restructuring negotiations nor otherwise referred to even when the issue of the 2nd defendant’s liability was being debated.  It was not mentioned in the pleadings until 18 months after the issue of the writ.  It was not referred to in documents, professionally prepared, when the restructuring was implemented;
(6)	As a matter of fact I am satisfied that during these negotiations the prospective new management was not told that the debt that Mr Cheng was urging be paid was legally due;
(7)	The consolidated accounts that were produced and presented for consideration leading up to the restructuring were full and frank; they included an expense which reflected the amount outstanding to the plaintiff.  But these were as per GEM regulations consolidated accounts, not necessarily to be borne by the holding company; indeed a note therein revealed that the debt identified as the unpaid printing costs was not of the 2nd defendant.  Mr K T Wong in the absence of anything suggesting otherwise was entitled to treat it as being a group debt, with different considerations as to whether it should be paid.

42.  With these factors and findings in mind, I turn to the issues and the questions to be answered; namely, was the October letter a binding commitment on the 2^nd defendant as to its future conduct?

43.  A number of cases have been put before me on the issue of whether a letter written by a parent company to a creditor of a subsidiary has the force of binding the parent.  As Keith J said in Bouygues SA v Shanghai Links Execution Community Limited [1998] 2 HKLRD 479, the issue is ultimately one of construction.  As he said, the absence of express words of promise means that it is necessary to consider carefully the context in which the letter is written.

44.  In this case the letter was written after the parties had already committed to revised terms.  So there was a want of consideration.

45.  Further, the words in a written document must be objectively construed in the context of the factual background known to the parties at or before the time of the contract.  But previous negotiations and subjective intentions of the parties are irrelevant; see ICS v West Bromwich Building Society [1998] 1 WLR 896.

46.  The only pertinent words in the October letter are those in the final sentence.  These are almost without meaning, viewed objectively, and most assuredly do not amount to a commitment in the form of a limitless guarantee.  Bearing in mind Mr Lee’s profound experience and the plaintiff’s status in Hong Kong and worldwide, it beggars belief that they would be content to rely on such a casual expression of intent.  And conduct post the event, namely, silence covering the existence of the October letter, does nothing to assist the plaintiff’s cause in promoting it to having the binding force of a contract.

47.  There is, in short, a lack, indeed a total lack, of the requisite degree of certainty such that the parties could not have intended to have been bound by the terms of the October letter.

48.  For the sack of completeness I shall deal with the second question, namely, was Mr Cheng authorized to commit the 2^nd defendant to the 1^st defendant’s debt?

49.  Conceding that there was no formal Board resolution to this effect, Mr Cheng said he already had the Board’s authority by virtue of the resolution I was told was passed in January 2001 and his executive office.  As far as the resolution is concerned that was not available for me to sight.  And the existence of such authority was not pleaded.  According to the pleadings, given the abandonment of the original claim, the first commitment by the 2^nd defendant emerged in the October letter, so the requisite authority had to be forthcoming when that emerged from Mr Cheng’s pen.  And this was no idle matter.  The 2^nd defendant was effectively being required to commit to a debt without limit, with the principal debtor in some difficulty; thus there was the reasonable prospect that it would be required to honour it.  Shareholders’ funds were at risk.  This cried out for a considered Board view and formal authorization.  And there was none.  Mr Cheng’s office of executive director gave him no unilateral powers in lieu thereof.

The Outcome

50.  I find in favour of the 2^nd defendant that there was no contract which bound it to meet the unpaid debt due by the 1^st defendant to the plaintiff.  The claim against it is dismissed.  Costs including any reserved nisi at first instance are to the 2^nd defendant taxed if not agreed.