RE NEW UNION DEVELOPMENT LTD.

HCCW 701/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP NO. 701 OF 2000

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J U D G M E N T

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Introduction

1. This is a winding up petition based on the ground that the company has not paid its debt under a Chinese loan agreement dated 16 March 1994 ("the New Union Loan Agreement"). The principal is US$3 million with interest at 11% per annum. As at 25 March 2000, the total amount of indebtedness exceeds US$4 million. While not disputing the amount of indebtedness, the company defends the petition on two grounds:-

(2) The petitioner is in fact an "on-lending" agent and is not entitled to enforce the New Union Loan Agreement in its own rights. I will call this the agent ground.

(2) Alternatively, the petitioner is a money lender but it has failed to comply with section 18(1) of the Money Lenders Ordinance ("the Ordinance") when making the New Union Loan Agreement. (Initially, non-compliance in respect of both sections 18(1) and 19 of the Ordinance is raised. But at the hearing before me, Mr Mak, counsel for the company, does not seek to rely on section 19.) I will call this the non-compliance ground.

2. Apart from the immediate parties, some other companies also featured here. They are:

(a) Guangdong International Trust and Investment Corporation (廣東省國際信託投資公司) ("GITIC"), a PRC company.

(b) Guangdong International Trust and Investment Corporation Hong Kong (Holdings) Limited (廣東國際信託投資(香港)有限公司)("GITIC HK"), a wholly owned subsidiary of GITIC.

(c) Guangzhou International Trust and Investment Corporation (廣州國際信託投資公司) ("GZITIC"), which wholly owns the petitioner.

Proper approach

3. Before I go to the evidence, the first question that needs to be addressed is: what proper approach should the court take in a winding up petition like the present one when the liability in question is disputed? Counsel for both parties agree that the proper test is whether the debt is bona fide disputed on substantial grounds: Re ICS Computer Distribution Ltd [1993] 3 HKC 440, per Rogers J (as he then was) as p 442G - H.

4. Rogers J further held at pp 443C - 444E of the judgment that the onus is on the company against which a petition to adduce sufficiently precise factual evidence to satisfy the court that it has a bona fide dispute on substantial grounds; that it is inappropriate to draw an analogy between this test with that for an application for summary judgment under Order 14; and that as a matter of practice there is no difference in approach between the determination of the validity of a defence to a petition and an application to strike out a petition.

5. With the above in mind, I now turn to the grounds.

The agent ground

6. The company's case on the circumstances leading to the execution of the New Union Loan Agreement is this.

7. In late 1992, the company together with two Chinese parties formed a joint venture company for the purpose of developing a 26 storey commercial and residential building known as Tinze Mansion in Guangzhou. It needed to inject substantial capital in the joint venture company. Lacking funds, the company approached GITIC, who after negotiations, verbally agreed to grant it an unsecured loan of US$3 million. The company agreed to repay the loan to GITIC or its designated agent in Hong Kong within 3 months from drawing down, with interest at 10% per annum and handling charge at 0.5% for every interest period.

8. As instructed by GITIC and pursuant to the arrangement, Mr Yeung Siu Chun ("Mr Yeung"), a director of the company, contacted the petitioner for execution of the loan. The petitioner is the on-lending agent of GITIC in Hong Kong. The company agreed with the petitioner to add on to the interest rate 1% per annum and to the handling charge 0.5% to be payable to the petitioner. In these circumstances, the New Union Loan Agreement was made between the company as the borrower and the petitioner as the lender.

9. The company also relies on certain matters after the execution of the New Union Loan Agreement. Firstly, it had made partial repayments of the accrued interest to GZITIC, which is closely related to GITIC. However, the only documentary evidence adduced in this connection is a copy letter dated 14 October 1997 issued by the petitioner certifying that the company had deposited a sum of RMB$1,397,018.36 (equivalent to US$165,916.67) into GZITIC's account. Secondly, according to a Chinese demand note dated 30 April 1997 ("the April note"), the plaintiff was asked to repay the loan and interest into GZITIC's account in Guangzhou. Thirdly, the petitioner had admitted in a Chinese letter dated 29 October 1998 ("the October letter") that it was an "on-lending" agent of GITIC to advance the loan to the company. Lastly, in a letter dated 23 November 1998 to the company's former solicitors ("the November letter"), the petitioner's solicitors stated that "as your client must be aware that our client is acting as agent for [GITIC] to advance this loan to your client".

10. The petitioner's case is as follows.

11. The parties entered into the New Union Loan Agreement on 16 March 1994. On 15 March, the petitioner entered into a loan agreement with GITIC HK whereby the petitioner borrowed US$3 million from GITIC HK ("GITIC HK Loan Agreement'). Its terms are substantially identical to the New Union Loan Agreement except interest rate is 10% per annum.

12. With a few exceptions, the flow of funds under the two loan agreements was directly between the immediate parties. In connection with the New Union Loan, a total of HK$453,031.32 (equivalent to US$56,508.50) was paid by the company to the petitioner through GZITIC; and a total sum of RMB$1,397,018.36 (equivalent to US$165,916.67) was paid by the company through its joint venture company in the Mainland to the petitioner through GZITIC. (As seen above, this is the same payment the company relies on.) In connection with the GITIC Loan, the only indirect payment was a sum of RMB$1,270,016.64 (equivalent to US$150,833.33) paid by the petitioner through GZITIC to GITIC HK for interest.

13. The company had written four confirmations all dated 31 October 1997 acknowledging that it owed the petitioner an outstanding principal of US$3 million as at 30 April 1994, 30 April 1995, 30 April 1996 and 30 April 1997 respectively. The petitioner had also signed two written confirmations confirming the balances it owed GITIC HK as at 31 December 1994 and 31 December 1997 respectively.

14. The November letter was one of the correspondences between the parties on settlement negotiations. The letters have been adduced as evidence. They are by nature without prejudice but for present purposes, no issue has arisen as to their admissibility. In response to the November letter, the company's former solicitors wrote back on the following day. In that letter, the solicitors categorically denied that the company knew that the petitioner was acting as the agent for GITIC HK. In a further letter dated 15 December 1998, the company's former solicitors stated that whether the company knew that the petitioner was an on-lending agent, which was denied, would made no bearing on the present case; and that the contracting parties under the New Union Loan Agreement were the petitioner and the company.

15. Mr Mak complains that the relevant documents including the loan agreements, the documents showing the flow of funds thereunder and the demand letters were all dressed up to misrepresent that the petitioner was acting as a principal under the New Union Agreement when in fact it was only an agent for GITIC. The petitioner's interest, counsel submits, is actually the 1% interest difference between the two loan agreements. At the very highest, the petitioner is only a nominal plaintiff.

16. Mr Shieh, counsel for the company, submits that under the New Union Agreement, the petitioner was clearly contracting as a principal. It is therefore entitled to enforce it in its own rights. The flows of funds and the parties' subsequent conduct were all consistent with the "principal to principal" relationship. On the April note, counsel points out that the petitioner requested the company to repay the loan into its designated account, namely the GZITIC's account. On the October letter, counsel submits that since the petitioner was chased after by its own lender, namely, GITIC HK, it was only natural for the petitioner to demand the company for repayment. What the petitioner did in the October and November letter was no more than stating the commercial reality. The petitioner was first put in funds by GITIC through the GITIC HK Loan Agreement. It then lent money to the company under the New Union Loan Agreement. Counsel finally submits that in any event, even assuming that the petitioner was an agent, it is nevertheless entitled to enforce the New Union Loan Agreement in its own rights: Bowstead on Agency (16th Ed) at pp 550 - 551.

17. In my view, whether the petitioner is entitled to enforce the New Loan Agreement depends on the true interpretation of its terms. The terms are clear: the petitioner was contracting in its own rights. Nothing in the Agreement supports the contention that the petitioner was an agent of GITIC, GITIC HK or indeed anybody else.

18. Further, the company's contention is contradicted by the undisputed documentary evidence and the parties' subsequent conduct. In my view, the documents clearly show that there was a "back-to-back" arrangement whereby GITIC HK lent US$3 million to the petitioner who in turn lent it to the company. In a loose commercial sense, the petitioner might be referred to as an "on-lending agent". However, it is not an agent as such legally. It contracted as a principal under both the GITIC HK Loan Agreement (as a borrower) and the New Union Agreement (as a lender). And the 1% difference in interest between the two agreements represented the petitioner's profit in the transaction. Both the petitioner and the company had all along acted as a principal under the New Union Loan Agreement. For example, the petitioner designated in the April note the account into which the loan was to be repaid. The company had acknowledged in the four written confirmations for the years 1994 to 1997 that it owed the petitioner money under the New Union Loan Agreement. It even denied the suggestion that the petitioner was an agent of GITIC. I accept Mr Shieh's submission that what the petitioner did in the October and November letter was to merely state the commercial reality. Contrary to Mr Mak's contention, it was not an admission that the petitioner was an agent.

19. I reject Mr Mak's submission that the relevant documents were all dressed up to misrepresent the true relationship between the petitioner and the company. As I understand Mr Yeung's affirmation, he did not suggest that that was the case. Indeed, he did not explain why such a sham was necessary or why the company would agree to take part in it. The attack is entirely unmeritorious.

20. Even if I were wrong and assuming that the petitioner was indeed an agent of GITIC, I agree with Mr Shieh that on the clear terms of the New Union Agreement, it can still enforce it in its own rights: Bowstead on Agency (16th Ed), supra.

21. Accordingly, the agent ground fails.

Non-compliance ground

22. It is common ground that the petitioner is a money lender. The Ordinance requires it to comply with certain conditions when making a loan: see sections 18 and 19. However, the company has not specified in evidence how the non-compliance in the present case arose. Mr Mak submits that there was a breach under section 18(1) of the Ordinance. Section 18(1) provides:

"No agreement for the repayment of money lent by a money lender or for the payment of interest on money so lent ... shall be enforceable unless -

(a) within 7 days after the making of the agreement, a note or memorandum in writing of the agreement is made in accordance with subsection (2) and signed personally by the borrower, and a copy of such note or memorandum is given to the borrower at the time of signing; and

(b) there is included in or attached to such copy a summary, in such form as may be prescribed, of such provisions of this Part and Part IV as may be prescribed,

and no such agreement ... shall be enforceable if it is proved that the note or memorandum was not signed by the borrower before the money was lent ..."

Section 18(3) of the Ordinance stipulates:

"Notwithstanding subsection (1), if the court before which the enforceability of any agreement ... comes in question is satisfied that in all the circumstances it would be inequitable that any such agreement ... which does not comply with this section should be held not to be enforceable, the court may order that such agreement ... is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable."

23. Hardly can it be disputed that the New Union Agreement itself had already satisfied the requirement concerning the memorandum under section 18(1)(a). However, Mr Mak submits that there was a technical breach in that no accompanying summary under section 18(1)(b) had been provided. No such summary had been adduced as evidence before me. He further contends that a new loan was created whenever it was extended from time to time. A new memorandum under section 18(1)(a) was therefore required for each extension.

24. In reply, Mr Shieh first complains that the company having failed to adduce any evidence on non-compliance, the petitioner has been deprived of the chance to deal with it by evidence. Even assuming that there was a technical breach under section 18(1)(b), counsel contends that the court is entitled to look at all the circumstances and to exercise its discretion under section 18(3) of the Ordinance to enforce the loan. Finally, Mr Shieh disagrees that a new loan had been created whenever the loan was extended. Accordingly, there is no non-compliance of section 18(1)(a).

25. On the question of discretion under section 18(3), Mr Mak contends that the absence of prejudice itself is not sufficient. The law should not be flouted by the money lender. The court should be slow to exercise its discretion under section 18(3) and in any event should only do so after all the circumstances have been canvassed after trial.

26. In my view, the burden rests squarely on the company to show non-compliance. Mr Yeung has failed to particularize the alleged non-compliance in his affirmation. It is not sufficient to just leave the matter to counsel to deal with it in submission without adducing sufficiently precise evidence: see Re ICS Computer Distribution Ltd, supra at p 444E.

27. Further, I reject Mr Mak's submission that a new loan was created from time to time when the loan was extended. For all intent and purpose, there existed at all material time only one loan between the parties. I therefore reject the submission that there was non-compliance under section 18(1)(a).

28. Even assuming that there was a breach of section 18(1)(b), it was accepted to be a mere technical one. I am prepared to look at all the circumstances to consider if I should exercise my discretion under section 18(3). I take into account the following factors. Firstly, the New Union Agreement was entered into by the parties after commercial negotiations. There is no suggestion that there existed any inequality of bargaining power between the parties. The company is not an ordinary individual who might be easily exploited by unscrupulous money lenders. It was a commercial entity engaged in real property development. The terms of the New Union Loan Agreement indicate that it was just an ordinary short-term loan. It was clearly an arm-length deal. There is no evidence to the contrary. Secondly, the company has not suffered any prejudice. (I, of course, acknowledge that mere prejudice is not sufficient.) Thirdly, it would appear that the non-compliance point is not raised until the present proceedings. The company had over the years accepted that it was a valid loan and had conducted itself accordingly. Lastly, given it was a technical breach, I am prepared to accept Mr Shieh's submission that the petitioner had attempted to and did substantially comply with the requirements under the Ordinance. In the circumstances, I reject Mr Mak's submission that a trial is necessary before the discretion under section 18(3) can be exercised. And I will exercise my discretion thereunder to enforce the New Union Loan Agreement even if there is a technical breach under section 18(1)(b).

29. Accordingly, the non-compliance ground also fails.

Conclusion

30. For the above reasons, I am not satisfied that the company has raised bona fide any substantial dispute on its liability under the New Union Loan agreement. I will allow the petition and make an order that the company be wound up.

31. I also make an order nisi that the petition do have the costs of the proceeding, to be taxed if not agreed. The order nisi will become absolute within 14 days after handing down.