KAN CHI CHUEN v. NEW HAPPY LTD. AND OTHERS

CACV 1531/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 1531 OF 2001

(ON APPEAL FROM HCA 8958 OF 2000)

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JUDGMENT

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Hon Woo JA (giving the judgment of the Court):

Introduction

This is an appeal by the 1st, 2nd and 3rd defendants from an order of Waung J made on 1 June 2001 dismissing their appeal from Master Jones who had entered summary judgment against all the 3 defendants in respect of the claim in the plaintiff's statement of claim made against each of them for the amount of $2,150,000.

2. The Judge held that the defence set out in the defendants' affirmations of a set off agreement or representations in 1995 was not made out. Against this decision, a number of grounds are raised in the Notice of Appeal, both on law and on fact.

The background and the defence

3. The basis of the claim is set out succinctly in the statement of claim. The 1st defendant is a limited company with two directors, the 2nd and 3rd defendants. By a written agreement dated December 1994 signed by the 2nd and 3rd defendants, they acknowledged and agreed that the plaintiff had lent to the 1st defendant sums totalling $5,500,000; they guaranteed that the 1st defendant would repay the loan in one month with interest at the rate of 15% per annum; they further guaranteed to compensate the plaintiff for the difference in exchange rate as $2,500,000 of the loan was converted from Dutch marks into Hong Kong Dollars by the plaintiff; the 1st defendant had repaid $2,500,000 leaving a balance of $3,000,000; and they delivered three cheques all dated 1 May 1995 to the plaintiff as security for the outstanding principal, the difference in exchange rate and interest, namely, a cheque for $3,000,000, a cheque for $301,434.34 and another cheque for $401,917.80.

4. By another written document dated 24 May 2000 signed by the 2nd and 3rd defendants, they acknowledged and agreed that the said three cheques were dishonoured upon presentation for payment; on 7 August 1995, the 1st defendant drew a cheque for $400,000 to replace part of the cheque for $401,917.80, and this replacement cheque was paid; on 25 August 1998, the 1st defendant drew another cheque for $303,352.13 to replace the cheque for $301,434.33 and the balance under the cheque for $401,917.80; at a meeting held on 14 November 1998, the plaintiff and the 2nd and 3rd defendants agreed that the outstanding principal be reduced by $500,000 being trade debts owed by one of the plaintiff's companies to the 1st defendant; and the 2nd defendant drew a cheque for $2,500,000.

5. On 30 May 2000, the cheque for $2,500,000 was dishonoured upon presentation for payment.

6. By a written agreement dated 6 June 2000 signed by the 3rd defendant, the 2nd and 3rd defendants agreed to repay the $2,500,000 by instalments in the following manner ("the Agreement"):

(a) They repaid $150,000 on that day leaving a balance of $2,350,000.

(b) A sum of not less $100,000 should be repaid by the 20th day of each month until the whole outstanding balance was fully settled.

(c) As a security for the repayment, the 2nd and 3rd defendants drew a cheque for $2,350,000.

(d) If they failed to honour their promise to repay by instalments, the plaintiff should require them to repay all the outstanding balance at one go and should charge interest at the rate of prime plus 2 per cent.

(e) The plaintiff should also present the said cheque for payment in such event.

7. The 1st defendant only repaid a sum of $100,000. There was no repayment of not less than $100,000 by 20 August 2000. Pursuant to the Agreement, the plaintiff presented the cheque for $2,350,000 for payment on 23 August 2000, which was dishonoured upon presentation on the ground of "refer to drawer". Notice of dishonour was given to the 2nd and 3rd defendants on 5 September 2000. On 28 August 2000, the 1st defendant repaid to the plaintiff a sum of $100,000. Giving credit to the two sums of $100,000 each repaid, the plaintiff claims a sum of $2,150,000 as the balance of the sum of $2,350,000, together with interest pursuant to the Agreement.

8. The statement of claim was endorsed on the writ that was issued on 12 September 2000. By summons dated 30 September 2000, the plaintiff applied for summary judgment against the 1st, 2nd and 3rd defendants. The documents and the Agreement referred to above were exhibited to an affirmation of the plaintiff made on 30 September 2000.

9. The defence of the defendants can be found in the affirmation of the 2nd defendant made on 20 October 2000. The contents of this affirmation were also confirmed by the affirmation of the 3rd defendant made on 22 March 2001. In the 2nd defendant's affirmation, he admitted that the plaintiff lent to the 1st defendant sums totalling $5,500,000 in 1993 and 1994. In 1994, the 1st defendant repaid $2,500,000 leaving a balance of $3,000,000. The 1st defendant also admitted that he and his wife both signed an acknowledgment of the outstanding loan of $3,000,000 in December 1994. He then deposed to the fact some time after 1994, the plaintiff informed him that he had formed Long Wan International Ltd ("Long Wan") and the 1st defendant began supplying finishing services, raw materials and moulds to Long Wan. Invoices for these services and goods were issued by the 1st defendant to Long Wan. The 1st defendant's affirmation then sets out the crux of the defence as follows:

"8. As Long Wan did not pay the invoices rendered by the 1st Defendant on time, I began pressing Long Wan to settle the 1st Defendants our invoices. I also exerted pressure on the Plaintiff personally and said to him that if Long Wan paid the 1st Defendant, the 1st Defendant would then be able to repay the balance of the Loan to him.

9. But, sometime in late 1995 or early 1996, the Plaintiff informed me that he had 3 other partners in Long Wan but he was in the process of taking over Long Wan and he intended to run Long Wan by himself. The Plaintiff said that once he had taken over Long Wan, he would then set-off the balance of the Loan owed to him by the 1st Defendant against Long Wan's outstanding account with the 1st Defendant.

10. As I trusted the Plaintiff, I agreed to this arrangement and I stopped pressing Long Wan to settle the 1st Defendant's invoices.

11. At a meeting sometime in August 1998, the Plaintiff said that he would only be responsible for 29.58% of the outstanding account of Long Wan, being the percentage of his shareholding in Long Wan.

12. I subsequently learned that this was not correct and that Long Wan only had 2 shareholders, namely the Plaintiff and Leung Wai Hung Eddie, who I believe is the nominee of the Plaintiff. Attached and marked as exhibit "KMK-1" is a copy of the company search of Long Wan International Limited [showing the position of Long Wan as per its return dated 5 August 2000 to the Companies Registry].

13. In fact when Long Wan ceased business, the Plaintiff sold Long Wan's equipment to 1st Defendant.

14. I also note that the Plaintiff has applied for deregistration of Long Wan and in the application, the Plaintiff has certified that Long Wan has no outstanding liabilities. If Long Wan did indeed still have outstanding liabilities to the 1st Defendant, the Plaintiff could not have made this certification.

15. In the circumstances, I believe that the Plaintiff should have set-off the balance of the Loan owed to him by the 1st Defendant against Long Wan's outstanding account with the 1st Defendant. Accordingly, the balance of the Loan due to the Plaintiff should have been extinguished by way of set-off."

10. In the second affirmation of the plaintiff made on 30 November 2000 in reply to the 2nd defendant's affirmation, he made the point that Long Wan was a separate legal entity and ex-directors and shareholders were not personally liable for the debts of Long Wan as a matter of law. He denied paragraph 9 of the 2nd defendant's affirmation. He also deposed to the facts he did hold only 29.58% of the beneficial interest of Long Wan and he produced minutes of a members' meeting of Long Wan held on 17 April 1996 to show that there were 4 shareholders and he only owned 29.58% of the shares in Long Wan. He also gave the reason why he settled part of Long Wan's trade debts with the 2nd defendant: because of their long-term relationship.

The law under Order 14

11. Whether unconditional leave to defend should be granted by the court on the basis of a factual defence raised by a defendant is dealt with in some detail in para 14/4/9 of High Court Civil Procedure 2002. It is only necessary to recite part of it for the disposal of this appeal. Bokhary JA (as he then was) said in Re Safe Rich Industries Ltd (CA 81/94, unreported, noted in [1994] HKLY 115):

"The test at the summary stage is indeed as simple as whether the defendant's assertions are believable. But it must be recognized - because failure to recognize it would create a debt-dodger's charter - that whether the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute."

12. In Mass International Ltd v Hillis Industries Ltd [1996] 1 HKC 434 at 439E, P Chan J (as he then was) warned:

"On the other hand, it must also be borne in mind that for an application like the present, the court must not embark on a mini trial on affidavits."

13. In Codd v Delap (1905) 92 LT 510 at 511, Lord Lindley stated:

"Unless it is obvious that the defence put forward by the defendant is 'frivolous and practically moonshine', O.14 ought not to be applied."

14. It is trite that where there are circumstances which require to be closely investigated there ought to be a trial and judgment should not be given under O 14 (see para 14/4/10 of Hong Kong Civil Procedure 2002).

The Judge's reasoning

15. In dismissing the defendants' appeal against the summary judgment, the Judge said:

"10. In my view, having regard to all the surrounding circumstances, although I must warn myself that this is an Order 14, it seems to me that the argument and the submissions made to me based on a case of a set-off agreement or representation in 1995 was not made out. In my view, even on an Order 14, the court is entitled to take a robust view of what had happened, and also to take a robust view of subsequent events. The subsequent events in 1998 and 2000, all suggest to me that the parties regarded the true position of the indebtedness of the defendants to the plaintiff as being in no way affected by the alleged indebtedness of Long Wan to the 1st defendant or by the plaintiff's financial interest in Long Wan. Afterall, the transaction in August 1998 resulted in actual cash movement by the plaintiff's side to the 1st defendant, certainly not a set-off in the sense that Mr Chua was trying to ask the court to accept. Without a finding or acceptance by the court of a valid 1995 Agreement or a set-off promise, there seems to be nothing left for any of the defendants, certainly not the 2nd and 3rd defendants because they would have no basis to defend a cheque action on a 1995 promise or agreement which was rejected nor for the 1st defendant because the same defence was also rejected.

11. There was in the course of the argument a reference to a total failure or partial failure of consideration in relation to a cheque. I think that if you look at what happened in June 2000, what was really agreed was a package and the plaintiff agreed to hold off in consideration of the defendants' various agreements. This is of course after taking into account of the May 2000 Table (p.104-5) signed by the defendants. In the light of package agreed in June 2000, there seems to me really no scope for either a finding of total lack of consideration or even a partial failure of consideration on a pro tanto basis. "

This appeal

16 While a number of factual and legal issues are raised in the Notice of Appeal, we can dispose of this appeal on the facts as presented by the parties in their affirmations. Before addressing the facts, we should mention just one aspect of the law.

17. There is nothing wrong for the Judge to take a robust view of the facts as disclosed to him and it appears to us that he was mostly correct to state: "The subsequent events in 1998 and 2000, all suggest to me that the parties regarded the true position of the indebtedness of the defendants to the plaintiff as being in no way affected by the alleged indebtedness of Long Wan to the 1st defendant or by the plaintiff's financial interest in Long Wan." However, we agree with Mr Chua that the Judge seemed to be operating under an error of law in saying that the defence case of a set-off agreement or representation in 1995 was not made out and that to be successful the defendants need to have "a finding or acceptance by the court of a valid 1995 Agreement or a set-off promise..." As Godfrey JA said in Ng Shou Chun v Hung Chun San [1994] 1 HKC 155 at 158, "The issue is not whether the defendant's assertions are to be believed; it is whether those assertions are believable."

18. We now turn to the facts. We say that the Judge was mostly correct to say that the events in 1998 and 2000 suggested to him that the parties regarded the true position of the indebtedness of the defendants to the plaintiff as being in no way effected by the indebtedness of Long Wan to the 1st defendant or by the plaintiff's financial interest in Long Wan because that is also the view that we form of those subsequent events. However, there are the following items of evidence or the lack of it which were not dealt with in the judgment:

(a) While the defendants' company search of Long Wan showed that as per return of the company to the Companies Registry dated 5 August 2000, there were two shares of a dollar each held by the plaintiff and another person indicating that the plaintiff was a 50% shareholder of Long Wan, the documents produced by the plaintiff to show his interest in Long Wan being 29.58% only related to the position in 1996. The plaintiff has not disclosed his shareholding in the interim.

(b) The document dated 24 May 2000 and the Agreement dated 6 June 2000, both of which were produced by the plaintiff, existed earlier than the company search of Long Wan's position as at 5 August 2000, which also shows that the plaintiff requested the Companies Registry to deregister Long Wan by certifying that, inter alia, Long Wan had no outstanding liabilities.

(c) There is no explanation whatever from the plaintiff as to why the defendants did not chase after Long Wan for the trade debts.

19. The above items are important in the examination of the defence case that in late 1995 or early 1996, the plaintiff informed the 1st defendant that he was in the process of taking over Long Wan from the other partners and that once he had taken over Long Wan, he would then set off the balance of the loan owed to him by the 1st defendant against Long Wan's outstanding trade debts owed to the 1st defendant. Indeed, there was a "table of set-off" dated 10 November 1998 setting out the following sums:

Long Wan owes the 1st defendant trade debts of $2,227,916.86
The plaintiff should bear the trade debts in the proportion of 29.58%: $2,227,916.86 x 29.58%	$659,017.80
The plaintiff sells two machines, totalling	$356,020.00
Balance after set-off: the plaintiff owes the 1st defendant trade debts	$302,997.80
Both parties agree that interest on the balance of the debt will be calculated on the basis of 2 years, 15% interest per annum $302,997.81 x 15% x 2	$ 90,899.34
Direct Source Ltd (the plaintiff's another company) for cost of samples purchased of $379,750.00, already paid $189,875.00, still owing	$189,875.00
This debt has already been paid by a cheque on 22 August 1998	$583,772.14

20. There was another set-off referred to in the document dated 24 May 2000. It was recorded in that document that on 14 November 1998 the plaintiff and his wife of the one part and the 2nd and 3rd defendants of the other part orally agreed that the outstanding principal of the loan be reduced by $500,000 being the trade debts owed by Long Wan to the 1st defendant and the sum be deducted from the outstanding balance of the loan due to the plaintiff.

21. According to the 2nd affirmation of the 2nd defendant made on 22 March 2001, the amount still due from Long Wan to the 1st defendant as of 6 June 2000 is approximately $2,510,238.50, arrived at as follows:

(a)	Amount due from Long Wan as of 30 April 1996	$2,227,916.86
(b)	Amount paid by Plaintiff on 22 August 1998	$ 659,017.81
	Balance	$1,568,899.06
(c)	Interest from 30 April 1996 until 6 June 2000 on HK$1,568,899.06 (but say 4 years) at 15% per annum	$ 941,339.44
(d)	Amount due and payable by the plaintiff as of 6 June 2000	$2,510,238.50

22. There was no explanation from the plaintiff as to why the 1st defendant did not seek full payment of the trade debts from Long Wan as from 1995 up to the institution of the Order 14 proceedings. While the 24 May 2000 document and the Agreement of 6 June 2000 suggest that the defendants accepted that they still owed the plaintiff $2,350,000 and agreed to repay the loan immediately by instalments, the absence of explanation from the plaintiff as to why (1) he had certified in his application for Long Wan to be deregistered in September 2000 that Long Wan had no outstanding liabilities, and (2) the 1st defendant gave up chasing Long Wan for the payment of the trade debts, while the defendants were so willing to acknowledge the loan and took steps to repay it. In view of the Long Wan cessation of business and deregistration, it would be absurd to even suggest that the defendants were agreeable to repay the loan whereas they would expect to undergo great difficulty, delay and/or expense in pursuing Long Wan for the trade debts. In this respect, the plaintiff's absence of explanation on the one hand shows weakness of his case in recovering the outstanding amount of the loan and on the other hand enhances the credibility of the defendants' case. This strange phenomenon of in effect agreeing to pay the loan and to forego the trade debts ought to be closely investigated in a trial, and an Order 14 judgment is therefore inapt.

23. The plaintiff seeks to rely on the dishonoured cheque for $2,350,000 in saying that there is no set-off in action on the dishonoured cheque. However, we do not need to dwell on the law regarding this aspect. Suffice to say, if the defence case of a set off agreement is established, the trade debts owed by Long Wan to the 1st defendant ought to have been set off against the loan. That of course would depend on whether the plaintiff had acquired a 100% interest in Long Wan, and what in fact was his interest at all material times. The defence case would give rise to an arguable case based on total failure of consideration, in that the loan the 1st defendant owed to the plaintiff would and should have been fully offset by the trade debts and interest thereon due from Long Wan to it. In such a case, the 1st defendant would owe the plaintiff nothing. There would be no consideration flowing from the plaintiff to the 2nd and 3rd defendants as issuers of the cheque because their liability as guarantors of the loan would have disappeared when the primary debtor, the 1st defendant, owed nothing to the plaintiff. Alternatively, the defence of promissory estoppel would apply and would estop the plaintiff from recovering the loan from the defendants until the set off has taken place.

Conclusion

24. For the above reasons, we are of the view that the appeal must be allowed.

25. We would remind litigants and practitioners of what Godfrey JA said in Man Earn Ltd v Wing Ting Fong [1996] 1 HKC 225 at 228H-I:

"I would express the hope that those practitioners, of whom there are too many, who appear to be prepared to advise every client with what seems to be a good case to invoke this extraordinary procedure, without reflecting on the fact that, if the attempt fails, the result will be to keep the plaintiff out of the judgment to which he may well be entitled for far longer than would have been the case if they had concentrated, instead, on bringing the matter to trial, will in future think twice before giving such advice."

26. We therefore allow the appeal and order that there be unconditionally leave to defend. Having heard the parties on costs, we also make an order that the defendants have the costs of this appeal but the costs before Master Jones and the Judge be costs in the cause.