GUANGDONG INTERNATIONAL TRUST & INVESTMENT CORPORATION HONG KONG (HOLDINGS) LTD v. M.O. HOLDINGS LTD AND OTHERS

HCA 1216/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1216 OF 2001

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J U DG M E N T

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Introduction

1.  This action is part of the process of the recovery of the Plaintiff’s assets following its having been wound up by its creditors by resolution dated 9 November 1998.  In this particular matter the Plaintiff’s liquidators have been faced with incomplete accounting records and documentation, which has made their task a difficult one.  The Plaintiff was the Hong Kong subsidiary of Guangdong International Trust & Investment Corporation [“GITIC”] based in Guangzhou which went bankrupt in highly controversial and much publicised circumstances shortly before the Plaintiff itself was forced into liquidation by its own creditors.  The Plaintiff has been described by Mr Gabriel Tam, one of its liquidators, as a “window” company for GITIC and as such responsible for the raising of capital on the Hong Kong markets which GITIC would use to finance capital projects and other investments on the mainland.  Part of its investment business was to make commercial loans which GITIC would effect in Hong Kong through the Plaintiff.  It is this aspect of its operations that has given rise to this action.

The nature of the claims

2.  The 1^st Defendant, a BVI company, has not appeared nor is it represented.  It is the holding company of the 3^rd Defendant which is registered in Hong Kong.  The 2^nd Defendant is also a BVI company and its role is a limited one, having been used as a conduit for the transmission of funds, some which comprise the subject matter of this action, from the Plaintiff to the 1^st Defendant.  Although the main protagonists before me have been the Plaintiff and the 3^rd Defendant, it is essential to consider the matter against the background of a loan agreement dated 15 October 1997 entered into between the Plaintiff and the 1^st Defendant for USD16,579,752.62.  The action against the 3^rd Defendant is brought by the Plaintiff for repayment of a loan of USD5 million that was made on or about the12 March 1998.

3.  The issue between these two parties is short and stark.  The 3^rd Defendant says that this amount was repaid, on its behalf, by the 1^st Defendant by means of two payments on 7 April 1998 of USD2 million and one of USD3 million on 15 April 1998, together with a payment of interest by itself of USD55,611.11 on 29 April 1998.  This last payment reflects an interest rate of 13% per annum.  If the 3^rd Defendant is right that it owes the Plaintiff no money under this loan then the 1^st Defendant’s indebtedness to the Plaintiff must be increased by that amount.  If the 3^rd Defendant is not able to sustain this view of the facts then it must be liable for this amount and the 1^st Defendant’s liability to the Plaintiff must be commensurately reduced.  The Plaintiff’s case is that the debt by the 3^rd Defendant remains outstanding and that the two payments of USD2 and 3 million by the 1^st Defendant was to reduce its own indebtedness under October 1997 loan from the Plaintiff and that an amount of USD6,309,265.52 still remains outstanding under that loan, together with other sums which I will need to return to presently.

4.  Given the way in which the issue was been presented as between the Plaintiff and the 3^rd Defendant, Waung J. directed at the PTR review, that the 3^rd Defendant bore the evidential burden and therefore should go first as between itself and the Plaintiff which is how the trial has been conducted.

The Difficulties

5.  The essential problem in this matter is that the court does not have any contemporaneous evidence, either oral or documentary, as to the making of the loan by the Plaintiff to the 3^rd Defendant.  All references to it come after the event once the liquidators began to investigate the Plaintiff’s assets, including of course debts that appeared to be outstanding to it.  In such circumstances I am invited to arrive at an ex post facto conclusion having regard to a series of what are said to be relevant facts and circumstances and draw the appropriate inferences from these.  Mr Sussex S.C., for the 3^rd Defendant, whilst accepting, as he must, the paucity or, perhaps better expressed, the absence of direct evidence submits that on a proper analysis of the available evidence and the inherent likelihood arising from that evidence that the only proper inference that I can draw is that the two payments of USD2 and 3 million must have been made by the 1^st Defendant, as holding company of the 3^rd Defendant, for and on behalf of its subsidiary.

The Analysis

6.  Having stated the problem I now turn to how Mr Sussex wishes me to conclusively infer that the 1^st Defendant has discharged the 3^rd Defendant’s debt.

7.  Mr Sussex starts with the Loan Agreement in writing between the Plaintiff and the 1^st Defendant.  It starts at page 80 (Tab 14) of Volume 2.  The loan is for USD16,579,752.32.  He draws attention to the repayment schedule at page 93.  There are two draw-down dates being 31 October 1997 for USD14,990,872.46 and the 10December 1997 for USD1,588,880.16.  The repayment schedule is central to the 3^rd Defendant’s case.  Under the earlier draw-down the first repayment due had to be on 26 April 1998, being an interest only payment, followed six months later with a payment of principal plus interest on 26 October 1998 in the sum of USD4,996,957.40 plus interest.  In respect of the second draw-down the first repayment was due on 1 June 1998 of interest only with a principal and interest payment subsequently due on 30 November 1998.

8.  Addressing that chronology Mr Sussex observes that when the payments of USD2 million and USD3 million were made on 7 and 15 April 1998 respectively, the 1^st Defendant had no obligation to make any repayment under the loan agreement of 15 October 1997.  He therefore submits that it would be very curious for the 1^st Defendant to start reducing its liability under that loan so early and so significantly.  He supports this by referring to the pre-payment provisions under the agreement itself which is Clause 6 (page 84).  Clause 6.02 is the relevant part;

“	The Borrower may repay the Loan or any part thereof without penalty on any business day prior to the Repayment date provided that:-
	(i)	the Borrower shall have given to the Lender not less than 10 days prior notice in writing specifying the amount and date of the prepayment (which shall be Business Day); ….”

There is a (ii) which I need not consider for present purposes.  Nevertheless, it is perhaps also helpful to note that the concluding part of this sub-clause which underlines the procedural strictness of this provision.  It says;

“Any notice of prepayment given by the Borrower under this Clause shall be irrecovable and the Borrower shall be bound to make the prepayment in accordance with such notice.  The Borrower may not prepay the loan, or any part thereof, except in accordance with the express terms of the agreement.”

9.  Mr Sussex’s point here is that no such notice appears to have been sent by the 1^st Defendant.  Discovery has not produced such notices – two would have been required.  The Plaintiff does not appear to have received any.  If such significant early repayments had been made well before the scheduled repayments, one would have expected the Plaintiff to have insisted on strict compliance with the Clause 6.02 provisions and only accepted these prepayments against the 10 day written notices.  Such substantial repayments would have altered the whole tenor of the repayment schedule and one would therefore have expected to see the documentation supporting such payments.

10.  This is Mr Sussex’s main point, but he adds to it by referring to documents that were found by the liquidators in the Plaintiff’s envelope or file which formed part of its records in relation to the loan by it to the 1^st Defendant.  These are in volume 2 at pages 173, 178, 179 and 180.  Page 179 is dated 3 November 1997, and so in terms of timing perhaps not especially helpful, which shows the interest calculation in respect of the interest payment due on 26 April 1998, on the first draw-down dated 31 October 1997.  This document having been dated 3 November 1997, a few days following the draw-down and relating to interest that was to fall due some six months later on 26 April 1998 is perhaps indicative of the document being pro-forma in nature, merely recording on 3 November 1997 what the Plaintiff was expecting to receive six months later in April 1998.  The same comment must, I think, also apply to the document at page 178 which is dated 11 December 1997, the day following the draw-down on the second tranche of the loan, calculating the interest that would be payable six months later on 1 June 1998.  Mr Sussex places stronger reliance on the documents at page 179 and 180 dated 29 April 1998 and 8 June 1998 which pick up the indebtedness position on both tranches of the draw-down after the first payment of interest would have been payable and after (this is Mr Sussex’s point) the two payments of USD2 and 3 million had been made on 7 and 15 April 1998.  These payments are not reflected in the documents at pages 179 and 180.  Therefore, says Mr Sussex, it must have been clear in the Plaintiff’s estimation of these matters that these two large payments were not referable to the loan of October 1997 but to something else – the 3^rd Defendant say to the repayment of its own loan by its holding company the 1^st Defendant.

11.  At first blush that is a highly attractive submission to make and I would have thought a conclusive one if there was some other evidence in support of it.  The fact is that the best and only evidence that there is, is that the documents were not sent to the 3^rd Defendant, but were discovered in an envelope in the Plaintiff’s papers by the liquidators’ staff.  I also don’t know whether the document at pages 179 and 180 were prepared on the dates that appear on them or whether they too are pro-forma in nature setting out what the expected position was to be.  It seems to me that I should not, at this stage, take them at face value without more.  I am able to safely conclude that they were not sent – the 3^rd Defendant did not receive them and although they do undoubtedly represent the Plaintiff’s thinking as to outstanding balances at certain periods of time in the future, I am not able to safely conclude that they were created on the dates that they bear [pages 179 and 180 that is].  As to the document at pages 172 and 178 one can perhaps more readily infer that they were prepared on or close to the date that they bear but these do not assist Mr Sussex in the way that he seeks to deploy pages 179 and 180.

12.  Nevertheless, there is more about this loan to the 3^rd Defendant from the Plaintiff’s own directors which Mr Sussex gladly draws to my attention.  The liquidators’, having broadly taken stock of the Plaintiff’s asset and liability position, discovered that a sum of USD5 million was outstanding.  They then wrote to the 3^rd Defendant, on 26 April 1999 requiring repayment of this amount (page 2/130).  The 3^rd Defendant replied on 11 May 1999 (page 2/132) spelling out the repayment in the way that I have already indicated.

13.  Not content with that reply the liquidators, perfectly correctly, wrote to the Plaintiff’s former directors seeking confirmation of the position.  Their letter to this effect is dated 11 June 1999 (2/193 – item 6 page 194) this letter being part of a wide ranging enquiry by them into a number of items relating to the liquidation.  They received a reply from the directors on 19 June 1999 (2/71 @ 73 item 6) to the effect of the USD5 million loan was a short term advance which had been fully repaid.  In view of this Mr Sussex says that here is as good a confirmation as one can get that this amount has indeed been repaid which serves to corroborate, in a highly persuasive way, the documentary evidence to which I have already referred.

The live evidence

14.  Mr Sussex has called one witness, Madam Tse Yuk Lan, the 3^rd Defendant’s Assistant General Manager at the time of these events, whose evidence does not and cannot advance the 3^rd Defendant’s case any further than what is to be seen from the documents which I have already referred to.  Her first witness statement makes the bare assertion that the debt had been repaid.  She was tendered for cross-examination and it is plain from her answers to Mr Carolan, for the Plaintiff, that her knowledge of this matter is sketchy and certainly, at best, second hand.  As to the interest payment of USD55,611.11 she has put in a second witness statement purporting to show how this comes to 13% (1/49).  She told me that she had seen a slip of paper with this calculation which had come from the 3^rd Defendant’s accountant who had told her that the interest rate was 13%.  There is therefore no direct, hard evidence that the agreed rate of interest was 13%.  What I have is a case of reverse arithmetic showing that USD55,611.11 comes to a rate of 13% per annum.

15.  Mr Gabriel Tam, the liquidator, has given evidence for the Plaintiff.  He of course has done his best but cannot rarely advance the enquiry any further.  The high point of his evidence is that he spoke to Mr Wu, one of the two directors of the Plaintiff who had originally said that the Defendant had been repaid.  According to Mr Tam, Mr Wu could not confirm whether the USD5 million had been repaid by the 1^st Defendant on behalf of the 3^rd Defendant.

The Result

16.  The question is whether, on all of the evidence, the 3^rd Defendant has been able to step over the threshold of proof and show that it is more probable than not that this amount, which was undoubtedly paid, was paid by the 1^st Defendant on behalf of the 3^rd Defendant in respect of this particular loan.  It needs to carry the burden.  In my judgment it has.  There is a coherent logic in the way that Mr Sussex has drawn together the various strands of the evidence on the contemporaneous documents.  Neither live witness can improve on that evidence and in this regard I have paid considerable attention to Mr Tam’s account as to his recent conversation with Mr Wu but, at the end of the day, this conversation cannot affect the way that the scales have fallen.  Even giving this conversation full value, as it were, it cannot disturb the picture that emerges from the contemporaneous documents which in my judgment hold together for the reasons that Mr Sussex has advanced in the course of the argument.  In respect of the interest payment, the 13% rate which is calculated based on the amount of the payment over the period of time of the loan, is perfectly understandable and, as to the rate itself, appears to be entirely sensible, being a higher rate than for the loan to the 1^st Defendant given the fact that it was to be a short term advance.

17.  Accordingly, the claim against the 3^rd Defendant must fail, where for the reasons that I have given I find that the amount has been repaid by the 1^st Defendant for and on behalf of the 3^rd Defendant, together with contractual interest, which I find to have been 13%, paid by the 3^rd Defendant itself.  There will therefore be judgment for the 3^rd Defendant.  This being so the Plaintiff must pay the 3^rd Defendant its costs of the action, to be taxed on a party and party basis.  This part of the order will be an order nisi in the usual way.

As against the 1^st Defendant

18.  The Plaintiff claims against the 1^st Defendant must succeed with the amount of the judgment being for the greater amount, as appears in paragraph 9 (b) of the Re-amended Statement of Claim, together with interest on that amount as appears in Clause 5 of the loan agreement between the Plaintiff and the 1^st Defendant.  The Plaintiff should also have its costs of the action against the 1^st Defendant to be taxed on a party and party basis.  This will also be an order nisi and in addition I will give the Plaintiff an opportunity, if he so wishes, to be heard as to whether it should recover the costs that it must pay the 3^rd Defendant from the 1^st Defendant, provided it submits its application to do so within 14 days of the date of this judgment, in which case I will give directions as to how I propose to hear the argument.  It may well be that this can conveniently be dealt with on paper.  Lastly, given the terms of this judgment and that it is being handed down, I wish to hear from the Plaintiff by letter in the first instance, as to what form of order I should make against the 2^nd Defendant.